UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10738
ANNTAYLOR STORES CORPORATION
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3499319
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
- ---------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 541-3300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No ____.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Outstanding as of
Class August 25, 1999
----- ---------------
Common Stock, $.0068 par value 31,537,672
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INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Condensed Consolidated Statements of Operations
for the Quarters and Sixth Months Ended July 31,
1999
and August 1, 1998..................................... 3
Condensed Consolidated Balance Sheets at
July 31, 1999 and January 30, 1999..................... 4
Condensed Consolidated Statements of Cash Flows
for the Sixth Months Ended July 31, 1999 and
August 1, 1998......................................... 5
Notes to Condensed Consolidated Financial Statements..... 6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
PART II.OTHER INFORMATION
Item 1.Legal Proceedings........................................ 20
Item 2.Changes in Securities and Use of Proceeds................ 20
Item 4.Submission of Matters to a Vote of Security Holders...... 21
Item 5.Other Information........................................ 22
Item 6.Exhibits and Reports on Form 8-K......................... 22
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3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters and Six Months Ended July 31, 1999 and August 1, 1998
(unaudited)
Quarters Ended Six Months Ended
-------------------- --------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
(in thousands, except per share amounts)
-------- -------- -------- --------
Net sales........................... $265,747 $223,393 $515,147 $421,563
Cost of sales ...................... 139,842 118,459 257,905 215,295
-------- -------- -------- --------
Gross profit ....................... 125,905 104,934 257,242 206,268
Selling, general and administrative
expenses ........................ 97,612 84,289 194,768 165,418
Amortization of goodwill ........... 2,760 2,760 5,520 5,520
-------- -------- -------- --------
Operating income ................... 25,533 17,885 56,954 35,330
Interest expense ................... 1,263 4,247 5,584 8,974
Other expense, net ................. 142 57 810 237
-------- -------- -------- --------
Income before income taxes and
extraordinary loss................ 24,128 13,581 50,560 26,119
Income tax provision ............... 10,755 6,537 22,432 12,656
-------- -------- -------- --------
Income before extraordinary loss ... 13,373 7,044 28,128 13,463
Extraordinary loss (net of income
tax benefit of $641,000) ......... 962 -- 962 --
-------- -------- -------- --------
Net income.......................... $ 12,411 $ 7,044 $ 27,166 $ 13,463
======== ======== ======== ========
Basic earnings per share of common
stock:
Basic earnings per share before
extraordinary loss............ $ 0.47 $ 0.27 $ 1.03 $ 0.52
Extraordinary loss per share ... 0.03 -- 0.04 --
-------- -------- -------- -------
Basic earnings per share........ $ 0.44 $ 0.27 $ 0.99 $ 0.52
======== ======== ======= =======
Diluted earnings per share of
common stock:
Diluted earnings per share
before extraordinary
loss.......................... $ 0.42 $ 0.27 $ 0.92 $ 0.52
Extraordinary loss per share ... 0.03 -- 0.03 --
-------- -------- -------- -------
Diluted earnings per share...... $ 0.39 $ 0.27 $ 0.89 $ 0.52
======== ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
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4
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 1999 and January 30, 1999
July 31, January 30,
1999 1999
--------- ---------
(unaudited)
(in thousands)
ASSETS
Current assets
Cash and cash equivalents ........................ $ 90,603 $ 67,031
Accounts receivable, net ......................... 65,736 71,049
Merchandise inventories .......................... 134,388 136,748
Prepaid expenses and other current assets ........ 26,759 23,637
--------- ---------
Total current assets ........................... 317,486 298,465
Property and equipment, net .......................... 163,180 151,785
Goodwill, net ........................................ 314,179 319,699
Deferred financing costs, net ........................ 5,817 2,627
Other assets ......................................... 2,213 2,841
--------- ---------
Total assets ................................... $ 802,875 $ 775,417
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................. $ 62,302 $ 65,419
Accrued salaries and bonus ....................... 12,600 17,132
Accrued tenancy .................................. 7,423 8,465
Accrued expenses ................................. 27,170 37,535
Current portion of long-term debt ................ 1,256 1,206
--------- ---------
Total current liabilities ...................... 110,751 129,757
Long-term debt ....................................... 113,661 103,951
Other liabilities .................................... 12,839 12,386
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of Subsidiary, AnnTaylor
Finance Trust, Holding Solely Convertible
Debentures ....................................... -- 96,624
Stockholders' equity
Common stock, $.0068 par value; 120,000,000
shares authorized; 31,508,620 and
26,035,301 shares issued, respectively .......... 214 177
Additional paid-in capital ........................ 467,470 359,805
Warrants to acquire 2,814 shares of common stock... -- 46
Retained earnings ................................. 100,365 73,295
Deferred compensation on restricted stock ......... (2,036) (272)
--------- ---------
566,013 433,051
Treasury stock, 15,948 and 17,201 shares,
respectively, at cost .......................... (389) (352)
--------- ---------
Total stockholders' equity ...................... 565,624 432,699
--------- ---------
Total liabilities and stockholders' equity ...... $ 802,875 $ 775,417
========= =========
See accompanying notes to condensed consolidated financial statements.
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5
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended July 31, 1999 and August 1, 1998
(unaudited)
Six Months Ended
-----------------------
July 31, August 1,
1999 1998
-------- --------
(in thousands)
Operating activities:
Net income....................................... $ 27,166 $ 13,463
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary loss ............................. 1,603 --
Provision for loss on accounts receivable ...... 481 748
Depreciation and amortization .................. 15,205 14,340
Amortization of goodwill ....................... 5,520 5,520
Non-cash interest .............................. 985 618
Amortization of deferred compensation .......... 382 266
Loss on disposal of property and equipment ..... 885 249
(Increase) decrease in:
Receivables .................................. 4,832 (1,404)
Merchandise inventories ...................... 2,360 (16,220)
Prepaid expenses and other current assets .... (3,122) (2,794)
Increase (decrease) in:
Accounts payable ............................. (3,117) 17,789
Accrued expenses ............................. (15,939) 802
Other non-current assets and
liabilities, net ........................... 1,082 (184)
-------- --------
Net cash provided by operating activities ........ 38,323 33,193
Investing activities:
Purchases of property and equipment .............. (27,486) (17,259)
-------- --------
Net cash used by investing activities ............ (27,486) (17,259)
Financing activities:
Payments on mortgage ............................. (593) (549)
Proceeds from exercise of stock options .......... 8,853 --
Repurchase of restricted stock ................... -- (19)
Redemption of 8-3/4% Notes ....................... (101,375) --
Redemption of Company Obligated Mandatorily
Redeemable Convertible Preferred Securities ..... (100) --
Proceeds from issuance of Convertible
Debentures due 2019 ............................ 110,000 --
Payment of deferred financing costs .............. (4,050) (2,529)
-------- --------
Net cash provided (used) by financing activities . 12,735 (3,097)
-------- --------
Net increase in cash ............................... 23,572 12,837
Cash and cash equivalents, beginning of period ..... 67,031 31,369
-------- --------
Cash and cash equivalents, end of period........... $ 90,603 $ 44,206
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest......... $ 6,423 $ 9,161
======== ========
Cash paid during the period for income taxes..... $ 19,956 $ 17,019
======== ========
See accompanying notes to condensed consolidated financial
statements.
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6
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements are unaudited but, in the
opinion of management, contain all adjustments (which are of a normal recurring
nature) necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. All significant
intercompany accounts and transactions have been eliminated.
The results of operations for the 1999 interim period shown in this report
are not necessarily indicative of results to be expected for the fiscal year.
The January 30, 1999 condensed consolidated balance sheet amounts have been
derived from the previously audited consolidated balance sheet of AnnTaylor
Stores Corporation ("the Company").
Detailed footnote information is not included for the quarters ended July
31, 1999 and August 1, 1998. The financial information set forth herein should
be read in conjunction with the Notes to the Company's Consolidated Financial
Statements contained in the AnnTaylor Stores Corporation 1998 Annual Report to
Stockholders.
2. NET INCOME PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share assumes the issuance of additional shares of common stock
that are issuable by the Company upon the conversion of all outstanding
warrants, stock options, and convertible securities. Basic and diluted earnings
per share calculations follow:
[Tables on next page]
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7
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Net Income per Share (continued)
Quarters Ended
--------------------------------------------
July 31, 1999 August 1, 1998
---------------------- --------------------
(in thousands, except per share amounts)
Per Per
Share Share
Income Shares Amount Income Shares Amount
======= ====== ===== ====== ====== =====
BASIC EARNINGS PER SHARE
Income available to common
stockholders before
extraordinary loss ............ $13,373 28,257 $0.47 $7,044 25,644 $0.27
===== =====
EFFECT OF DILUTIVE SECURITIES
Warrants ......................... -- 2 -- 3
Stock options .................... -- 301 -- 130
Preferred Securities ............. -- 3,208 -- --
Convertible Debentures due 2019... 284 1,092 -- --
------ ------ ----- ------
DILUTED EARNINGS PER SHARE
Income available to common
stockholders before
extraordinary loss $13,657 32,860 $0.42 $7,044 25,777 $0.27
======= ====== ===== ====== ====== =====
Six Months Ended
--------------------------------------------
July 31, 1999 August 1, 1998
---------------------- --------------------
(in thousands, except per share amounts)
Per Per
Share Share
Income Shares Amount Income Shares Amount
------- ------ ----- ------- ------ -----
BASIC EARNINGS PER SHARE
Income available to
common stockholders
before extraordinary
loss...................... $28,128 27,222 $1.03 $13,463 25,644 $0.52
==== =====
EFFECT OF DILUTIVE SECURITIES
Warrants..................... -- 2 -- 3
Stock options................ -- 304 -- 78
Preferred Securities......... 1,297 4,165 -- --
Convertible Debentures due 2019 285 546 -- --
------- ------ ------- ------
DILUTED EARNINGS PER SHARE
Income available to common
stockholders before
extraordinary loss........ $29,710 32,239 $0.92 $13,463 25,725 $0.52
======= ====== ===== ======= ====== =====
Conversion of the preferred securities into common stock is not included in
the computation of diluted earnings per share for the quarter and six months
ended August 1, 1998 due to the antidilutive effect of the conversion as of that
date.
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8
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. LONG-TERM DEBT
The following summarizes long-term debt outstanding at July
31, 1999:
(in thousands)
Convertible Debentures due 2019,
net of discount of $88,719,000...... $110,353
Mortgage............................. 4,564
--------
Total debt ....................... 114,917
Less current portion................. 1,256
--------
Total long-term debt.............. $113,661
========
During the second quarter of Fiscal 1999, the Company completed the
issuance of an aggregate of $199,072,000 principal amount at maturity of its
Convertible Subordinated Debentures due 2019 ("Convertible Debentures"). The
Convertible Debentures were sold at an original issue price of $552.56 per
$1,000 prinicipal amount at maturity of Debenture. The net proceeds of the sale
were applied to the redemption of the $100,000,000 outstanding 8-3/4%
Subordinated Notes due 2000 (the "8-3/4% Notes") issued by AnnTaylor, Inc. ("Ann
Taylor"). Cash interest is payable on the principal amount at maturity of the
Convertible Debentures at the rate of 0.55% per annum. This interest rate and
the accrual of original issue discount represent a yield to maturity on the
Convertible Debentures of 3.75%. The Convertible Debentures are convertible at
the option of the holders thereof initially into 12.078 shares of the Company's
common stock per $1,000 principal amount at maturity of Debenture (equivalent to
$45.75 per share of common stock). The Company's obligations with respect to the
Convertible Debentures are guaranteed on a subordinated basis by Ann Taylor.
On July 22, 1999, Ann Taylor redeemed all of its outstanding 8-3/4% Notes,
at a redemption price of 101.375% of principal amount, plus accrued unpaid
interest to the redemption date. The redemption of the 8-3/4% Notes resulted in
an extraordinary charge to earnings in the second quarter and year to date
period of $0.03 per share, net of income tax benefit.
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9
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. LONG-TERM DEBT (CONTINUED)
On June 29, 1999, the Company's special purpose financing vehicle,
AnnTaylor Finance Trust, redeemed all of its outstanding 8-1/2% Company
Obligated Mandatorily Redeemable Convertible Preferred Securities ("preferred
securities"). All but $100,000 liquidation amount of the preferred securities
were tendered for conversion into an aggregate of 5,116,717 shares of Company
common stock prior to the conversion date, at a conversion price of $19.65 per
share of common stock, or 2.545 shares of common stock per $50 liquidation
amount of the security. Holders of preferred securities that were not tendered
for conversion received 105.95% of the liquidation amount of the preferred
securities redeemed, plus accrued distributions.
4. COMMON STOCK WARRANTS
The Company's outstanding warrants to acquire, in the aggregate, 185 shares
of common stock of the Company expired on July 15, 1999. The warrants became
exercisable as a result of the initial public offering of the Company's common
stock in May 1991.
5. ENTERPRISE-WIDE OPERATING INFORMATION
The Company is a specialty retailer of women's apparel, shoes, and
accessories. Given the economic characteristics of the store formats, the
similar nature of the products sold, the type of customer and method of
distribution, the operations of the Company are aggregated into one reportable
segment. The Company believes that the customer base for its stores consists
primarily of relatively affluent, fashion-conscious women from the ages of 25 to
55, and that the majority of its customers are working women with limited time
to shop.
6. SUBSEQUENT EVENTS
The Board of Directors of the Company has authorized a $40 million
securities repurchase program. Pursuant to this program, purchases of shares of
the Company's Common Stock and/or its Convertible Debentures due 2019 will be
made from time to time, subject to market conditions and at prevailing market
prices, through open market purchases or in privately negotiated transactions.
Repurchased shares of Common Stock will become treasury shares and may be used
for general corporate and other purposes. Repurchased Debentures will be
canceled.
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10
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. SUBSEQUENT EVENTS (CONTINUED)
To facilitate the securities repurchase and the Company's capital
expenditure program, on September 7, 1999 Ann Taylor entered into an amendment
to its credit facility with its bank lending group that eliminated the credit
agreement's limitation on annual capital expenditures, replacing it with a fixed
charge coverage ratio covenant, and specifically permits the securities
repurchase program. Additionally, Ann Taylor has elected to reduce the
commitment of the lenders under the credit agreement by $25,000,000 to
$125,000,000 from $150,000,000 effective September 3, 1999, and extended the
term of the credit agreement to June 30, 2001.
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11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarters Ended Six Months Ended
-------------- ----------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---- ---- ---- ----
Number of Stores:
Open at beginning of period.... 371 339 365 324
Opened during period........... 16 4 27 20
Expanded during period*........ 2 1 2 3
Closed during period........... --- 1 5 2
Open at end of period.......... 387 342 387 342
Type of Stores Open at
End of Period:
Ann Taylor stores........... 313 293
Ann Taylor Factory Stores... 12 14
Ann Taylor Loft stores...... 62 35
- ---------------
* Expanded stores are excluded from comparable store sales for
the first year following expansion.
QUARTER ENDED JULY 31, 1999 COMPARED TO QUARTER ENDED AUGUST 1, 1998
The Company's net sales in the second quarter of 1999 increased to
$265,747,000 from $223,393,000 in the second quarter of 1998, an increase of
$42,354,000 or 19.0%. The increase is attributable to the opening of new stores
and an increase in comparable stores sales of 8.4%. Management believes that the
comparable store sales increase was primarily attributable to favorable customer
reaction to the Company's product offerings and merchandise assortment.
Gross profit as a percentage of net sales increased to 47.4% in the second
quarter of 1999 from 47.0% in the second quarter of 1998. This increase in gross
margin primarily reflects a higher initial markup rate, reflecting on-going
improvements achieved by the Company's sourcing division.
Selling, general and administrative expenses represented 36.7% of net sales
in the second quarter of 1999, compared to 37.7% of net sales in the second
quarter of 1998. The decrease in selling, general, and administrative expenses
as a percentage of net sales was primarily attributable to increased leverage on
fixed expenses resulting from increased comparable store sales and improved
operating efficiencies, partially offset by an increase in marketing
expenditures in support of the Company's strategic initiatives to enhance the
Ann Taylor brand.
As a result of the foregoing, the Company had operating income of
$25,533,000, or 9.6% of net sales, in the second quarter of 1999, compared to
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12
operating income of $17,885,000, or 8.0% of net sales, in the second quarter of
1998. Amortization of goodwill was $2,760,000 in both the second quarter of 1999
and the second quarter of 1998. Operating income, without giving effect to
goodwill amortization in either year, was $28,293,000, or 10.6% of net sales, in
the second quarter of 1999 and $20,645,000, or 9.2% of net sales, in the second
quarter of 1998.
Interest expense was $1,263,000 in the second quarter of 1999 and
$4,247,000 in the second quarter of 1998. The decrease in interest expense is
attributable to the redemption during the second quarter of 1999 of the
preferred securities and the 8-3/4% Notes, as well as greater interest income
earned on cash on hand, offset in part by interest expense on the Convertible
Debentures issued during the second quarter of 1999.
The income tax provision was $10,755,000, or 44.6% of income before income
taxes and extraordinary loss, in the second quarter of 1999, compared to
$6,537,000, or 48.1% of income before income taxes, in the second quarter of
1998. The effective income tax rate for both periods was higher than the
statutory rate primarily as a result of non-deductible goodwill amortization.
On July 22, 1999 the Company applied the proceeds received from the
issuance of its Convertible Debentures to redeem the outstanding 8-3/4% Notes.
This resulted in an extraordinary charge to earnings in the second quarter of
1999 of $962,000, net of income tax benefit, or $0.03 per share on a diluted
basis.
As a result of the foregoing factors, the Company had net income of
$12,411,000, or 4.7% of net sales, for the second quarter of 1999, compared to
net income of $7,044,000, or 3.2% of net sales, for the second quarter of 1998.
AnnTaylor Stores Corporation conducts no business other than the management
of Ann Taylor.
SIX MONTHS ENDED JULY 31, 1999 COMPARED TO SIX MONTHS ENDED AUGUST 1, 1998
The Company's net sales in the first six months of 1999 increased to
$515,147,000 from $421,563,000 in the first six months of 1998, an increase of
$93,584,000 or 22.2%. The increase is attributable to the opening of new stores
and the expansion of existing stores and an increase in comparable store sales
of 12.4%. Management believes that the increase in comparable store sales was
primarily attributable to favorable customer reaction to the Company's product
offerings and merchandise assortment.
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13
Gross profit as a percentage of net sales increased to 49.9% in the first
six months of 1999 from 48.9% in the first six months of 1998. This increase in
gross margin primarily reflects a higher initial markup rate, reflecting
on-going improvements achieved by the Company's sourcing division, and in the
first quarter of 1999, a greater percentage of merchandise being sold at full
price, offset in part by a higher markdown rate on goods that were sold below
full price, compared with the first quarter of 1998.
Selling, general and administrative expenses represented 37.8% of net sales
in the first six months of 1999, compared to 39.2% of net sales in the first six
months of 1998. The decrease in selling, general and administrative expenses as
a percentage of net sales was primarily attributable to increased leverage on
fixed expenses resulting from increased comparable store sales and improved
operating efficiencies, partially offset by an increase during the first quarter
in the provision for management performance bonus expense and an increase in
marketing expenditures in support of the Company's strategic initiatives to
enhance the Ann Taylor brand.
As a result of the foregoing, the Company had operating income of
$56,954,000, or 11.1% of net sales, in the first six months of 1999, compared to
operating income of $35,330,000, or 8.4% of net sales, in the first six months
of 1998. Amortization of goodwill was $5,520,000 in each of the first six months
of 1999 and 1998. Operating income, without giving effect to goodwill
amortization, was $62,474,000, or 12.1% of net sales, in the 1999 period and
$40,850,000, or 9.7% of net sales, in the 1998 period.
Interest expense was $5,584,000 in the first six months of 1999 and
$8,974,000 in the first six months of 1998. The decrease in interest expense is
attributable to the redemption in the second quarter of 1999 of the preferred
securities and the 8-3/4% Notes, and to greater interest income earned on cash
on hand, offset in part by interest expense on the Convertible Debentures issued
in the second quarter of 1999.
The income tax provision was $22,432,000, or 44.4% of income before income
taxes and extraordinary loss, in the 1999 period, compared to $12,656,000, or
48.5% of income before income taxes and extraordinary loss, in the 1998 period.
The effective income tax rate for both periods differed from the statutory rate
primarily because of non-deductible goodwill amortization.
On July 22, 1999, the Company applied the proceeds received from the
issuance of it's Convertible Debentures to redeem the outstanding 8-3/4% Notes.
This resulted in an extraordinary charge to earnings in the first six months of
Fiscal 1999 of $962,000, net of income tax benefit, or $0.03 per share on a
diluted basis.
As a result of the foregoing factors, the Company had net income of
$27,166,000, or 5.3% of net sales, for the first six months of 1999, compared to
net income of $13,463,000 or 3.2% of net sales, for the first six months of
1998.
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14
FINANCIAL CONDITION
For the first six months of 1999, net cash provided by operating activities
totaled $38,323,000, primarily as a result of net income and non-cash operating
expenses and a decrease in receivables, partially offset by decreases in
accounts payable and accrued expenses. Cash used for investing activities during
the first six months of 1999 amounted to $27,486,000, for the purchase of
property and equipment. Cash provided by financing activities during the first
six months of 1999 amounted to $12,735,000, primarily from the proceeds from the
issuance of the Convertible Debentures and proceeds from exercises of employee
stock options to purchase Company common stock, partially offset by the
redemption of the 8-3/4% Notes and the payment of deferred financing costs
related to the issuance of the Convertible Debentures.
Merchandise inventories were $134,388,000 at July 31, 1999, compared to
inventories of $136,748,000 at January 30, 1999. Merchandise inventories at July
31, 1999 and January 30, 1999 included approximately $33,789,000 and
$32,329,000, respectively, of inventory associated with the Company's sourcing
division, which is primarily finished goods in transit from factories.
At July 31, 1999, there were no borrowings outstanding under Ann Taylor's
$150,000,000 senior secured revolving credit facility ("the Credit Facility").
Loans outstanding under the Credit Facility at any time may not exceed
$50,000,000. Maximum availability for loans and letters of credit under the
Credit Facility is governed by a monthly borrowing base, determined by the
application of specified rates against certain eligible assets.
In September 1999, Ann Taylor entered into an amendment to its credit
facility with its bank lending group that eliminated the credit agreement's
limitation on annual capital expenditures, replacing it with a fixed charge
coverage ratio test, and specifically permits a securities repurchase program.
Additionally, Ann Taylor has elected to reduce the commitment of the lenders
under the credit agreement by $25,000,000, to $125,000,000 from $150,000,000,
effective September 3, 1999, and extended the term of the credit agreement to
June 30, 2001.
During the second quarter, the Company completed the issuance of the
Convertible Debentures. The net proceeds of the sale were applied to the
redemption of the 8-3/4% Notes issued by Ann Taylor. The Convertible Debentures
were sold at an original issue price of $552.56 per $1,000 principal amount at
maturity of Debenture and have an aggregate principal amount at maturity of
$199,072,000. Cash interest is payable on the principal amount at maturity at
the rate of 0.55% per annum. This interest rate and the accrual of original
issue discount represent a yield to maturity on the Convertible Debentures of
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15
3.75%. The Convertible Debentures are convertible at theoption of the holders
thereof initially into 12.078 shares of the Company's common stock per $1,000
principal amount at maturity of Debenture (equivalent to $45.75 per share of
common stock). The Company's obligations with respect to the Convertible
Debentures are guaranteed on a subordinated basis by Ann Taylor.
On July 22, 1999, Ann Taylor redeemed all of its outstanding 8-3/4% Notes
at a redemption price of 101.375% of principal amount, plus accrued unpaid
interest to the redemption date.
On June 29, 1999, the Company's special purpose financing vehicle,
AnnTaylor Finance Trust, redeemed all of its outstanding 8-1/2% Company
Obligated Mandatorily Redeemable Convertible Preferred Securities ("preferred
securities"). The preferred securities were issued in April 1996. All but
$100,000 liquidation amount of the preferred securities were tendered for
conversion into an aggregate of 5,116,717 shares of Company common stock prior
to the conversion date, at a conversion price of $19.65 per share of common
stock, or 2.545 shares of common stock per $50 liquidation amount of the
security. Holders of preferred securities that were not tendered for conversion
received 105.95% of the liquidation amount of the preferred securities redeemed,
plus accrued distributions.
On July 15, 1999, the Company's outstanding warrants to acquire, in the
aggregate, 185 shares of common stock expired. The warrants had become
exercisable as a result of the Company's initial public offering of the
Company's common stock in 1991, and when exercised, entitled the owners thereof
to acquire such shares at no additional cost.
For Fiscal 1999, the Company's capital expenditures, which are primarily
attributable to the Company's store expansion, renovation and refurbishment
programs, and the investment in information systems, are expected to total
approximately $55,000,000, of which $27,486,000 were incurred for the six months
ended July 31, 1999. During the first six months of fiscal 1999, the Company
opened 11 new Ann Taylor stores and 16 Ann Taylor Loft stores, including 4
locations that were converted from Ann Taylor stores. In addition, the Company
completed the expansion of 2 Ann Taylor stores. The Company expects to open a
total of 18 new Ann Taylor stores and 30 Ann Taylor Loft stores (including four
Ann Taylor stores being converted to Ann Taylor Loft stores), and to expand or
relocate a total of 10 Ann Taylor stores, in Fiscal 1999.
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For Fiscal 2000, the Company expects its capital expenditures to total
approximately $85,000,000, principally for the Company's store expansion,
renovation and refurbishment programs and the continued investment in
information systems. The Company intends to increase store square footage by
approximately 500,000 square feet, or 22%, in Fiscal 2000, representing
approximately 15 new Ann Taylor stores and approximately 70 new Ann Taylor Loft
stores, and the expansion of 5 existing Ann Taylor stores.
In order to finance its operations and capital requirements, the Company
expects to use internally generated funds, trade credit and funds available to
it under the Credit Facility. The Company believes that cash flow from
operations and funds available under the Credit Facility are sufficient to
enable it to meet its on-going cash needs for its business, as presently
conducted, for the foreseeable future.
On August 31, 1999, the Board of Directors of the Company authorized a $40
million securities repurchase program. Pursuant to this program, purchases of
shares of the Company's Common Stock and/or its Convertible Debentures due 2019
will be made from time to time, subject to market conditions and at prevailing
market prices, through open market purchases or in privately negotiated
transactions. Repurchased shares of Common Stock will become treasury shares and
may be used for general corporate and other purposes. Repurchased Debentures
will be cancelled. The Company expects to use internally generated funds to
finance its securities repurchase program.
YEAR 2000 STATUS
Many computer systems use only two digits to identify a year (for example,
"99" is used for the year "1999"). As a result, these systems may be unable to
process accurately dates later than December 31, 1999, since they may recognize
"00" as the year "1900", instead of the year "2000". This anomaly is often
referred to as the "Year 2000 compliance" issue. Since 1997, the Company has
been executing a plan to remediate or replace affected systems on a timely
basis. Equipment and other non-information technology systems that use
microchips or other embedded technology, such as certain conveyor systems at the
Company's distribution center, are also covered by the Company's Year 2000
compliance project.
The Company's Year 2000 compliance project includes four phases: (1)
evaluation of the Company's owned or leased systems and equipment to identify
potential Year 2000 compliance issues; (2) remediation or replacement of Company
systems and equipment determined to be non-compliant (and testing of remediated
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systems before returning them to production); (3) inquiry regarding Year 2000
readiness of material business partners and other third parties on whom the
Company's business is dependent; and (4) development of contingency plans, where
feasible, to address potential third party non-compliance or failure of material
Company systems.
The initial phase of the Company's Year 2000 compliance project was the
evaluation of all software, hardware and equipment owned, leased or licensed by
the Company, and identification of those systems and equipment requiring Year
2000 remediation. This analysis was completed during Fiscal 1998.
All material computer software, hardware and equipment in the Company's
sourcing offices located outside of the United States, and U.S. home offices,
distribution center and retail stores that was not Year 2000 compliant has been
remediated or replaced.
Over the past few years, the Company's strategic plan has included
significant investment in and modernization of many of the Company's computer
systems. As a result, much of the costs and timing for replacement of certain of
the Company's systems that were not Year 2000 compliant were already anticipated
as part of the Company's planned information systems spending and did not need
to be accelerated as a result of the Company's Year 2000 project. The total cost
to the Company specifically associated with addressing the Year 2000 issue with
respect to its systems and equipment has not been, and is not anticipated to be,
material to the Company's financial position or results of operations in any
given year. The Company estimates that the total additional cost of managing its
Year 2000 project, remediating existing systems and replacing non-compliant
systems, is approximately $2.4 million, of which approximately $1.3 million is
being expensed as incurred (including $965,000 expensed in Fiscal 1998, and
$165,000 in the first six months of Fiscal 1999), and $1.1 million which was
capitalized (including $855,000 capitalized in Fiscal 1998 and approximately
$175,000 in the first six months of 1999).
Although the Company believes its Year 2000 compliance efforts with respect
to its systems will be successful, any failure or delay could result in actual
costs and timing differing materially from that presently contemplated, and in a
disruption of business. The Company is developing a contingency plan to permit
its primary operations to continue if the Company's modifications and
conversions of its systems are not successfully completed on a timely basis, but
the foregoing cost estimates do not take into account any expenditures arising
out of a response to any such contingencies that materialize. The Company's cost
estimates also do not include time or costs that may be incurred as a result of
third parties' failure to become Year 2000 compliant on a timely basis.
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The Company has been communicating with its business partners, including
key manufacturers, vendors, banks and other third parties with whom it does
business, to obtain information regarding their state of readiness with respect
to the Year 2000 issue. During the first quarter of fiscal 1999, the Company
completed an initial assessment of the Year 2000 readiness of those third
parties whose services are most significant to the Company's business. The
Company intends to continue to monitor the Year 2000 readiness of its key
suppliers of goods and services during the year. Failure of third parties to
remediate Year 2000 issues affecting their respective businesses on a timely
basis, or to implement contingency plans sufficient to permit uninterrupted
continuation of their businesses in the event of a failure of their systems,
could have a material adverse effect on the Company's business and results of
operations. Potential interruptions of such third parties' business or service
to the Company resulting from Year 2000 issues will be addressed in the
Company's contingency planning efforts, discussed below.
The Company's Year 2000 compliance project includes development of a
contingency plan designed to support critical business operations in the event
of the occurrence of systems failures or the occurrence of reasonably likely
worst case scenarios. The Company operates a large number of retail stores in
widely disbursed geographical locations, and Company merchandise is manufactured
by a large number of suppliers. The Company believes that these factors will
help to mitigate the adverse impact of potential Year 2000 failures by third
party suppliers or utilities. The Company believes that the most reasonably
likely worst case scenarios would involve an interruption of the supply of
merchandise to the Company's stores, as a result of the delay in completion of
the Company's merchandise orders by manufacturers, or a delay in the delivery of
merchandise to the Company's stores due to a disruption of service at ports of
export or at the U.S. port of import, or a disruption in service by
transportation providers, or a disruption in operation of the Company's
distribution center. The Company has developed contingency plans for its
business functions and is in the process of analyzing the plans to ensure their
adequacy. The Company anticipates this evaluation will be completed by the end
of the third quarter of Fiscal 1999.
The Company may not be able to compensate adequately for business
interruption caused by certain third parties. Potential risks include suspension
or significant curtailment of service or significant delays by banks, utilities
or common carriers, or at U.S. ports of entry. The Company's business also could
be materially adversely affected by the failure of governmental agencies to
address Year 2000 issues affecting the Company's operations. For example, a
significant amount of the Company's merchandise is manufactured outside the
United States, and the Company is dependent upon the issuance by foreign
governmental agencies of export visas for, and upon the U.S. Customs Service to
process and permit entry into the United States of, such merchandise. If
failures in government systems result in the suspension or delay of these
agencies' services, the Company could experience significant interruption or
delays in its inventory flow.
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The costs and timing for management's completion of Year 2000 compliance
modification and testing processes, and management's assessment and contingency
planning with respect to reasonably likely worst case scenarios, are based on
management's best judgement and estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, the success of third parties' Year 2000 compliance efforts and other
factors. There can be no assurance that these assumptions will be realized or
that actual results will not vary materially.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURES
Sections of this Quarterly Report on Form 10-Q, including the preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain various forward looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, with respect to the
financial condition, results of operations and business of the Company. Examples
of forward-looking statements are statements that use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar expressions.
These forward looking statements involve certain risks and uncertainties, and no
assurance can be given that any of such matters will be realized. Actual results
may differ materially from those contemplated by such forward looking statements
as a result of, among other things, failure by the Company to predict accurately
customer fashion preferences; a decline in the demand for merchandise offered by
the Company; competitive influences; changes in levels of store traffic or
consumer spending habits; effectiveness of the Company's brand awareness and
marketing programs; lack of sufficient customer acceptance of the Ann Taylor
Loft concept in the moderate-priced women's apparel market; general economic
conditions that are less favorable than expected or a downturn in the retail
industry; the inability of the Company to locate new store sites or negotiate
favorable lease terms for additional stores or for the expansion of existing
stores; a significant change in the regulatory environment applicable to the
Company's business; an increase in the rate of import duties or export quotas
with respect to the Company's merchandise; financial or political instability in
any of the countries in which the Company's goods are manufactured; any material
adverse effects of the Year 2000 issue on the business of the Company or third
parties with which the Company does business; or an adverse outcome of the
litigation referred to in Note 5 to the Consolidated Financial Statements of the
Company as of January 30, 1999 that materially and adversely affects the
Company's financial condition. The Company assumes no obligation to update or
revise any such forward looking statements, which speak only as of their date,
even if experience or future events or changes make it clear that any projected
financial or operating results implied by such forward-looking statements will
not be realized.
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PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
As previously disclosed in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 29, 1999, the Company, Ann
Taylor, certain current and former officers and directors of the Company and Ann
Taylor, and Merrill Lynch & Co. ("Merrill Lynch") and certain of its affiliates,
are defendants in a purported class action lawsuit, originally filed on April
26, 1996, by certain alleged stockholders of the Company in the United States
District Court for the Southern District of New York. (Novak v. Kasaks, et al.,
No. 96 CIV 3073 (S.D.N.Y. 1996)). On or about December 15, 1998, the plaintiffs
filed a notice of appeal to the United States Court of Appeals for the Second
Circuit, seeking review of the District Court's November 9, 1998 order granting
the defendants' motions to dismiss the amended complaint with prejudice for its
failure to state a claim upon which relief may be granted and its failure to
plead fraud with particularity. It is the Company's understanding that Merrill
Lynch, its affiliates and the two directors who previously served on the
Company's Board of Directors as representative of certain affiliates of Merrill
Lynch, have reached a settlement with the plaintiffs, and the action as against
these defendants has been remanded by the Court of Appeals to the District Court
for proceedings in connection with that settlement. The appeal as against the
remaining defendants, including the Company, has been fully briefed and is
scheduled for oral argument before the Court of Appeals on September 15, 1999.
Because this appeal is presently pending, any liability that may arise from this
action cannot be predicted at this time. The Company believes that the amended
complaint is without merit and intends to continue to defend the action
vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the period covered by this report, the Company issued $199,072,000
of convertible debentures due 2019 guaranteed on a subordinated basis by
AnnTaylor, Inc. (the "Convertible Debentures"). Approximately 2.4 million shares
of common stock are issuable upon conversion of the Convertible Debentures.
$180,975,000 of Convertible Debentures were originally issued by the Company on
June 18, 1999 to qualified institutional buyers ("QIBs") in reliance on Rule
144A under the Securities Act of 1933. The initial purchasers of the Convertible
Debentures were Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, and
Bank America Securities LLC (the "Initial Purchasers"). The remaining
$18,097,000 of Convertible Debentures were sold on July 15, 1999 pursuant to an
over-allotment option granted to the Initial Purchasers in the Purchase
Agreement, also in reliance on Rule 144A.
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The Convertible Debentures were sold at an original issue price of $552.56
per $1,000 principal amount at maturity, or an aggregate issue price of
$110,000,000. The aggregate underwriting commission to the Initial Purchasers
was $3,300,000.
The Convertible Debentures mature on June 18, 2019, and are convertible
into 12.078 shares of common stock per $1,000 principal amount at maturity of
Convertible Debenture. The convertible securities may be redeemed at the
Company's option on or after June 18, 2004.
The Bank of New York was named as trustee for the Convertible Debentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As reported in the Company's Quarterly Report for the First Quarter ended
May 1, 1999, AnnTaylor Stores Corporation's 1999 Annual Meeting of Stockholders
was held on May 18, 1999. The following matters were voted upon and approved by
the Company's stockholders at the meeting:
1. Mr. James J. Burke, Ms. Patricia DeRosa and Mr. Ronald W. Hovsepian were
re-elected as Class II Directors of the Company for terms expiring in 2002.
19,145,829, 19,146,019, and 19,138,995 shares were voted in favor of, and
1,006,356, 1,006,166, and 1,013,190 were voted against, the reelection of
Mr. Burke, Ms. DeRosa and Mr. Hovsepian, respectively. Mr. Gerald S.
Armstrong, Mr. Wesley E. Cantrell and Ms. Hanne M. Merriman continued as
Class III Directors with terms expiring in 2000 and Mr. Robert C. Grayson,
Ms. Rochelle B. Lazarus, and Mr. J. Patrick Spainhour continued as Class I
Directors with terms expiring in 2001.
2. The amendment of the Company's Restated Certificate of Incorporation to
increase the number of shares of common stock the Corporation is authorized
to issue from 40,000,000 to 120,000,000 was approved. 16,196,419 shares
were voted in favor of, 3,945,425 shares were voted against, and 10,341
shares abstained from voting on, this proposal.
3. The adoption of the Company's Associate Discount Stock Purchase Plan was
approved. 19,772,250 shares were voted in favor for, 143,810 shares were
voted against, and 24,409 shares abstained from voting on, this proposal.
4. The appointment of Deloitte & Touche llp as the Company's independent
auditors for the 1999 fiscal year was ratified. 20,131,509 shares were
voted in favor of, 8,715 shares were voted against, and 11,961 shares
abstained from voting on, this proposal.
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ITEM 5. OTHER INFORMATION
On August 31, 1999, the Board of Directors of the Company authorized a $40
million securities repurchase program. Pursuant to this program, purchases of
shares of the Company's Common Stock and/or its Convertible Debentures due 2019
will be made from time to time, subject to market conditions and at prevailing
market prices, through open market purchases or in privately negotiated
transactions. Repurchased shares of Common Stock will become treasury shares and
may be used for general corporate and other purposes. Repurchased Debentures
will be cancelled.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 Indenture, dated as of June 18, 1999, between the Company, Ann
Taylor, and The Bank of New York, as Trustee relating to the
Company's Convertible Subordinated Debentures due 2019.
Incorporated by reference to Exhibit 4.01 to the
Registration Statement of the Company filed on September 13,
1999.
4.2 Registration Rights Agreement, dated as of June 18, 1999, between
the Company, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith and Banc America Securities LLC. Incorporated
by reference to Exhibit 4.02 to the Registration Statement
of the Company filed on September 13, 1999.
10.6.2 Amendment #2 to the Employment Agreement, dated August 12,
1999, between the Company and J. Patrick Spainhour.
10.19.6 First Amendment to the Credit Agreement, dated as of September
7, 1999, among Ann Taylor, Bank of America, N.A., Citibank,
N.A., First Union National Bank and each of the other
lenders party to the Credit Agreement, NationsBanc
Montgomery Securities LLC, as Arranger, and Bank of America,
as Administrative Agent.
27 Financial Data Schedule
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) Reports on Form 8-K:
The Company filed a report dated June 11, 1999 with the Commission on Form
8-K on June 15, 1999, and a report dated June 21, 1999 was filed with the
Commission on Form 8-K on June 22, 1999, with respect to the Company's intention
and subsequent completion of a sale, through a private placement, of a new issue
of discounted convertible subordinated debentures due 2019 and that the proceeds
of the offering were used in connection with the redemption, on July 22, 1999,
of the $100,000,000 outstanding 83/4% subordinated notes due 2000 issued by the
Company's wholly owned subsidiary AnnTaylor, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AnnTaylor Stores Corporation
Date: September 14, 1999 By: /s/ J. Patrick Spainhour
-------------------- ---------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
Date: September 14, 1999 By: /s/ Barry Erdos
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Barry Erdos
Executive Vice President -
Chief Financial Officer and
Treasurer