-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HpaUhODrz0Pkr/DklViE/2lPleCDPamOhybBnhzhml7Qb5G90SRFlf6Rdb0Wi6Lz 7rBQpeggdeSVIhjOgWiLsw== 0000874214-99-000008.txt : 19990330 0000874214-99-000008.hdr.sgml : 19990330 ACCESSION NUMBER: 0000874214-99-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAYLOR ANN STORES CORP CENTRAL INDEX KEY: 0000874214 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 133499319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10738 FILM NUMBER: 99575274 BUSINESS ADDRESS: STREET 1: 142 WEST 57TH ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125413300 10-K 1 ANNTAYLOR STORES CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K --------- (Mark One) [X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended January 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File No. 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) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of Each Class Name of each exchange on which registered COMMON STOCK, THE NEW YORK STOCK EXCHANGE $.0068 PAR VALUE Securities registered pursuant to Section 12(g) of the Act: None. 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes |X]. No_____ . The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of February 26, 1999 was $912,348,697. The number of shares of the registrant's Common Stock outstanding as of February 26, 1999 was 26,007,152. DOCUMENTS INCORPORATED BY REFERENCE: None. - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL AnnTaylor Stores Corporation (the "Company"), through its wholly owned subsidiary AnnTaylor, Inc. ("Ann Taylor"), is a leading national specialty retailer of better quality women's apparel, shoes and accessories sold primarily under the Ann Taylor brand name. The Company believes that "Ann Taylor" is a highly recognized national brand that defines a distinct fashion point of view. Ann Taylor merchandise represents classic styles, updated to reflect current fashion trends. The Company's stores offer a full range of career and casual separates, weekend wear, dresses, tops, accessories and shoes, coordinated as part of a total wardrobing strategy. This total wardrobing strategy is reinforced by an emphasis on customer service. Ann Taylor sales associates are trained to assist customers in merchandise selection and wardrobe coordination, helping them achieve the "Ann Taylor look" while reflecting the customers' personal styles. As of January 30, 1999, the Company operated 365 stores in 41 states and the District of Columbia, under the names Ann Taylor, Ann Taylor Factory Store and Ann Taylor Loft. Of the 306 stores operated under the Ann Taylor name, approximately three-quarters are located in regional malls and upscale specialty retail centers, with the balance located in downtown and village locations. These stores represent the Company's core merchandise line. The Company believes that the customer base for its Ann Taylor 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, who are attracted to Ann Taylor by its focused merchandising and total wardrobing strategies, personalized customer service, efficient store layouts and continual flow of new merchandise. As of January 30, 1999, the Company operated 46 Ann Taylor Loft stores. Ann Taylor Loft is a separate moderate-price store for women who appreciate the Ann Taylor style but are more cost conscious. Merchandise is designed uniquely for these stores and is sold under the Ann Taylor Loft label. The first 30 of the Company's Ann Taylor Loft stores were located in factory outlet centers, including some Ann Taylor Factory Stores that, in 1996, were converted to Loft stores after the introduction of the Loft concept. In 1998, the Company opened its first 16 Ann Taylor Loft stores outside the factory outlet center environment, primarily in regional malls and strip shopping centers focused on the moderate-priced consumer. Management believes that Ann Taylor Loft represents a significant opportunity for the Company to compete in the moderately-priced women's apparel market. See "Stores and Expansion", "Competition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Statement Regarding Forward Looking Disclosures" below. The Company also operates 13 Ann Taylor Factory stores in factory outlet centers that serve primarily as a clearance vehicle for merchandise from Ann Taylor stores. Many of these stores also offer a limited selection of original priced Ann Taylor Loft merchandise. The Company was incorporated under the laws of the state of Delaware in 1988 under the name AnnTaylor Holdings, Inc. The Company changed its name to AnnTaylor Stores Corporation in April 1991. The Company was formed at the direction of Merrill Lynch Capital Partners, Inc. ("ML Capital Partners"), a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co"), for the purpose of acquiring Ann Taylor in a leveraged buyout transaction (the "Acquisition") in 1989. The Company completed an initial public offering of its common stock in May 1991. Over the past several years, the aggregate amount of Company common stock beneficially owned by ML Capital Partners and certain other affiliates of ML&Co. (collectively, the "ML Entities"), has decreased, from 11,473,452 shares, or approximately 57% of the Company's outstanding common stock, as of April 1992, to 1,733,628 shares, or approximately 6.7%, of the Company's outstanding common stock, as of February 12, 1999. The ML Entities have two designees on the Company's Board of Directors and, therefore, are in a position to influence management of the Company. On March 25, 1999, ML Capital Partners orally advised the Company that the ML Entities had sold all of these shares in March 1999. Unless the context indicates otherwise, all references herein to the Company include the Company, its wholly owned subsidiary Ann Taylor and their respective subsidiaries. =============================================================================== MERCHANDISE DESIGN AND PRODUCTION Substantially all merchandise offered by the Company's stores is developed by the Company's in-house product design and development teams, which design merchandise exclusively for the Company. The Company's merchandising groups determine inventory needs for the upcoming season, edit the assortments developed by the design teams, plan monthly merchandise flows, and arrange for the production of merchandise either through the Company's sourcing division, or with manufacturers or vendors who are private label specialists. The Company's production management and quality assurance department establishes the technical specifications for all Company merchandise, inspects factories in which the merchandise is produced, including periodic in-line inspections while goods are in production to identify potential problems prior to shipment and, upon receipt, inspects merchandise on a test basis for uniformity of size and color, as well as for conformity with specifications and overall quality of manufacturing. The Company sources merchandise from approximately 235 manufacturers and vendors, none of which accounted for more than 9% of the Company's merchandise purchases in Fiscal 1998. The Company's merchandise is manufactured in over 20 countries, with approximately 10% of the Company's merchandise manufactured in Hong Kong and 35% in China. Any event causing a sudden disruption of manufacturing or imports from Hong Kong or China, including the imposition of additional import restrictions, could have a material adverse effect on the Company's operations. Substantially all of the Company's foreign purchases are negotiated and paid for in U.S. dollars. The Company cannot predict whether any of the foreign countries in which its products are currently manufactured or any of the countries in which the Company may manufacture its products in the future will be subject to future or increased import restrictions by the U.S. government, including the likelihood, type or effect of any trade restriction. Trade restrictions, including increased tariffs or quotas, against apparel, footwear or other items sold by the Company could affect the importation of such merchandise generally and, in such event, could increase the cost or reduce the supply of merchandise available to the Company and adversely affect the Company's business, financial condition, results of operations and liquidity. The Company's merchandise flow may also be adversely affected by financial or political instability in any of the countries in which its goods are manufactured, if it affects the production or export of merchandise from such countries. Merchandise flow may also be adversely affected by significant fluctuation in the value of the U.S. dollar against foreign currencies or restrictions on the transfer of funds. The Company does not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier. The Company believes it has a good relationship with its suppliers and that, as the number of the Company's stores increases, subject to the discussion above, there will continue to be adequate sources to produce a sufficient supply of quality goods in a timely manner and on satisfactory economic terms. INVENTORY CONTROL AND MERCHANDISE ALLOCATION The Company's merchandise planning and allocation department analyzes each store's size, location, demographics, and sales and inventory history to determine the quantity of merchandise to be purchased for and the allocation of merchandise to the Company's stores. Upon receipt, merchandise is allocated in order to achieve an emphasis that is suited to each store's customer base. Merchandise typically is sold at its original marked price for several weeks, with the length of time varying by item. The Company reviews its inventory levels on an on-going basis in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Markdowns may be used if inventory exceeds customer demand for reasons of style, seasonal adaptation or changes in customer preference or if it is determined that the inventory will not sell at its currently marked price. Marked-down items remaining unsold are moved periodically to the Company's factory outlet stores, where additional markdowns may be taken. =============================================================================== Throughout Fiscal 1997 and Fiscal 1998, the Company focused on improving its inventory management strategies, including evaluating target average inventory investment per store, in order to achieve greater inventory turns and to enhance merchandise gross margins. In Fiscal 1998, inventory turned 5.0 times compared to 5.1 times in Fiscal 1997 and 4.7 times in Fiscal 1996. Inventory turnover is determined by dividing cost of sales by the average of the cost of inventory at the beginning and the end of the period, excluding inventory associated with the Company's sourcing division. Sourcing division inventory consists principally of finished goods in transit from factories. In Fiscal 1998, the Company selected a new comprehensive merchandising information system to provide improved systems support for the Company's merchandising functions. Since selection of the system, the Company has been conducting a methodical, detailed review of both the new system's functionality and the Company's internal merchandising processes, in order to design adaptations to the new system and, in some cases, changes to the Company's processes, so that the Company may make best use of the new system. The Company expects to be ready to pilot the new system at the end of Fiscal 1999 and to phase-in the system over the following year. When complete, this new system will serve as the Company's central source of information regarding merchandise items, inventory management, purchasing, allocation, replenishment, receiving and distribution. The Company uses a centralized distribution system, under which nearly all merchandise is distributed to the Company's stores through its distribution center, located in Louisville, Kentucky. See "Properties". Merchandise is shipped by the distribution center to the Company's stores several times each week. STORES AND EXPANSION An important aspect of the Company's business strategy is a real estate expansion program designed to reach new customers through the opening of new stores. The Company opens new stores in markets that it believes have a sufficient concentration of its target customers. The Company also adds stores, or expands the size of existing stores, in markets where the Company already has a presence, as market conditions warrant and sites become available. Store locations are determined on the basis of various factors, including geographic location, demographic studies, anchor tenants in a mall location, other specialty stores in a mall or specialty center location or in the vicinity of a village location, and the proximity to professional offices in a downtown or village location. Stores opened in factory outlet centers are located in factory outlet malls in which co-tenants generally include a significant number of outlet or discount stores operated by nationally recognized upscale brand name retailers. Store size also is determined on the basis of various factors, including geographic location, demographic studies, and space availability. As of January 30, 1999, the Company operated 365 stores throughout the United States, of which 306 were Ann Taylor stores, 46 were Ann Taylor Loft stores, and 13 were Ann Taylor Factory Stores. Most new Ann Taylor stores opened since 1993 have been between 4,000 and 9,000 square feet in size. In addition, in Fall 1995, the Company opened a "flagship" Ann Taylor store in each of New York City and San Francisco. Each of these flagship stores is in excess of 20,000 square feet. These stores represent the fullest assortment of Ann Taylor merchandise, and include amenities unique to these stores. In Fiscal 1998, the Company opened 26 Ann Taylor stores that averaged approximately 4,400 square feet. In Fiscal 1999, the Company plans to open approximately 20 Ann Taylor stores, which are expected to average approximately 5,000 square feet. Ann Taylor Loft stores that are located in factory outlet centers (including three such stores opened in Fiscal 1998) average 9,000 square feet. The 16 Ann Taylor Loft stores that were opened in regional malls and strip shopping centers in 1998 averaged approximately 6,200 square feet. In Fiscal 1999, the Company expects to open approximately 30 Ann Taylor Loft stores in regional malls and strip shopping centers. These stores are expected to average approximately 6,000 square feet. The Company's 13 Ann Taylor Factory Stores, located in factory outlet centers, average 7,000 square feet. =============================================================================== The Company's stores typically have approximately 20% of their total square footage allocated to stockroom and other non-selling space. The following table sets forth certain information regarding store openings, expansions and closings for Ann Taylor stores ("ATS"), Ann Taylor Factory Stores ("ATFS"), Ann Taylor Loft stores ("ATL") and the Company's former Ann Taylor Studio stores ("ATA") over the past five years:
No. Stores No. No. Total Stores No. Stores Stores Stores No. Stores Open Open at Opened During Expanded Closed at End of Beginning Fiscal Year During During Fiscal Year of Fiscal --------------------- Fiscal Fiscal ------------------------------------- Fiscal Year Year ATS ATFS ATL ATA(a) Year(b) Year(b) ATS ATFS ATL ATA(a) Total - ----------- ---- --- ---- --- ------ ------- ------- --- ---- --- ------ ----- 1994....... 231 18 7 5 5 25 4 236 21 --- 5 262 1995....... 262 26 4 14 4 30 4 258 22 17 9 306 1996....... 306 9 1 1 --- 7 8 259 14(c) 27(c) 9 309 1997....... 309 27 --- --- --- 9 12 283 14 27 --- 324 1998....... 324 26 --- 19 --- 8 4 306 13 46 --- 365 - ------------ (a) Ann Taylor Studio was a free-standing shoe and accessory store concept tested by the Company in 1994 and 1995. All Ann Taylor Studio stores were closed during Fiscal 1997. (b) All stores expanded and all stores closed were Ann Taylor stores, except that one store expanded in 1994 and one store expanded in 1995 were ATL stores, one store closed in 1998 was an ATFS store and nine stores closed in 1997 were ATA stores. (c) In 1995, certain ATFS and ATL stores that sold both original price Ann Taylor Loft merchandise and clearance merchandise from Ann Taylor stores and Ann Taylor Loft stores were classified as ATFS stores. In 1996, these stores were reclassified as ATL stores. During 1997, these stores' merchandise assortment was changed to be predominantly Ann Taylor Loft merchandise, and these stores are now operated as ATL stores.
The Company believes that its existing store base is a significant strategic asset of its business. Ann Taylor stores are located in some of the most productive retail centers in the United States. The Company believes that it is among the tenants most highly desired by real estate developers because of its strong Ann Taylor brand franchise and its high average sales per square foot productivity ($474 per square foot in Fiscal 1998) relative to other specialty apparel retailers. The Company has invested approximately $172 million in its store base since the beginning of Fiscal 1993; approximately 64% of its stores are either new or have been completely remodeled, as a result of an expansion or relocation, in the last five years. The Company's 1998 real estate expansion plan resulted in an increase in the Company's total store square footage of approximately 230,000 square feet (net of store closings), or 12.7%, from approximately 1,808,000 square feet to approximately 2,038,000 square feet. In Fiscal 1999, the Company intends to increase store square footage by approximately 275,000 square feet, or 13.5%, representing approximately 20 new Ann Taylor stores, the expansion, renovation or relocation of 10 existing Ann Taylor stores, and approximately 30 new Ann Taylor Loft stores. Capital expenditures for the Company's Fiscal 1998 store expansion program, net of landlord construction allowances, totaled approximately $26.4 million, including expenditures for store refurbishing and store refixturing. The Company expects that capital expenditures for its Fiscal 1999 store expansion program, net of landlord construction allowances, will be approximately $35 million, including expenditures for store refurbishing and store refixturing. =============================================================================== The Company's ability to continue to increase store square footage will be dependent upon, among other things, general economic and business conditions affecting consumer confidence and spending, the availability of desirable locations and the negotiation of acceptable lease terms. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Statement Regarding Forward Looking Disclosures". INFORMATION SYSTEMS In 1997, the Company completed a thorough review of its information systems, and developed a five-year strategic plan to upgrade these systems, including the planned implementation of the core merchandising system referred to above under "Inventory Control and Merchandise Allocation". The Company believes that enhanced information systems are critical to providing its management with enhanced decision support tools and maintaining the Company's competitive position. The five-year plan contemplates aggregate investment in information systems of approximately $35 million, of which approximately $11 million was expended in 1998, and $11 million is expected to be invested in 1999. For information regarding the Company's Year 2000 compliance efforts, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000 Status". CUSTOMER CREDIT Customers may pay for merchandise with the Ann Taylor credit card, American Express, Visa, MasterCard, JCB, cash or check. Credit card sales were 80.2% of net sales in Fiscal 1998, 78.7% in Fiscal 1997 and 77.8% in Fiscal 1996. In Fiscal 1998, 16.6% of net sales were made with the Ann Taylor credit card, and 63.6% were made with third-party credit cards. As of January 30, 1999, the Company's Ann Taylor credit card accounts receivable totaled $51,818,000, net of allowance for doubtful accounts. Accounts written off in Fiscal 1998 were approximately $1,468,000, or 0.2% of net sales. The Company has offered customers its proprietary Ann Taylor credit card since 1976. The Company believes that the Ann Taylor credit card enhances customer loyalty while providing the customer with additional credit. However, the percentage of the Company's total sales made with its proprietary credit card has been declining over the past several years. The Company believes the declining penetration of its Ann Taylor credit card as a percentage of sales is attributable to the gain of market share by bank cards throughout the retail industry generally, as well as to the increase in the number of the Company's Ann Taylor Factory Stores and Loft stores, which have historically experienced a significantly lower penetration of sales with the Ann Taylor card. At January 30, 1999, over 374,000 Ann Taylor credit card accounts had been used during the past 18 months. ADVERTISING AND PROMOTION For many years, the Company relied on its Ann Taylor fashion catalog, mailed principally to Ann Taylor credit card holders, as its principal advertising vehicle. The Company also occasionally ran print advertisements in newspapers and national women's fashion magazines such as Elle, Vogue and Harpers Bazaar. In early 1996, the Company suspended publication of its catalog and ran very few print advertisements. Beginning in 1997, the Company placed a renewed emphasis on marketing. The Company believes it is strategically important to communicate on a regular basis directly with its current customer base and with potential customers, through increased national and regional advertising,including outdoor media, as well as through direct mail marketing and in-store presentation. Marketing expenditures as a percentage of sales were 2.0% in Fiscal 1998, 1.3% in Fiscal 1997, and 0.8% in Fiscal 1996. =============================================================================== TRADEMARKS AND SERVICE MARKS The Ann Taylor trademark, and other trademarks and service marks used by the Company, either are registered or have trademark applications pending with the United States Patent and Trademark Office ("USPTO") and with the registries of many foreign countries. The Company's rights in the "AnnTaylor" mark are a significant part of the Company's business, as the Company believes its trademark is well known in the women's retail apparel industry. Accordingly, the Company intends to maintain its "AnnTaylor" mark and related registrations and vigorously protect its trademarks against infringement. In 1994, the Company initiated trademark registration applications with the USPTO for its AnnTaylor Loft trademark in the categories of retail store services and apparel. Registration of the trademark was issued in the retail store services category in 1996. However, the Company's application for a trademark registration in the apparel classification is being challenged in the USPTO by a French company, Freche et Fils, which cites its own "Loft Design By..." trademark in opposition to the Ann Taylor Loft mark. The Company believes that the challenge is without merit and intends to defend the action vigorously. In the event that Freche et Fils' challenge to the Company's trademark application for the Ann Taylor Loft trademark is successful, the Company would be denied federal registration of the Ann Taylor Loft trademark in the apparel classification. COMPETITION The women's retail apparel industry is highly competitive. The Company's stores compete with certain departments in national or local department stores, and with other specialty store chains and independent retail stores carrying similar lines of merchandise. The Company believes that its focused merchandise selection, exclusive fashions, personalized service and convenience distinguish it from other apparel retailers. Many of the Company's competitors are considerably larger and have substantially greater financial, marketing and other resources than the Company and there is no assurance that the Company will be able to compete successfully with them in the future. In addition, the Company has only limited experience in the "moderate" category, and existing competitors may have significantly greater brand recognition among this customer segment than the Company. EMPLOYEES Store management receives compensation in the form of salaries and performance-based bonuses. Sales associates are paid on an hourly basis plus performance incentives. A number of programs exist that offer incentives to both management and sales associates to increase sales and support the Company's total wardrobing strategy. As of January 30, 1999, the Company had approximately 7,300 employees, of whom 1,800 were full-time salaried employees, 1,900 were full-time hourly employees and 3,600 were part-time hourly employees working less than 30 hours per week. None of the Company's employees are represented by a labor union. The Company believes that its relationship with its employees is good. ============================================================================== STATEMENT REGARDING FORWARD LOOKING DISCLOSURES Sections of this Annual Report 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. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Statement Regarding Forward Looking Disclosures". ITEM 2. PROPERTIES As of January 30, 1999, the Company operated 365 stores, all of which were leased. The store leases typically provide for initial terms of ten years, although some leases have shorter or longer initial periods, and grant the Company the right to extend the term for one or two additional five-year periods. Most of the store leases require Ann Taylor to pay a specified minimum rent, plus a contingent rent based on a percentage of the store's net sales in excess of a specified threshold. Most of the leases also require Ann Taylor to pay real estate taxes, insurance and certain common area and maintenance costs. The current terms of the Company's leases, including renewal options, expire as follows: Fiscal Years Lease Number of Terms Expire Stores ------------ ------ 1999 - 2001........................ 21 2002 - 2004........................ 65 2005 - 2007........................160 2008 and later.....................119 Ann Taylor leases corporate offices at 142 West 57th Street in New York City, containing approximately 125,000 square feet and approximately 59,000 square feet of office space at 1372 Broadway in New York City. The leases for these premises expire in 2006 and 2010, respectively. The Company also leases office space in New Haven, Connecticut, containing approximately 37,000 square feet. This lease expires in 2000. Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution Services, Inc., owns its 256,000 square foot distribution center located in Louisville, Kentucky. Nearly all Ann Taylor merchandise is distributed to the Company's stores through this facility. The parcel on which the Louisville distribution center is located comprises approximately 20 acres and could accommodate possible future expansion of the facility. =============================================================================== ITEM 3. LEGAL PROCEEDINGS On April 26, 1996, certain alleged stockholders of the Company filed a purported class action lawsuit in the United States District Court Southern District of New York, against the Company, Ann Taylor, certain officers and directors of the Company and Ann Taylor, ML&Co. and certain affiliates of ML&Co. (Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The complaint alleged causes of action under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended, by alleging that the Company and the other defendants engaged in a fraudulent scheme and course of business that operated a fraud or deceit on purchasers of the Company's common stock during the period commencing February 3, 1994 through May 4, 1995 due to alleged false and misleading statements about the Company and Ann Taylor. The complaint sought, among other things, certification as a class action on behalf of all purchasers of common stock during the period commencing February 3, 1994 through May 4, 1995, the awarding of compensatory damages to the plaintiffs and purported members of the class, the awarding of costs, including pre-judgment and post-judgment interest, reasonable attorneys' fees and expert witness fees to the plaintiffs and purported members of the class and equitable and/or injunctive relief. On March 10, 1998, the Court granted the defendants' motions to dismiss the complaint. The Court found that the complaint failed to state a claim upon which relief may be granted, and failed to plead fraud with particularity and an inability to do so. The Court's Opinion granted the plaintiffs leave to amend and re-file the complaint within thirty days of the date of the Opinion, and the plaintiffs filed an amended complaint on April 9, 1998. On November 9, 1998, the Court issued an Opinion dismissing, with prejudice, the amended complaint. On or about December 15, 1998, the plaintiffs filed a notice of appeal to the U.S District Court of Appeals, Second Circuit, seeking review of the Appellate Court's decision. This appeal is presently pending, and 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 defend the action vigorously. The Company is also a party to routine litigation incident to its business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position, results of operations or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ============================================================================== PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed and traded on the New York Stock Exchange under the symbol ANN. The number of holders of record of common stock at February 26, 1999 was 613. The following table sets forth the high and low closing sale prices for the common stock on the New York Stock Exchange during Fiscal 1998 and Fiscal 1997. Market Price ------------ High Low ---- --- Fiscal Year 1998 Fourth quarter..............................$ 41-9/16 $ 28-3/4 Third quarter............................... 29-5/8 19-3/8 Second quarter.............................. 23-1/2 16-1/8 First quarter............................... 16-1/2 11-13/16 Fiscal Year 1997 Fourth quarter..............................$ 14-15/16 $ 11-5/16 Third quarter............................... 19-5/8 14 Second quarter.............................. 25 16-7/8 First quarter............................... 24-1/4 17 The Company has never paid dividends on the common stock and does not intend to pay dividends in the foreseeable future. As a holding company, the ability of the Company to pay dividends is dependent upon the receipt of dividends or other payments from Ann Taylor. The payment of dividends by Ann Taylor to the Company is subject to certain restrictions under Ann Taylor's Credit Facility described below under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". The payment of cash dividends on the common stock by the Company is also subject to certain restrictions contained in the Company's guarantee of Ann Taylor's obligations under the Credit Facility. In addition, in connection with the preferred securities issued by the Company's financing vehicle, AnnTaylor Finance Trust, the payment by the Company of cash dividends on the common stock is restricted in the event of a default by the Company of its obligations in relation to the preferred securities or in the event payment of dividends on the preferred securities is deferred. Any determination to pay cash dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant at that time by the Company's Board of Directors. ITEM 6. SELECTED FINANCIAL DATA The following selected historical financial information for the periods indicated has been derived from the audited consolidated financial statements of the Company. The Company's consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 and consolidated balance sheets as of January 30, 1999 and January 31, 1998, as audited by Deloitte & Touche llp, independent auditors, appear elsewhere in this document. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto of the Company included elsewhere in this document. All references to years are to the fiscal year of the Company, which ends on the Saturday nearest January 31 in the following calendar year. All fiscal years for which financial information is set forth below had 52 weeks, with the exception of Fiscal 1995, which had 53 weeks. ================================================================================
Fiscal Years Ended ---------------------------------------------------- Jan. 30, Jan. 31, Feb. 1, Feb. 3, Jan. 28, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (dollars in thousands, except per square foot data and per share data) Operating Statement Information: Net sales ..........................$ 911,939 $781,028 $ 798,117 $731,142 $658,804 Cost of sales....................... 455,724 411,756 443,443 425,225 357,783 ------- ------- ------- ------- ------- Gross profit..................... 456,215 369,272 354,674 305,917 301,021 Selling, general and administrative expenses.......... 349,955 308,232 291,027 271,136 214,224 Studio shoe stores closing expense (a)...................... --- --- 3,600 --- --- Employment contract separation expense (b)...................... --- --- 3,500 --- --- Retirement of assets (c)............ 3,633 --- --- --- --- Amortization of goodwill (d)........ 11,040 11,040 10,086 9,506 9,506 ------- ------- ------- ------- ------- Operating income................. 91,587 50,000 46,461 25,275 77,291 Interest expense (e)................ 18,117 19,989 24,416 20,956 14,229 Other (income) expense, net......... 567 548 403 38 168 ------- ------- ------- ------- ------- Income before income taxes and extraordinary loss............... 72,903 29,463 21,642 4,281 62,894 Income tax provision................ 33,579 17,466 12,975 5,157 30,274 ------- ------- ------- ------- ------- Income (loss) before extraordinary loss.............. 39,324 11,997 8,667 (876) 32,620 Extraordinary loss (f).............. --- 173 --- --- 868 ------- ------- ------- ------- ------- Net income (loss)................$ 39,324 $ 11,824 $ 8,667 $ (876) $ 31,752 ======= ======= ======= ======== ======= Basic earnings (loss) per share before extraordinary loss..............$ 1.53 $ 0.47 $ 0.36 $ (0.04) $ 1.44 Extraordinary loss per share (f).... --- 0.01 --- --- 0.04 ------- ------- ------- ------- ------- Basic earnings (loss) per share.....$ 1.53 $ 0.46 $ 0.36 $ (0.04) $ 1.40 ======= ======= ======= ======== ======= Diluted earnings (loss) per share before extraordinary loss..............$ 1.44 $ 0.47 $ 0.36 $ (0.04) $ 1.42 Extraordinary loss per share (f).... --- 0.01 --- --- 0.04 ------- ------- ------- ------- ------- Diluted earnings (loss) per share...$ 1.44 $ 0.46 $ 0.36 $ (0.04) $ 1.38 ======= ======= ======= ======== ======= Weighted average shares outstanding (in thousands)................... 25,715 25,628 23,981 23,067 22,687 Weighted average shares outstanding, assuming dilution (in thousands).......... 31,006 25,693 24,060 23,167 23,067 Operating Information: Percentage increase (decrease) in comparable store sales (g)...... 7.9% (5.5)% 1.8% (8.9)% 13.7% Net sales per gross square foot (h).$ 474 $ 445 $ 476 $ 518 $ 627 Number of stores: Open at beginning of the period.. 324 309 306 262 231 Opened during the period......... 45 27 11 48 35 Expanded during the period....... 8 9 7 30 25 Closed during the period......... 4 12 8 4 4 Open at the end of the period.... 365 324 309 306 262 Total store square footage at end of period ...................2,038,000 1,808,000 1,705,000 1,651,000 1,173,000 Capital expenditures................$ 45,131 $ 22,945 $ 16,107 $ 78,378 $ 61,341 Depreciation and amortization, including goodwill (d)...........$ 39,823 $ 38,843 $ 36,294 $ 28,294 $ 21,293 Working capital turnover (I)........ 6.3x 6.5x 7.8x 7.8x 8.5x Inventory turnover (j).............. 5.0x 5.1x 4.7x 4.3x 4.6x Balance Sheet Information (at end of period): Working capital (k).................$ 168,708 $ 122,181 $ 118,850 $ 86,477 $ 102,181 Goodwill, net (d)................... 319,699 330,739 341,779 313,525 323,031 Total assets........................ 775,417 683,661 688,139 678,709 598,254 Total debt.......................... 105,157 106,276 131,192 272,458 200,000 Preferred securities................ 96,624 96,391 96,158 --- --- Stockholders' equity................ 432,699 384,107 370,582 325,688 326,112 (Footnotes on following page) =============================================================================== (Footnotes for preceding page. In Fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" and all prior year per share information has been recalculated. Unless otherwise noted, all per share information is for diluted earnings per share.) (a) Relates to the closing of the nine Ann Taylor Studio shoe stores. The charge of $3,600,000 ($2,052,000, or $0.08 per share, net of income tax benefit) in Fiscal 1996 represented the write-off of the net book value of the nine stores and leases and other related costs for these locations. (b) In connection with the resignation in August 1996 of a former executive, a one-time pre-tax charge of $3,500,000 ($1,958,000, or $0.08 per share, net of related tax benefit) was recorded in Fiscal 1996 relating to the estimated costs of the Company's obligations under her employment contract with the Company. (c) A charge of $3,633,000 ($2,180,000, or $0.07 per share, net of tax benefit) was recorded in Fiscal 1998 for the retirement of certain assets resulting from the renovation of the Company's corporate offices. (d) As a result of the Acquisition of Ann Taylor by the Company, which was effective as of January 29, 1989, $380,250,000, representing the excess of the allocated purchase price over the fair value of the Company's net assets, was recorded as goodwill and is being amortized on a straight-line basis over 40 years. In addition, as a result of the acquisition of the Company's sourcing division, effective September 20, 1996, the Company recorded goodwill of $38,430,000 that is being amortized on a straight-line basis over 25 years. (e) Includes non-cash interest expense of $1,290,000, $1,419,000, $1,574,000, $1,004,000, and $978,000 in Fiscal 1998, 1997, 1996, 1995, and 1994, respectively, from amortization of deferred financing costs. (f) In Fiscal 1997, Ann Taylor incurred an extraordinary loss of $303,000 ($173,000, or $0.01 per share, net of income tax benefit), in connection with the prepayment of the outstanding balance of a term loan. In Fiscal 1994, Ann Taylor incurred an extraordinary loss of $1,522,000 ($868,000, or $0.04 per share, net of income tax benefit), in connection with the prepayment of long-term debt with the proceeds of a public sale of common stock of the Company. (g) Comparable store sales are calculated by excluding the net sales of a store for any month of one period if the store was not also open during the same month of the prior period. In a year with 53 weeks, such as Fiscal 1995, sales in the last week of that year are not included in determining comparable store sales. A store that is expanded by more than 15% is treated as a new store for the first year following the opening of the expanded store. (h) Net sales per square foot ("sales per square foot") is determined by dividing net sales for the period by the average of the gross square feet at the beginning and end of each period. Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space. (i) Working capital turnover is determined by dividing net sales by the average of the amount of working capital at the beginning and end of the period. (j) Inventory turnover is determined by dividing cost of sales by the average of the cost of inventory at the beginning and end of the period (excluding inventory associated with the Company's sourcing division). (k) Includes current portion of long-term debt of $1,206,000, $1,119,000, $287,000, $40,266,000, and $0 in Fiscal 1998, 1997, 1996, 1995, and 1994, respectively.
================================================================================ ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES The following table sets forth certain sales and store data for the periods indicated:
Fiscal Year Ended -------------------------------------------- Fiscal 1998 Fiscal 1997 Fiscal 1996 (52 weeks) (52 weeks) (52 weeks) ---------- ---------- ------------ Net sales ($000).............................. $911,939 $ 781,028 $ 798,117 Total net sales increase (decrease) percentage (52 week basis) ................. 16.8% (2.1)% 10.6% Comparable store sales increase (decrease) percentage (52 week basis)....... 7.9% (5.5)% 1.8% Net sales per average square foot............. $ 474 $ 445 $ 476 Total store square footage at end of period... 2,038,000 1,808,000 1,705,000 Number of New stores ................................. 45 27 11 Expanded stores ............................ 8 9 7 Closed stores .............................. 4 12 8 Total stores open at end of period ........... 365 324 309
The Company's net sales do not show significant seasonal variation, although net sales in the fourth quarter have historically been moderately higher than in the other quarters. As a result, the Company has not had significant overhead and other costs generally associated with large seasonal variations. RESULTS OF OPERATIONS The following table sets forth operating statement data expressed as a percentage of net sales for the periods indicated:
Fiscal Year ------------------------ 1998 1997 1996 ---- ---- ---- Net sales ....................................... 100.0% 100.0% 100.0% Cost of sales ................................... 50.0 52.7 55.6 ----- ----- ----- Gross profit ................................ 50.0 47.3 44.4 Selling, general and admnistrative expenses ...................... 38.4 39.5 36.5 Studio shoe stores closing expense .............. -- -- 0.4 Employment contract separation expense .......... -- -- 0.4 Retirement of assets ............................ 0.4 -- -- Amortization of goodwill ........................ 1.2 1.4 1.3 ----- ----- ----- Operating income ............................ 10.0 6.4 5.8 Interest expense ................................ 2.0 2.6 3.1 Other expense, net .............................. -- -- -- ----- ----- ----- Income before income taxes and extraordinary loss 8.0 3.8 2.7 Income tax provision ............................ 3.7 2.3 1.6 ----- ----- ----- Income before extraordinary loss ................ 4.3 1.5 1.1 Extraordinary loss .............................. -- -- -- ----- ----- ----- Net income ...................................... 4.3% 1.5% 1.1% ===== ===== =====
============================================================================ FISCAL 1998 COMPARED TO FISCAL 1997 The Company's net sales increased to $911,939,000 in Fiscal 1998 over $781,028,000 in Fiscal 1997, an increase of $130,911,000, or 16.8%. Comparable store sales for Fiscal 1998 increased 7.9%, compared to a decrease of 5.5% in Fiscal 1997. Management believes that the sales increase was primarily attributable to the opening of new stores, the expansion of existing stores, and a net increase in comparable store sales in 1998, as a result of improved customer acceptance of the Company's product offerings and merchandise assortment. Gross profit as a percentage of net sales increased to 50.0% in 1998 from 47.3% in 1997. As discussed in Note 1 to the Consolidated Financial Statements, the Company elected in Fiscal 1998 to change the method by which the Company accounts for inventory, from the retail method to the average cost method. The effect of this accounting change on Fiscal 1998 net income was an increase of $1,272,000, or $0.04 per share on a diluted basis. Under the retail method, gross margin as a percentage of net sales would have been approximately 49.8%. The increase in gross margin reflects continued merchandise margin improvements resulting from the maturation of the Company's sourcing organization, since the acquisition of the Company's sourcing joint venture two years ago, as well as a reduction in markdowns as a percentage of sales. See discussion of Sourcing Acquisition in Note 14 to the Company's Consolidated Financial Statements. Selling, general and administrative expenses were $349,955,000, or 38.4% of net sales, in 1998, compared to $308,232,000, or 39.5% of net sales, in 1997. 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. The benefits of this leverage were partially offset by an increase 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. Operating income increased to $91,587,000, or 10.0% of net sales, in 1998 from $50,000,000, or 6.4% of net sales, in 1997. Operating income in 1998 was reduced by $3,633,000, or 0.4% of net sales, for the retirement of certain assets in connection with the renovation of the Company's corporate offices. Amortization of goodwill was $11,040,000, or 1.2% of net sales, in 1998 compared to $11,040,000, or 1.4% of net sales, in 1997. Operating income without giving effect to such amortization was $102,627,000, or 11.2% of net sales, in 1998 and $61,040,000, or 7.8% of net sales, in 1997. Interest expense was $18,117,000 in 1998 compared to $19,989,000 in 1997. The decrease in interest expense was primarily attributable to a decrease in the Company's outstanding long-term debt, resulting in part from the prepayment in July 1997 of a $24,500,000 term loan referred to below, and to greater interest income earned on cash on hand. The weighted average interest rate on the Company's outstanding indebtedness at January 30, 1999 was 8.60% compared to 8.59% at January 31, 1998. The income tax provision was $33,579,000, or 46.1% of income before income taxes, in the 1998 period, compared to $17,466,000, or 59.3% of income before income taxes and extraordinary loss, in 1997. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. Without giving effect to such non-deductible goodwill amortization, the Company's effective income tax rate was 40% of income before income taxes in the 1998 period, compared to 43% before income taxes and extraordinary loss in the 1997 period. The decrease in the effective income tax rate resulted primarily from the implementation of additional state tax planning and from an increase in the amount of income earned outside the United States by the Company's non-U.S. sourcing subsidiaries. As a result of the foregoing factors, the Company had net income of $39,324,000, or 4.3% of net sales, for 1998, compared to net income of $11,824,000, or 1.5% of net sales, for 1997. ============================================================================= FISCAL 1997 COMPARED TO FISCAL 1996 The Company's net sales decreased to $781,028,000 in Fiscal 1997 from $798,117,000 in Fiscal 1996, a decrease of $17,089,000, or 2.1%. Comparable store sales for Fiscal 1997 decreased 5.5% compared to Fiscal 1996. Management believes that the decreases were primarily attributable to lower customer acceptance of certain of the Company's merchandise offerings and, to a lesser extent, planned decreases in promotional inventory for certain periods during the year. Gross profit as a percentage of net sales increased to 47.3% in 1997 from 44.4% in 1996. This increase was primarily attributable to benefits achieved by the Company's sourcing division. Selling, general and administrative expenses were $308,232,000, or 39.5% of net sales, in 1997, compared to $291,027,000, or 36.5% of net sales, in 1996. The increase in selling, general and administrative expenses as a percentage of net sales was primarily attributable to increased tenancy expense related to increased retail square footage, investments in certain strategic initiatives, such as marketing and enhanced merchandising information systems, and decreased leverage on fixed expenses due to lower sales in 1997. Operating income increased to $50,000,000, or 6.4% of net sales, in 1997 from $46,461,000, or 5.8% of net sales, in 1996. Operating income in 1996 was reduced by $3,500,000, or 0.4% of net sales, representing the estimated costs of the Company's obligations under a former executive's employment contract following her resignation in August 1996, and by a one-time charge of $3,600,000, or 0.4% of net sales, relating to the planned closing of all nine Ann Taylor Studio shoe stores announced in January 1997. Amortization of goodwill was $11,040,000, or 1.4% of net sales, in 1997 compared to $10,086,000, or 1.3% of net sales, in 1996. Operating income without giving effect to such amortization was $61,040,000, or 7.8% of net sales, in 1997 and $56,547,000, or 7.1% of net sales, in 1996. Interest expense was $19,989,000 in 1997 compared to $24,416,000 in 1996. The decrease in interest expense was primarily attributable to a decrease in the Company's outstanding long-term debt, resulting in part from the prepayment in July 1997 of a $24,500,000 term loan referred to below, and to greater interest income earned on cash on hand. The weighted average interest rate on the Company's outstanding indebtedness at January 31, 1998 was 8.59% compared to 8.63% at February 1, 1997. The income tax provision was $17,466,000, or 59.3% of income before income taxes and extraordinary loss, in the 1997 period compared to $12,975,000, or 60.0% of income before income taxes, in 1996. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. On July 2, 1997, the Company used available cash to prepay the outstanding balance of a $24,500,000 term loan due September 1998. This loan repayment resulted in an extraordinary charge to earnings in Fiscal 1997 of $173,000, net of income tax benefit. As a result of the foregoing factors, the Company had net income of $11,824,000, or 1.5% of net sales, for 1997, compared to net income of $8,667,000, or 1.1% of net sales, for 1996. CHANGES IN FINANCIAL POSITION Accounts receivable increased to $71,049,000 at the end of 1998 from $60,211,000 at the end of 1997, an increase of $10,838,000, or 18.0%. This increase was primarily attributable to construction allowance receivables, which increased $6,501,000 to $12,485,000 in 1998, and to third party credit card receivables (American Express, MasterCard, and Visa) which increased $2,182,000 and Ann Taylor credit card receivables, which increased $2,097,000, due to increased sales. ============================================================================== Merchandise inventories increased to $136,748,000 at January 30, 1999 from $97,234,000 at January 31, 1998, an increase of $39,514,000, or 40.6%. The increase in merchandise inventories is primarily due to inventory purchased for new store square footage, planned increases in inventory levels and the early shipment or receipt of Spring merchandise. Merchandise inventories at January 30, 1999 and January 31, 1998 included approximately $32,329,000 and $21,124,000, respectively, of inventory associated with the Company's sourcing division. Inventory attributed to the sourcing division is principally finished goods in transit from factories. Total square footage increased to approximately 2,038,000 square feet at January 30, 1999 from approximately 1,808,000 square feet at January 31, 1998. Merchandise inventory on a per square foot basis, excluding inventory associated with the Company's sourcing division, was approximately $51 at the end of 1998, compared to approximately $42 at the end of 1997, an increase of approximately 21.4%. Inventory turned 5.0 times in 1998 compared to 5.1 times in 1997, excluding inventory associated with the Company's sourcing division. Inventory turnover is determined by dividing cost of sales by the average of the cost of inventory at the beginning and end of the period (excluding inventory associated with the sourcing division). LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of working capital are cash flow from operations and borrowings available under Ann Taylor's revolving credit facility described below. The following table sets forth material measures of the Company's liquidity: Fiscal Year ---------------------------- 1998 1997 1996 ---- ---- ---- (dollars in thousands) Cash provided by operating activities.......$ 75,535 $ 71,589 $ 67,532 Working capital.............................$ 168,708 $122,181 $ 118,850 Current ratio ............................... 2.30:1 2.39:1 2.53:1 Debt to equity ratio ........................ .24:1 .28:1 .35:1 Cash provided by operating activities, as presented on the consolidated statements of cash flows, increased in 1998 principally as a result of earnings, noncash charges, and an increase in accounts payable and accrued liabilities, offset by increases in merchandise inventories, receivables and prepaid expenses and other current assets. On June 30, 1998, Ann Taylor entered into a new $150,000,000 senior secured revolving credit facility (the "Credit Facility") with a syndicate of lenders. This facility replaced Ann Taylor's then-existing $122,000,000 bank credit agreement that was scheduled to expire in July 1998 and also resulted in the non-renewal by Ann Taylor's sourcing division of its $50,000,000 credit facility and in the non-renewal by AnnTaylor Funding, Inc. of a $40,000,000 accounts receivable facility. The Credit Facility is used by Ann Taylor for the issuance of commercial and standby letters of credit and to provide funds for other general corporate purposes. Loans outstanding under the Credit Facility at any time may not exceed $50,000,000. The Company did not make any borrowings under the loan provisions of the Credit Facility during Fiscal 1998, and there were no loans outstanding at fiscal year end. The outstanding loan balance is required to be reduced to zero for the thirty-day period commencing January 1 each year. This cleandown period was achieved for January 1999. 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 advance rates against certain eligible assets. Based on this calculation, the maximum amount available for loans and letters of credit under the Credit Facility at January 30, 1999 was approximately $131,054,000. Commercial and standby letters of credit outstanding under the Credit Facility at January 30, 1999 were approximately $65,763,000. =============================================================================== Amounts outstanding under the Credit Facility bear interest at a rate equal to, at Ann Taylor's option, the lead lender's Base Rate or Eurodollar Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%, respectively. In addition, Ann Taylor is required to pay the lenders a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%, respectively. The Credit Facility contains financial and other covenants, including limitations on indebtedness, liens, investments and capital expenditures, restrictions on dividends or other distributions to stockholders and maintenance of certain financial ratios including specified levels of net worth. For Fiscal 1998, the capital expenditure limit was $52,000,000. For Fiscal 1999, capital expenditures are limited to a maximum of $55,000,000. The lenders have been granted a pledge of the common stock of Ann Taylor and certain of its subsidiaries, and a security interest in substantially all other tangible and intangible assets, including accounts receivable, trademarks, inventory, store furniture and fixtures, of Ann Taylor and its subsidiaries, as collateral for Ann Taylor's obligations under the Credit Facility. The Credit Facility matures on June 30, 2000 and includes an automatic one-year extension, contingent upon the satisfaction of certain conditions. In addition, the commitments under the Credit Facility terminate on February 16, 2000 unless Ann Taylor's outstanding 8 3/4% Subordinated Notes due 2000 (the "8 3/4% Notes") are refinanced on or prior to such date with the proceeds of subordinated debt or capital stock, the terms and conditions of which are reasonably satisfactory to the Requisite Lenders under the Credit Facility. In April and May of 1996, the Company completed the sale of an aggregate of $100,625,000 of preferred securities issued by its financing vehicle, AnnTaylor Finance Trust. The preferred securities have a liquidation preference of $50 per security and are convertible at the option of the holders thereof into shares of common stock of the Company at a conversion rate of 2.545 shares of common stock for each preferred security. A total of 2,012,500 preferred securities were issued, and are convertible into an aggregate of 5,121,812 shares of common stock, representing approximately 16% of the Company's outstanding common stock as of January 30, 1999. The Company received net proceeds of $95,984,000 in connection with the sale of the preferred securities and applied $94,000,000 to reduce outstanding borrowings under Ann Taylor's then-existing revolving credit facility. Ann Taylor and its wholly owned subsidiary, AnnTaylor Distribution Services, Inc., are parties to a $7,000,000 seven-year mortgage loan maturing in Fiscal 2002. The loan is secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $130,000. The mortgage balance at January 30, 1999 was $5,157,000. The Company's capital expenditures totaled $45,131,000, $22,945,000, and $16,107,000 in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Capital expenditures were primarily attributable to the Company's store expansion, renovation, and refurbishment programs, as well as the investment the Company made in certain information systems and, in Fiscal 1998, the Company's corporate offices. The Company expects its total capital expenditure requirements in Fiscal 1999 will be approximately $50,000,000, including capital for new store construction for a planned square footage increase of approximately 275,000 square feet, or 13.5%, as well as capital to support continued investments in information systems. The actual amount of the Company's capital expenditures will depend in part on the number of stores opened, expanded and refurbished and on the amount of construction allowances the Company receives from the landlords of its new or expanded stores. See "Business--Stores and Expansion". ============================================================================== Dividends and distributions from Ann Taylor to the Company are restricted by the Credit Facility and the Indenture for the 8 3/4% Notes. 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. Effective February 1, 1998, the Company elected to change its method of inventory valuation from the retail method to the average cost method. The Company believes the average cost method is a preferable method for matching the cost of merchandise with the revenues generated. The cumulative effect of this accounting change on February 1, 1998 was not material, and therefore no disclosure is noted on the Consolidated Statement of Operations. The effect of this accounting change on Fiscal 1998 net income was an increase of $1,272,000, or $0.04 per share on a diluted basis. It is not possible to determine the effect of the change on income in fiscal periods ending prior to February 1, 1998. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which is effective for the Company for the quarter ended October 30, 1999. SFAS No. 133 establishes accounting and reporting standards for derivatives and for hedging activities. Management is currently evaluating the impact of this standard and believes its adoption will not affect the Company's consolidated financial position, results of operations or cash flows. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which is effective for the Company for fiscal years beginning after December 15, 1998. The application of SOP 98-1 is not anticipated to have a material impact on the Company's consolidated financial statements. 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 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 computer hardware in the Company's U.S. home offices and distribution center that was not Year 2000 compliant has been remediated or replaced, and all computer hardware in the Company's retail stores that was not Year 2000 compliant will be remediated or replaced by the end of the first quarter of Fiscal 1999. Of those software systems that were found not to be Year 2000 compliant, approximately 90% of all material systems have been remediated or replaced by Year 2000 compliant software. The Company anticipates that all remaining material systems, including certain operating systems used in the Company's distribution center, will be remediated or replaced by the end of the second quarter of Fiscal 1999. Hardware and software unique to the Company's sourcing offices located outside the United States are scheduled to be remediated or replaced by the end of the second quarter of Fiscal 1999. The Company engaged a consultant to assist in the evaluation of the equipment used in the Company's distribution center (other than computer software and hardware, which were included in the analysis and remediation efforts described above). This equipment evaluation has been completed, and remediation or replacement of distribution center equipment found not to be Year 2000 compliant is scheduled to be completed by the end of the second quarter of Fiscal 1999. 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 $2.1 million, of which approximately $1.1 million will be expensed as incurred (including $965,000 expensed in Fiscal 1998), and $1 million which will be capitalized (including $855,000 capitalized in Fiscal 1998). 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. The Company is 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. 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. Assessment of third party Year 2000 readiness is expected to be substantially completed by the end of the first quarter of Fiscal 1999. The Company will not be able to determine its most reasonably likely worst case scenarios until assessment of third parties' Year 2000 compliance is completed. ============================================================================== The Company's Year 2000 compliance project also 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 anticipates that contingency plans will be substantially developed by the end of the second 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. The costs and timing for management's completion of Year 2000 compliance modification and testing processes are based on management's best 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 Annual Report on Form 10-K, 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 "Legal Proceedings" 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. =============================================================================== ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company maintains the majority of its cash and cash equivalents in financial instruments with original maturities of three months or less. These financial instruments are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of these financial instruments, a change of 100 basis points in interest rates would not have a material effect on the Company's financial condition. The Company's outstanding long-term debt as of January 31, 1999 bears interest at fixed rates; therefore, the Company's results of operations would only be affected by interest rate changes to the extent that fluctuating rate loans are outstanding under the Credit Facility. As of January 31, 1999, the Company has no such amounts outstanding. Future borrowings would be affected by interest rate changes; however, the Company does not believe that a change of 100 basis points in interest rates would have a material effect on the Company's financial condition. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company for the years ended January 30, 1999, January 31, 1998 and February 1, 1997 are included as a part of this Report (See Item 14): Consolidated Statements of Operations for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997. Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998. Consolidated Statements of Stockholders' Equity for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997. Consolidated Statements of Cash Flows for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997. Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. =============================================================================== PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As of March 26, 1999, the Company's directors and executive officers were as follows: NAME AGE POSITION WITH THE COMPANY AND OFFICE HELD ---- --- ----------------------------------------- J. Patrick Spainhour 49 Chairman, Chief Executive Officer and Director of the Company and Ann Taylor Patricia DeRosa 46 President, Chief Operating Officer and Director of the Company and Ann Taylor Walter J. Parks (a) 40 Senior Vice President - Chief Financial Officer and Treasurer of the Company and Ann Taylor Jocelyn F.L. Barandiaran 38 Senior Vice President - General Counsel and Secretary of the Company and Ann Taylor James M. Smith 37 Vice President - Controller and Assistant Treasurer of the Company and Ann Taylor Gerald S. Armstrong 55 Director of the Company and Ann Taylor James J. Burke, Jr. 47 Director of the Company and Ann Taylor Wesley E. Cantrell 64 Director of the Company and Ann Taylor Robert C. Grayson 54 Director of the Company and Ann Taylor Ronald W. Hovsepian 37 Director of the Company and Ann Taylor Rochelle B. Lazarus 51 Director of the Company and Ann Taylor Hanne M. Merriman 57 Director of the Company and Ann Taylor - -------------------- (a) Mr. Parks resigned from his positions with the Company and Ann Taylor effective March 31, 1999. The Board of Directors of the Company is divided into three groups, serving staggered three-year terms. The Board of Directors has standing Audit, Compensation and Nominating Committees. The current members of the Audit Committee are Mr. Grayson (Chairman), Ms. Lazarus and Ms. Merriman. The current members of the Compensation Committee are Ms. Lazarus (Chairman), Mr. Armstrong, Mr. Burke and Ms. Merriman. The current members of the Nominating Committee are Ms. Merriman (Chairman), Mr. Armstrong and Mr. Grayson. Directors who are employees of the Company do not receive any compensation for serving on the Board of Directors of the Company or Ann Taylor. In addition, Mr. Armstrong and Mr. Burke, who serve on the Boards of the Company and Ann Taylor as representatives of ML&Co. and certain of its affiliates, have declined to receive any compensation from the Company for Board service. All other Directors (referred to below as "non-employee Directors") receive an annual retainer of $20,000, plus $1,000 for each meeting of the Board or committee of the Board that they attend. Committee chairs also receive an annual stipend of $3,000 for their service as such. In addition, commencing with fiscal 1998, each non-employee Director also receives an annual grant of an option to purchase 2,000 shares of Common Stock. Any new non-employee Director joining the Board will, at the time of election, also receive an initial grant of an option to purchase 7,500 shares of Common Stock. On June 17, 1998, incumbent non-employee Directors were each granted a one-time option to purchase 7,500 shares of Common Stock. =============================================================================== The following is a brief biography of each of the Company's directors and executive officers: J. PATRICK SPAINHOUR. Mr. Spainhour has been Chairman and Chief Executive Officer of the Company and Ann Taylor since August 1996 and a Director of the Company and Ann Taylor since February 1996. From February 1996 to August 1996, he was President and Chief Operating Officer of the Company and Ann Taylor. From August 1994 to February 1996, Mr. Spainhour was executive vice president and chief financial officer of The Donna Karan Company, a designer apparel company. From February 1993 to July 1994, he was executive vice president, finance and operations of Stride Rite Corp., a footwear company. PATRICIA DEROSA. Ms. DeRosa has been President, Chief Operating Officer and a Director of the Company and Ann Taylor since December 1996. From August 1995 to November 1996, she was executive vice president, business development of Charming Shoppes, Inc., a women's specialty apparel retailer. From 1975 to 1981 and from 1983 to August 1995, she served in various capacities at The Gap, Inc., a specialty apparel retailer, including from 1993 to 1995 as president of the GapKids division. WALTER J. PARKS. Mr. Parks has been Senior Vice President--Chief Financial Officer and Treasurer of the Company and Ann Taylor since February 1997. He has been employed by Ann Taylor since 1988 and has held various positions, including General Accounting Manager, Director of Financial Reporting and, from 1992 to 1995, Vice President of Financial Reporting, and from February 1995 to February 1997, Senior Vice President--Finance of the Company and AnnTaylor. Mr. Parks resigned from his positions with the Company and Ann Taylor effective March 31, 1999. JOCELYN F.L. BARANDIARAN. Ms. Barandiaran has been Senior Vice President--General Counsel and Secretary of the Company and Ann Taylor since October 1996. She served as Vice President--General Counsel and Secretary of the Company and Ann Taylor from May 1992 to September 1996. JAMES M. SMITH. Mr. Smith has been Vice President--Controller and Assistant Treasurer of the Company since March 1997, and has been Vice President--Controller and Assistant Treasurer of Ann Taylor since February 1995. He has also held the position of Assistant Secretary of both the Company and Ann Taylor since June 1998. From February 1993 to January 1995, Mr. Smith was Director of Financial Reporting for Ann Taylor. GERALD S. ARMSTRONG. Mr. Armstrong has been a Director of the Company and Ann Taylor since February 1989. He has been the managing partner of Arena Capital Partners, LLC, a private investment firm, since January 1998. Mr. Armstrong was a partner of Stonington Partners, Inc. ("Stonington Partners"), a private investment firm, from November 1993 to December 1997, and a director of Stonington Partners from August 1993 to December 1997. He was a partner of ML Capital Partners, a private investment firm associates with ML&Co. from May 1993 through June 1994, and was an executive vice president of ML Capital Partners from November 1988 through April 1993. Mr. Armstrong was also a managing director of the Investment Banking Division of ML&Co. from November 1988 through June 1994. Since June 1994, Mr. Armstrong has served as a consultant to ML Capital Partners. Mr. Armstrong is also a director of Blue Bird Corporation and World Color Press, Inc. JAMES J. BURKE, JR. Mr. Burke has been a Director of the Company and Ann Taylor since February 1989. He has been a partner of Stonington Partners, since November 1993, and a director of Stonington Partners since August 1993. He was a partner of ML Capital Partners from May 1993 through June 1994, and was president and chief executive officer of ML Capital Partners from January 1987 through April 1993. Mr. Burke was a first vice president of Merrill Lynch, Pierce, Fenner & Smith Incorporated from July 1988 through June 1994 and was a managing director of the Investment Banking Division of ML&Co. from April 1985 through June 1994. Since June 1994, Mr. Burke has served as a consultant to ML Capital Partners. Mr. Burke is also a director of Borg-Warner Security Corporation, Education Management Corp., Pathmark Stores, Inc., Supermarkets General Holdings Corporation and United Artists Theatre Circuit, Inc., and several privately held companies. WESLEY E. CANTRELL. Mr. Cantrell has been a Director of the Company and Ann Taylor since November 1998. He has been president and chief executive officer of Lanier WorldWide, Inc. since March 1987. Lanier WorldWide is engaged in the office systems and equipment business, and is an operating unit of Harris Corporation, a company engaged in the communications, semiconductors, office systems and equipment, and advanced electronic systems industries. =============================================================================== ROBERT C. GRAYSON. Mr. Grayson has been a Director of the Company and Ann Taylor since April 1992. He has been president of Robert C. Grayson & Associates, Inc., a retail marketing consulting firm, since February 1992. He has also served as chairman of Berglass-Grayson, a management consulting firm, since June 1995. He was a vice chairman of the board of Tommy Hilfiger Corp., an apparel manufacturer and retailer, and chairman of the board of Tommy Hilfiger Retail, a subsidiary of such company, from June 1994 to March 1996. Mr. Grayson is also a director of Sunglass Hut International, Inc., Kenneth Cole Productions, Inc. and Frisby Technologies Inc. RONALD W. HOVSEPIAN. Mr. Hovsepian has been a Director of the Company and Ann Taylor since June 1998. He has been vice president of business development of International Business Machines Corporation ("IBM"), a supplier of advanced information processing products and services, since January 1999. He was general manager of IBM's global retail and distribution industry solutions organization in 1998; from 1996 to 1997 he was vice president, supply chain solutions, and from 1994 to 1995 he was director, consumer driven solutions, at IBM. ROCHELLE B. LAZARUS. Ms. Lazarus has been a Director of the Company and Ann Taylor since April 1992. She has been chief executive officer of Ogilvy & Mather Worldwide, an advertising agency, since September 1996, and also chairman of Ogilvy & Mather Worldwide since March 1997. She was president and chief operating officer of Ogilvy & Mather Worldwide from December 1995 to September 1996, and was president of Ogilvy & Mather North America from April 1994 to December 1995. HANNE M. MERRIMAN. Ms. Merriman has been a Director of the Company and Ann Taylor since December 1993. She has been the Principal in Hanne Merriman Associates, retail business consultants, since January 1992. Ms. Merriman is also a director of USAirways Group, Inc., The Rouse Company, State Farm Mutual Automobile Insurance Company, Ameren Corp., Central Illinois Public Service Company, T. Rowe Price Mutual Funds, and Finlay Enterprises, Inc. She also serves as a director of the Children's Hospital Foundation (part of the Children's National Medical Center), and is a member of the National Women's Forum. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information regarding the annual and long-term compensation awarded or paid for each of the last three fiscal years to the Chief Executive Officer and the four other most highly compensated executive officers of the Company as of January 30, 1999 (collectively, the "named executives").
Annual Compensation Long-Term Compensation ---------------------------------------- --------------------------- Restricted Securities All Other Fiscal Other Annual Stock Awards Underlying Compensaton Name and Principal Position Year Salary ($) Bonus ($)(a) Compensation($) ($) Options (#) ($) (b) - --------------------------- ---- ---------- ----------- --------------- ---------- ----------- ------- J. Patrick Spainhour 1998 $725,000 $942,500 -- -- 20,000 $ 2,400 Chairman and Chief 1997 656,250 81,250 -- -- -- 3,306 Executive Officer 1996 556,074 295,000 -- $1,378,125(c) 175,000 -- Patricia DeRosa 1998 600,000 660,000 -- -- 10,000 -- President and Chief 1997 600,000 150,000 $367,234(d) -- -- -- Operating Officer 1996 86,538 -- -- 987,500(e) 100,000 -- Walter J. Parks(f) 1998 245,000 137,340 -- -- -- 2,400 Senior Vice President 1997 245,000 15,313 -- -- 16,000 2,438 Chief Financial Officer 1996 215,000 32,250 -- -- 7,500 2,312 and Treasurer Jocelyn F.L. Barandiaran 1998 233,004 121,450 -- -- 4,200 -- Senior Vice President 1997 225,000 14,063 -- -- 16,000 -- General Counsel and 1996 215,000 32,250 -- -- 5,000 -- Secretary James M. Smith 1998 145,600 65,520 -- -- 2,000 2,184 Vice President 1997 140,000 7,000 -- -- 7,500 2,374 Controller, Assistant 1996 125,000 11,250 -- -- 5,000 1,875 Treasurer and Assistant Secretary (a)Bonus awards were earned pursuant to the Company's Management Performance Compensation Plan, except that a portion of the bonus amounts indicated for Mr. Spainhour for 1996 and for Ms. DeRosa for 1997 were guaranteed bonuses paid to them in accordance with the terms of their respective employment agreements with the Company. =============================================================================== (b)Represents contributions made by the Company on behalf of the named executives to its 401(k) Savings Plan. (c)Represents the market value, on the date of the grant, of 75,000 restricted shares of Common Stock granted to Mr. Spainhour on December 13, 1996 in connection with his promotion to Chairman and Chief Executive Officer of the Company. The value of these shares as of January 30, 1999 was $2,906,250. Mr. Spainhour's rights to these shares vest with respect to one-third of the grant per year on each of the first three anniversaries of August 23, 1996, the effective date of his promotion, subject to his continued employment by the Company. Mr. Spainhour would be entitled to receive dividends on these restricted shares if any dividends are paid by the Company on its Common Stock. (d) Represents reimbursement of relocation expenses. (e)Represents the market value, on the date of the grant, of 30,000 restricted shares of Common Stock and 20,000 restricted units granted to Ms. DeRosa on December 9, 1996 in connection with her commencement of employment, pursuant to her employment agreement with the Company. The value of these shares and units as of January 30, 1999, was $1,937,500. Ms. DeRosa's rights to these shares and units vest with respect to one-third of the grant per year on each of the first three anniversaries of December 9, 1996, the effective date of her employment agreement, subject to her continued employment by the Company. Ms. DeRosa would be entitled to receive dividends on the restricted shares if any dividends are paid by the Company on its Common Stock. (f) Mr. Parks resigned from his employment effective March 31, 1999.
The following table sets forth certain information with respect to stock options awarded during fiscal year 1998 to the named executives listed in Table I above. These option grants also are reflected in Table I. In accordance with Securities and Exchange Commission ("Commission") rules, the hypothetical realizable values for each option grant are shown based on compound annual rates of stock price appreciation of 5% and 10% from the grant date to the expiration date. The assumed rates of appreciation are prescribed by the Commission and are for illustrative purposes only; they are not intended to predict future stock prices, which will depend upon market conditions and the Company's future performance and prospects.
TABLE II Stock Options Granted in Fiscal Year 1998 Potential Realizable Value % of Total # at Assumed Annual Rates # of Securities of Options of Stock Price Underlying Granted to Exercise Appreciation Options Employees in Price Expiration for Option Term (b) Name Granted (a) Fiscal 1998 ($/Share) Date 5%($) 10%($) ---- ----------- ----------- --------- ---- ----- ------ J. Patrick Spainhour 20,000 8.5% $15.50 4/21/08 $195,000 $494,000 Patricia DeRosa 10,000 4.2% 15.50 4/21/08 97,500 247,000 Walter J. Parks --- --- --- --- --- --- Jocelyn F.L. Barandiaran 4,200 1.8% 15.50 4/21/08 40,950 103,740 James M. Smith 2,000 0.9% 15.50 4/21/08 19,500 49,400 (a) Options vest 25% per year on each of the first through fourth anniversaries of the date of grant, subject to earlier vesting upon the occurrence of one of the following "Acceleration Events": (i) any person (excluding ML Capital Partners and its affiliates, and certain other persons) becomes the owner of at least 20% of the outstanding Common Stock, (ii) a majority of the Board of Directors changes, or (iii) a merger or other specified event occurs. (b) These columns show the hypothetical realizable value of the options at the end of the ten-year term of the options, assuming that the market price of the Common Stock subject to the options appreciates in value at the annual rate indicated in the table, from the date of grant to the end of the option term.
=============================================================================== The following table shows the number of shares of Common Stock acquired by each executive officer upon the exercise of Company stock options during fiscal year 1998, and the aggregate dollar value realized by such executives upon such exercise, based upon the fair market value of the Common Stock on the date of exercise, as well as the number of all vested (exercisable) and unvested (not yet exercisable) stock options held by each executive officer at the end of fiscal year 1998, and the value of all such options that were "in the money" (i.e., the market price of the Common Stock was greater than the exercise price of the options) at the end of fiscal year 1998.
TABLE III Aggregate Option Exercises in Fiscal 1998 and Fiscal Year End Option Values No. of Shares $ Value Number of Shares Underlying $ Value of Unexercised Acquired on Realized Upon Unexercised Options In-the-Money Options Exercise of Exercise of at End of Fiscal 1998 at End of Fiscal 1998 Name Stock Options Options(a) Exercisable/Unexercisable Exercisable/Unexercisable (b) - ---- ------------- ---------- ------------------------- ----------------------------- J. Patrick Spainhour 25,000 $412,500 150,000/20,000 $3,328,125/$465,000 Patricia DeRosa --- --- 83,000/27,000 1,462,875/532,125 Walter J. Parks 21,218 240,705 7,499/17,753 122,494/154,073 Jocelyn F.L. Barandiaran --- --- 48,040/24,660 851,982/352,794 James M. Smith 10,623 104,678 4,584/11,793 79,301/163,955 - ----------- (a) Calculated based on the closing market price of the Common Stock on the date of exercise, less the amount required to be paid upon exercise of the option. (b) Calculated based on the closing market price of the Common Stock of $38.75 on January 29, 1999, the last trading day in fiscal year 1998, less the amount required to be paid upon exercise of the option.
PENSION PLAN. Since 1989, Ann Taylor has maintained a defined benefit retirement plan (as amended, the "Pension Plan") for the benefit of its employees and those of its wholly owned subsidiaries, which is intended to qualify under Section 401(a) of the Internal Revenue Code (the "Code"). Originally, the Pension Plan provided for calculation of benefits based on a "cash balance" formula. Effective January 1, 1998, the Pension Plan provides for calculation of benefits based on a "career average" formula instead of a cash balance formula. Under the "career average" formula, each participant's service and annual earnings are used to determine their annual pension accrual. During each participant's first ten years with Ann Taylor, their pension will accrue, for each year of participation in the Pension Plan, at the rate of 1.25% of their current year's pay up to the Social Security Wage Base ("Wage Base") plus 1.6% of any pay that exceeds the Wage Base, up to the maximum amount permitted by the Code. Upon completion of more than 10 years of service, the participant's annual pension accrual increases to 1.6% of the current year's pay, up to the Wage Base, plus 1.95% of any pay over the Wage Base, up to the maximum amount permitted by the Code. Pension benefits are fully vested after five years of service. Participants receive credit for service with Ann Taylor prior to July 1, 1989 for purposes of vesting, and for purposes of calculating benefits under the Pension Plan. There is no interruption in participation for those employees who were participants in the Pension Plan as of December 31, 1997; their cash balance benefit was frozen as of that date. Pension benefits for such employees who retire on or after January 1, 1998 are calculated using whichever of the two - - the amount in their cash balance account as of December 31, 1997, or the career average formula - provides greater benefits. Under the Code, the annual compensation that may be taken into account for purposes of calculating benefits under the Pension Plan is limited to $160,000 (indexed for inflation). With the exception of Mr. Smith, all current executives named in Table I had annual compensation in 1998 which exceeds this figure, and the calculation of benefits for these executives is based on the lower plan limitation amount. =============================================================================== As of December 31, 1998, the credited years of service under the Pension Plan for Mr. Spainhour was 1.8 years; Ms. DeRosa one year; Mr. Parks 9.3 years; Ms. Barandiaran 5.7 years; and Mr. Smith 4.9 years. The estimated monthly retirement benefit, payable as a single life annuity, that would be payable to each of the executives named in Table I who were participants in the Pension Plan during fiscal 1998, assuming (i) no increases in income and (ii) retirement and the commencement of benefit payments at age 65, is as follows: Mr. Spainhour, $3,949; Ms. DeRosa, $4,378; Mr. Parks, $7,295; Ms. Barandiaran, $7,305; and Mr. Smith, $7,193. These benefits would not be subject to any reduction for social security or other offset amounts. EMPLOYMENT AGREEMENTS. Spainhour Employment Agreement. Effective as of February 19, 1996, the Company and Mr. Spainhour entered into an employment agreement in connection with his commencement of service as an employee of the Company. This agreement was amended as of August 23, 1996 (as amended, the "Spainhour Agreement"), in connection with Mr. Spainhour's promotion to Chairman and Chief Executive Officer of the Company. The Spainhour Agreement provides for Mr. Spainhour's employment as Chairman and Chief Executive Officer of the Company for a term of three years, which term is automatically extended on an annual basis for one additional year unless either party provides notice that it does not wish to extend the term (a "Nonrenewal Notice"). Under the Spainhour Agreement, effective January 1, 1998, Mr. Spainhour is entitled to an annual base salary of not less than $725,000. Mr. Spainhour also is entitled to participate in the Company's annual bonus and stock option plans, as well as other Company benefit programs. Pursuant to the terms of the Spainhour Agreement, Mr. Spainhour was granted, under the Stock Option Plan, an option to purchase 100,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date Mr. Spainhour commenced employment with the Company (February 19, 1996). These options vested 50% on each of the first two anniversaries of the date of grant. In addition, in connection with his promotion to Chairman and Chief Executive Officer of the Company, Mr. Spainhour received (i) a "performance vesting" option to purchase 75,000 shares of Common Stock under the Stock Option Plan, at an exercise price equal to the fair market value of the Common Stock on the date of grant, which option vests on the ninth anniversary of the date of grant, subject to earlier vesting upon the occurrence of certain performance criteria and subject to accelerated vesting and termination in accordance with the terms of the Stock Option Plan; and (ii) 75,000 restricted shares of Common Stock, one-third of which vest on each of the first three anniversaries of August 23, 1996, subject to accelerated vesting in accordance with the terms of the Stock Option Plan, or upon the termination of Mr. Spainhour's employment other than for Cause or by Mr. Spainhour for Good Reason (as such terms are defined in the Spainhour Agreement). In the event of termination of Mr. Spainhour's employment by the Company without Cause, or by Mr. Spainhour for Good Reason, or in the event of the expiration of the term of the Spainhour Agreement by reason of a Nonrenewal Notice provided by the Company, Mr. Spainhour shall be entitled, among other things, to receive, for the longer of one year or the remaining term of the Spainhour Agreement, an amount representing his salary plus the average of his last three annual bonuses, subject to Mr. Spainhour's compliance with the noncompete and nonsolicitation provisions of the Spainhour Agreement. If any payments or benefits received by Mr. Spainhour would be subject to the "golden parachute" excise tax under the Code, the Company has agreed to pay Mr. Spainhour such additional amounts as may be necessary to place him in the same after-tax position as if the payments had not been subject to such excise tax. DeRosa Employment Agreement. On November 25, 1996, the Company and Ms. Patricia DeRosa entered into an employment agreement (the "DeRosa Agreement") providing for her employment as President and Chief Operating Officer of the Company for a term of three years. Under the terms of the DeRosa Agreement, Ms. DeRosa is entitled to an annual base salary of not less than $600,000 and is entitled to participate in the Company's annual bonus and stock option plans, as well as other Company benefit programs. =============================================================================== Pursuant to the terms of the DeRosa Agreement, Ms. DeRosa was granted under the Stock Option Plan an option to acquire 100,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on November 25, 1996. One half of these options are "time vesting" options, one-third of which become exercisable on each of the first three anniversaries of December 9, 1996 (the "Effective Date"). The other half of the options are "performance vesting" options which vest on the ninth anniversary of Ms. DeRosa's employment, subject to earlier vesting upon the occurrence of certain performance criteria and subject to accelerated vesting and termination in accordance with the terms of the Stock Option Plan. In addition, Ms. DeRosa received 30,000 restricted shares of Common Stock and 20,000 restricted units, which represent the right to receive a cash payment based on the closing price of the Common Stock on the trading date immediately preceding the date the restrictions lapse. One-third of each of the restricted shares and restricted units vest on each of the first three anniversaries of the Effective Date. In the event of termination of Ms. DeRosa's employment by the Company without Cause or by Ms. DeRosa for Good Reason, Ms. DeRosa shall be entitled, among other things, to receive (i) for the longer of one year or the remaining term of the DeRosa Agreement, an amount representing her base salary and (ii) the bonus for the season in which the date of termination occurs, pro rated to reflect the number of days in such season through the date of termination, subject to Ms. DeRosa's compliance with the noncompete and nonsolicitation provisions of the DeRosa Agreement. Any unvested restricted shares and restricted units would also vest at such time. If any payments or benefits received by Ms. DeRosa would be subject to the "golden parachute" excise tax under the Code, the Company has agreed to pay Ms. DeRosa such additional amounts as may be necessary to place her in the same after-tax position as if the payments had not been subject to such excise tax. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 22, 1999, the outstanding Common Stock was held of record by 613 stockholders. The following table sets forth certain information as of the Record Date concerning the beneficial ownership of Common Stock by each stockholder who is known by the Company to own beneficially in excess of 5% of the outstanding Common Stock, by each director, by the named executives listed in Table I above, and by all directors and executive officers as a group. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their shares of Common Stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their shares of Common Stock.
No. of Percent Shares of ------- Name of Beneficial Owner Common Stock - ------------------------ ------------ Morgan Stanley Dean Witter & Co. (a).................. 4,191,741 16.0% Fleet Financial Group, Inc. (b)....................... 1,824,484 7.0% Merrill Lynch & Co., Inc. and certain affiliates (c).. 1,733,628 6.6% FMR Corp. (d)......................................... 1,649,450 6.3% AMVESCAP PLC (e)...................................... 1,325,800 5.1% J. Patrick Spainhour (f).............................. 180,410 * Patricia DeRosa (f)................................... 99,333 * Walter J. Parks (f)................................... 625 * Jocelyn F.L. Barandiaran (f).......................... 51,465 * James M. Smith (f).................................... 2,781 * Gerald S. Armstrong (g)(h)............................ 10,964 * James J. Burke, Jr. (g)............................... 52,920 * Wesley E. Cantrell.................................... 0 * Robert C. Grayson..................................... 25,000 * Ronald W. Hovsepian................................... 0 * Rochelle B. Lazarus (i)............................... 600 * Hanne M. Merriman..................................... 200 * All executive officers and directors as a group (12 persons) (j) 424,298 1.6% - ------------------ * Less than 1% ============================================================================== (a) Pursuant to a Schedule 13G dated February 12, 1999 and filed with the Commission by Morgan Stanley Dean Witter & Co., Morgan Stanley Dean Witter Advisors Inc., and Van Kampen Asset Management Inc., Morgan Stanley Dean Witter & Co had shared voting power with respect to 3,708,741 shares, sole voting power with respect to no shares, and shared dispositive power with respect to 4,191,741 shares; Morgan Stanley Dean Witter Advisors Inc. had shared voting power with respect to 1,891,400 shares, sole voting power with respect to no shares, shared voting power with respect to 1,891,400 shares, and sole dispositive power with respect to no shares; and Van Kampen Asset Management Inc. had shared voting power with respect to 1,164,082 shares, sole dispositive power with respect to no shares, shared dispositive power with respect to 1,294,382 shares, and sole dispositive power with respect to no shares. The address for Morgan Stanley Dean Witter & Co. is 1585 Broadway, New York, NY 10036; for Morgan Stanley Dean Witter Advisors Inc. is Two World Trade Center, New York, NY 10048; and for Van Kampen Asset Management Inc. is One Parkview Plaza, Oakbrook Terrace, IL 60181. (b) Pursuant to a Schedule 13G dated February 13, 1998 and filed with the Commission by Fleet Financial Group, Inc. ("Fleet"), Fleet had sole voting power with respect to 25,000 shares, shared voting power with respect to 1,799,484 shares, sole dispositive power with respect to 25,000 shares, and shared dispositive power with respect to 1,686,400 shares. The address for Fleet Financial Group, Inc. is One Federal Street, Boston, Massachusetts 02110. (c) Pursuant to an amendment to a Schedule 13G dated February 12, 1999 and filed with the Commission by ML&Co., its subsidiary Merrill Lynch Group, Inc. ("ML Group") and certain of their affiliates (collectively, the "Merrill Lynch Entities"), ML&Co. and ML Group are deemed to beneficially own an aggregate of 1,733,628 shares of Common Stock. ML&Co. and ML Group may be deemed to beneficially own these shares as a result of their control of their wholly owned subsidiaries (i) Merrill Lynch Capital Partners, Inc., which is the general partner of both (a) MLCP Associates L.P. No. I, and (b) Merrill Lynch LBO Partners No. B-I, L.P., a limited partnership that acts as general partner of Merrill Lynch Capital Appreciation Partnership No. B-II, which, as reported in the Schedule 13G, is the owner of record of shares representing approximately 3.29% of the outstanding Common Stock, and ML Offshore LBO Partners No. B-II which, as reported in the Schedule 13G, is the owner of record of shares representing approximately 1.92% of the shares; (ii) KECALP Inc. and Merrill Lynch MBP Inc., each of which acts as general partners of limited partnerships that are record owners of shares (no single limited partnership is the record holder of more than 5% of the outstanding Common Stock); and (iii) ML IBK Positions, Inc. that, as reported in the Schedule 13G, owns of record less than 1% of such shares. The Merrill Lynch Entities are deemed to have shared voting and investment power with other ML&Co. affiliates with respect to the shares of Common Stock deemed to be beneficially owned by them. On March 25, 1999, ML Capital Partners orally advised the Company that the Merrill Lynch Entities had sold all of these shares in March 1999. The address for ML&Co., ML Group and ML IBK Positions, Inc. is 250 Vesey Street, World Financial Center, North Tower, New York, New York 10281. The address for each of the other Merrill Lynch Entities named above is 225 Liberty Street, New York, New York 10080. (d) Pursuant to an amendment dated January 7, 1999 to a Schedule 13G filed with the Commission by FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson, FMR Corp. indicated that it had sole voting power with respect to 222,000 shares and shared voting power with respect to no shares, and each of FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson indicated that they had sole dispositive power with respect to 1,649,450 shares. The address for each of FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson is 82 Devonshire Street, Boston, MA 02109. (e) Pursuant to a Schedule 13G dated February 10, 1999 and filed with the Commission by AMVESCAP PLC on behalf of itself and its subsidiaries AVZ, Inc., AIM Management Group Inc., AMVESCAP Group Services, Inc., INVESCO, Inc., INVESCO North American Holdings, Inc., INVESCO Capital Management, Inc., INVESCO Funds Group, Inc., INVESCO Management & Research, Inc., INVESCO Realty Advisers, Inc., and INVESCO (NY) Asset Management, Inc. (collectively, "AMVESCAP"), AMVESCAP beneficially owns 1,325,800 shares and has shared voting power and shared dispositive power with respect to all such shares. The address for AMVESCAP is 11 Devonshire Square, London EC2M 4YR England, and 1315 Peachtree Street, N.E., Atlanta, Georgia 30309. =============================================================================== (f) The shares listed include shares subject to options exercisable within 60 days of March 22, 1999 as follows: Mr. Spainhour, 155,000 shares; Ms. DeRosa, 69,333 shares; Mr. Parks, 625 shares; Ms. Barandiaran, 51,465 shares; and Mr. Smith, 2,581 shares. The shares listed also include restricted shares which have not yet vested and which are subject to forfeiture, as follows: Mr. Spainhour, 25,000 shares; and Ms. DeRosa, 10,000 shares. (g) James J. Burke, Jr. and Gerald S. Armstrong serve on the Board of Directors of the Company and Ann Taylor as designees of ML&Co. and certain of its affiliates. Both Mr. Burke and Mr. Armstrong disclaim beneficial ownership of the shares beneficially owned by the Merrill Lynch Entities. (h) 3,000 of these shares are held by Mr. Armstrong's spouse, as custodian for their children. Mr. Armstrong disclaims beneficial ownership of these shares. (i) Shares are held in a pension fund of which Ms. Lazarus' spouse is the sole beneficiary. Ms. Lazarus has no voting or investment power with respect to these shares. (j) The shares listed include 279,004 shares subject to options exercisable within 60 days of March 22, 1999, and 35,000 restricted shares that have not yet vested and are subject to forfeiture.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 (as amended) (the "Exchange Act"), requires the Company's directors and certain officers, and holders of more than 10% of the Company's Common Stock, to file with the Securities and Exchange Commission and the New York Stock Exchange reports of their ownership and changes in ownership of Common Stock. Copies of Section 16(a) reports are required to be furnished to the Company. Based solely on a review of the copies of such statements furnished to the Company, or written representations from certain reporting persons that no Forms 5 were required for such persons, the Company believes that during fiscal year 1998, all transactions were reported on a timely basis, except that Mr. Hovsepian's initial statement of ownership was filed by the Company's counsel one business day late. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to an amendment to a Schedule 13G dated February 12, 1999 and filed with the Commission by the Merrill Lynch Entities, the Merrill Lynch Entities beneficially owned an aggregate of 1,733,628 shares, or approximately 6.7%, of the outstanding Common Stock. Messrs. Armstrong and Burke serve on the Boards of Directors of the Company and Ann Taylor as representatives of ML&Co. and its affiliates. Accordingly, ML&Co. and its affiliates are in a position to influence the management of the Company. Messrs. Armstrong and Burke are also members of the Compensation Committee of the Board of Directors of the Company. On March 25, 1999, ML Capital Partners orally advised the Company that the Merrill Lynch Entities had sold all of these shares in March 1999. ============================================================================== PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this Annual Report: The following consolidated financial statements of the Company and the independent auditors' report are included on pages 36 through 56 and are filed as part of this Annual Report: Consolidated Statements of Operations for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997; Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998; Consolidated Statements of Stockholders' Equity for the fiscal years ended January 30, 1999, January 31, 1998, and February 1, 1997; Consolidated Statements of Cash Flows for the fiscal years ended January 30, 1999, January 31, 1998, and February 1, 1997; Notes to Consolidated Financial Statements; Independent Auditors' Report. (b) Reports on Form 8-K The Company filed a report with the Commission on Form 8-K dated November 9, 1998 with respect to the dismissal of the amended complaint, filed in April 1998, of the purported class action lawsuit against the Company, Ann Taylor, certain officers and directors of the Company and Ann Taylor, ML&Co. and certain affiliates of ML&Co. The Company filed a report with the Commission on Form 8-K dated December 17, 1998 with respect to the plaintiffs' filing of a notice of appeal of such dismissal. (c) Exhibits The exhibits listed below are filed as a part of this Annual Report. Exhibit Number -------------- 3.1 Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission (the "Commission") on August 10, 1992 (Registration No. 33-50688). 3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.2 to the Form 10-Q of the Company for the Quarter ended November 2, 1991 filed on December 17, 1991 (Registration No. 33-28522). 4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet Bank, N.A., as Trustee, including the form of Subordinated Note due 2000. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Ann Taylor filed on July 7, 1993. 4.1.1 Instrument of Resignation, Appointment and Acceptance, dated as of December 1, 1995, among Ann Taylor, Fleet Bank, N.A., as Resigning Trustee, and Norwest Bank Minnesota, N.A., the Successor Trustee. Incorporated by reference to Exhibit 4.1.1 to the Annual Report on Form 10-K of the Company filed on April 8, 1996. 10.1 Form of Warrant Agreement entered into between Ann Taylor and The Connecticut Bank and Trust Company, National Association, including the form of Warrant. Incorporated by reference to Exhibit 4.3 to Amendment No. 1 to the Registration Statement of the Company and Ann Taylor filed on June 21, 1989 (Registration No. 33-28522). 10.2 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.2.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.15.1 to the Annual Report on Form 10-K of the Company filed on April 30, 1993. =============================================================================== Exhibit Number - -------------- 10.3 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th Street headquarters. Incorporated by reference to Exhibit 10.21 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.3.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.1 to the Registration Statement of the Company filed on April 11, 1991 (Registration No. 33-39905). 10.3.2 Second Amendment to Lease, dated as of February 28, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.2 to the Annual Report on Form 10-K of the Company filed on April 29, 1993. 10.3.3 Extension and Amendment to Lease dated as of October 1, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.3.4 Modification of Amendment and Extension to Lease, dated as of April 14, 1994 between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.3.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.5 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.3.6 Sixth Amendment to Lease, dated as of January 5, 1996, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.6 to the Annual Report on Form 10-K of the Company filed on April 30, 1998. 10.3.7 Seventh Amendment to Lease, dated as of June 5, 1996, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.7 to the Annual Report on Form 10-K of the Company filed on April 30, 1998. 10.3.8 Eighth Amendment to Lease, undated, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.8 to the Annual Report on Form 10-K of the Company filed on April 30, 1998. 10.3.9 Ninth Amendment to Lease, dated as of May 13, 1997, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.9 to the Annual Report on Form 10-K of the Company filed on April 30, 1998. 10.3.10 Tenth Amendment to Lease, dated as of May 21, 1997, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.10 to the Annual Report on Form 10-K of the Company filed on April 30, 1998. 10.3.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between Pacific Metropolitan Corporation and Ann Taylor. 10.4 Tax Sharing Agreement, dated as of July 13, 1989, between the Company and Ann Taylor. Incorporated by reference to Exhibit 10.24 to Amendment No. 2 to the Registration Statement of the Company and Ann Taylor filed on July 13, 1989 (Registration No. 33-28522). 10.5 Employment Agreement dated as of February 1, 1994 between the Company and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of the Company for the Quarter ended October 29, 1994 filed on December 9, 1994. ============================================================================== Exhibit Number - -------------- 10.6 Employment Agreement dated February 16, 1996 between the Company and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K of the Company filed on April 8, 1996. 10.6.1 Amendment to the Employment Agreement, dated August 23, 1996, between the Company and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.11.1 to the Annual Report on Form 10-K of the Company filed on May 1, 1997. 10.7 Employment Agreement dated November 25, 1996 between the Company and Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.8 Employment Agreement dated September 20, 1996 between Ann Taylor and Dwight F. Meyer. Incorporated by reference to Exhibit 10.4 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.9 Separation Agreement dated July 15, 1997 between Ann Taylor and Barry Shapiro. Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of the Company filed on April 30, 1998. 10.10 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan, Amended and Restated as of February 23, 1994 (the "1992 Option Plan"). Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of the Company filed on May 1, 1997. 10.10.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated 1992 Stock Option and Restricted Stock and Unit Award Plan, as approved by stockholders on June 18, 1997. Incorporated by reference to Exhibit 10.15.1 to the Form 10-Q of the Company for the Quarter Ended August 2, 1997 filed on September 12, 1997. 10.10.2 Amendment to the AnnTaylor Stores Corporation Amended and Restricted 1992 Stock Option and Restricted Stock and Unit Award Plan dated as of January 16, 1998. Incorporated by reference to Exhibit 10 of Form 8-K of the Company filed on March 12, 1998. 10.10.3 Amendment to the AnnTaylor Stores Corporation Amended and Restated 1992 Stock Option and Restricted Stock and Unit Award Plan dated as of May 2, 1998. Incorporated by reference to Exhibit 10.16.3 to the Form 10-Q of the Company for the Quarter ended April 2, 1998 filed on June 16, 1998. 10.11 AnnTaylor Stores Corporation Amended and Restated Management Performance Compensation Plan, as approved by stockholders on June 18, 1997. Incorporated by reference to Exhibit 10.16 to the Form 10-Q of the Company for the Quarter Ended August 2, 1997 filed on September 12, 1997. 10.11.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated Management Performance Compensation Plan dated as of March 12, 1998. Incorporated by reference to Exhibit 10.17.1 to the Annual Report on Form 10-K of the Company filed on April 30, 1998. 10.12 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Form 10-Q of the Company for the Quarter Ended October 31, 1992 filed on December 15, 1992. 10.13 AnnTaylor Stores Corporation Deferred Compensation Plan. Incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. ============================================================================== Exhibit Number - -------------- 10.13.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation Plan as approved by the Board of Directors on August 11, 1995. Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of the Company for the Quarter Ended July 29, 1995 filed on September 11, 1995. 10.14 Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Financing Statement dated November 20, 1995, between AnnTaylor Distribution Services, Inc., as Mortgagor, and General Electric Capital Assurance Company, as Mortgagee. Incorporated by reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.15 Promissory Note dated November 20, 1995 from Ann Taylor and AnnTaylor Distribution Services, Inc., collectively as Borrower, to General Electric Capital Assurance Company, as Lender. Incorporated by reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.16 Stock and Asset Purchase Agreement, dated as of June 7, 1996, by and among the Company, Ann Taylor, Cygne and Cygne Group (F.E.) Limited. Incorporated by reference to Exhibit 2 to the Registrants' Current Report on Form 8-K filed on June 10, 1996. 10.16.1 Amendment to Stock and Asset Purchase Agreement, dated as of August 27, 1996, by and among the Company, Ann Taylor, Cygne and Cygne Group (F.E.) Limited. Incorporated by reference to Exhibit 3 to the Registrants' Current Report on Form 8-K filed on August 30, 1996. 10.16.2 Stockholders Agreement, dated as of September 20, 1996, among the Company, Cygne and Cygne Group (F.E.) Limited, a Hong Kong corporation and wholly owned subsidiary of Cygne. Incorporated by reference to Exhibit 10.26.2 to the Annual Report on Form 10-K of the Company filed on May 1, 1997. 10.16.3 Consulting Agreement, dated as of September 20, 1996, by and between the Company, Cygne and Mr. Irving Benson. Incorporated by reference to Exhibit 10.26.4 to the Annual Report on Form 10-K of the Company filed on May 1, 1997. 10.17 Certificate of Trust of AnnTaylor Finance Trust. Incorporated by reference to Exhibit 4.1 to the Registration Statement of the Company and AnnTaylor Finance Trust filed on June 21, 1996 (Registration 333-06605). 10.17.1 Amended and Restated Declaration of Trust of AnnTaylor Finance Trust, dated as of April 25, 1996 among the Company, as Sponsor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as Delaware Trustee and J. Patrick Spainhour, Paul E. Francis and Walter J. Parks, as Trustees. Incorporated by reference to Exhibit 4.2 to the Registration Statement of the Company and AnnTaylor Finance Trust filed on June 21, 1996 (Registration 333-06605). 10.17.2 Indenture, dated as of April 15, 1996, among AnnTaylor Stores Corporation and The Bank of New York, as Trustee, including form of Preferred Securities and form of Convertible Subordinated Debentures due 2016. Incorporated by reference to Exhibit 4.3 to the Registration Statement of the Company and AnnTaylor Finance Trust filed on June 21, 1996 (Registration No. 333-06605). 10.18 Commitment Letter dated as of May 7, 1998 among AnnTaylor, Bank of America National Trust and Savings Association, BancAmerica Robertson Stephens, Citicorp USA and CoreStates Bank, N.A. Incorporated by reference to Exhibit 10.27 to the Form 10-Q of the Company for the Quarter Ended May 2, 1998 filed on June 16, 1998. =============================================================================== Exhibit Number - -------------- 10.19 Credit Agreement, dated as of June 30, 1998 among AnnTaylor, Bank of America, Citicorp USA and First Union National Bank, as Co-Agents, the financial institutions from time to time party thereto, BancAmerica Robertson Stephens, as Arranger, and Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28 to the Form 10-Q of the Company for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.19.1 Trademark Security Agreement, dated as of June 30, 1998, made by Ann Taylor in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.1 to the Form 10-Q of the Company for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.19.2 Guaranty, dated as of June 30, 1998, made by the Company in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.2 to the Form 10-Q of the Company for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.19.3 Security and Pledge Agreement, dated as of June 30, 1998, made by the Company in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.3 to the Form 10-Q of the Company for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.19.4 Security and Pledge Agreement, dated as of June 30, 1998 made by AnnTaylor in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.4 to the Form 10-Q of the Company for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.19.5 Subsidiary Guaranty, dated as of June 30, 1998 made by AnnTaylor Distribution Services in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.5 to the Form 10-Q of the Company for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.20 AnnTaylor Stores Corporation Long-Term Cash Incentive Compensation Plan, as approved by stockholders on June 17, 1998. Incorporated by reference to Exhibit A to the Proxy Statement dated May 1, 1998 filed on May 6, 1998. 18 Preferability letter relating to the change in accounting principle. Incorporated by reference to Exhibit 18 to the Form 10-Q of the Company for the Quarter Ended May 2, 1998 filed on June 16, 1998. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. ============================================================================== SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/ J. Patrick Spainhour ------------------------ J. Patrick Spainhour Chairman and Chief Executive Officer Date: March 26, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ J. Patrick Spainhour Chairman and Chief Executive March 26, 1999 ------------------------ Officer and Director J. Patrick Spainhour /s/ Patricia DeRosa President and Chief Operating March 26, 1999 ------------------- Officer and Director Patricia DeRosa /s/ Walter J. Parks Senior Vice President - March 26, 1999 ------------------- Chief Financial Officer Walter J. Parks and Treasurer /s/ James M. Smith Vice President and Controller March 26, 1999 -------------------- Principal Accounting Officer James M. Smith /s/ Gerald S. Armstrong Director March 26, 1999 ----------------------- Gerald S. Armstrong /s/ James J. Burke, Jr. Director March 26, 1999 ----------------------- James J. Burke, Jr. /s/ Wesley E. Cantrell Director March 26, 1999 ---------------------- Wesley E. Cantrell /s/ Robert C. Grayson Director March 26, 1999 --------------------- Robert C. Grayson /s/ Ronald W. Hovsepian Director March 26, 1999 ----------------------- Ronald W. Hovsepian /s/ Rochelle B. Lazarus Director March 26, 1999 ------------------- Rochelle B. Lazarus /s/ Hanne M. Merriman Director March 26, 1999 --------------------- Hanne M. Merriman =============================================================================== ANNTAYLOR STORES CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No. Independent Auditors' Report........................................... 37 Consolidated Financial Statements: Consolidated Statements of Operations for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997........ 38 Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998........................................... 39 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997..................................... 40 Consolidated Statements of Cash Flows for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997....... 41 Notes to Consolidated Financial Statements....................... 42 ============================================================================== INDEPENDENT AUDITORS' REPORT To the Stockholders of ANNTAYLOR STORES CORPORATION: We have audited the accompanying consolidated financial statements of AnnTaylor Stores Corporation and its subsidiaries, listed in the accompanying index. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at January 30, 1999 and January 31, 1998 and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 30, 1999 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of inventory valuation to the average cost method from the retail method. DELOITTE & TOUCHE LLP New York, New York March 8, 1999 ============================================================================== ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended January 30, 1999, January 31, 1998 and February 1, 1997 Fiscal Years Ended ------------------------------------ January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- (in thousands, except per share amounts) Net sales................................$911,939 $781,028 $798,117 Cost of sales............................ 455,724 411,756 443,443 ------- ------- ------- Gross profit............................. 456,215 369,272 354,674 Selling, general and administrative expenses 349,955 308,232 291,027 Studio shoe stores closing expense....... --- --- 3,600 Employment contract separation expense... --- --- 3,500 Retirement of assets..................... 3,633 --- --- Amortization of goodwill................. 11,040 11,040 10,086 ------ ------ ------ Operating income......................... 91,587 50,000 46,461 Interest expense......................... 18,117 19,989 24,416 Other expense, net....................... 567 548 403 ------ ------ ------ Income before income taxes and extraordinary loss 72,903 29,463 21,642 Income tax provision..................... 33,579 17,466 12,975 ------ ------ ------ Income before extraordinary loss......... 39,324 11,997 8,667 Extraordinary loss (net of income tax benefit of $130,000)............... --- 173 --- ------ ------ ------ Net income........................... $39,324 $11,824 $ 8,667 ======= ======= ======= Basic earnings per share: Basic earnings per share before extraordinary loss.................$ 1.53 $ 0.47 $ 0.36 Extraordinary loss per share......... --- 0.01 --- ------ ------ ------- Basic earnings per share.............$ 1.53 $ 0.46 $ 0.36 ======= ======== ======= Diluted earnings per share: Diluted earnings per share before extraordinary loss.................$ 1.44 $ 0.47 $ 0.36 Extraordinary loss per share......... --- 0.01 --- ------ ------ ------ Diluted earnings per share...........$ 1.44 $ 0.46 $ 0.36 ======= ======== ======= See accompanying notes to consolidated financial statements. ============================================================================== ANNTAYLOR STORES CORPORATION CONSOLIDATED BALANCE SHEETS January 30, 1999 and January 31, 1998 January 30, January 31, 1999 1998 ---- ---- Assets (in thousands) Current assets Cash and cash equivalents........................ . $ 67,031 $ 31,369 Accounts receivable, net ........................... 71,049 60,211 Merchandise inventories ............................ 136,748 97,234 Prepaid expenses and other current assets .......... 23,637 21,291 ------- ------- Total current assets ............................... 298,465 210,105 Property and equipment, net ........................ 151,785 139,610 Goodwill, net ...................................... 319,699 330,739 Deferred financing costs, net ...................... 2,627 1,258 Other assets ....................................... 2,841 1,949 ------- ------- Total assets........................................ 775,417 $ 683,661 ======= ========= Liabilities and Stockholders' Equity Current liabilities Accounts payable.................................... $ 65,419 $ 38,185 Accrued salaries and bonus ......................... 17,132 5,848 Accrued tenancy .................................... 8,465 6,727 Gift certificates redeemable ....................... 7,008 5,935 Accrued expenses ................................... 30,527 30,110 Current portion of long-term debt .................. 1,206 1,119 ------- ------- Total current liabilities .......................... 129,757 87,924 Long-term debt ..................................... 103,951 105,157 Other liabilities .................................. 12,386 10,082 Commitments and contingencies Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary, AnnTaylor Finance Trust, Holding Solely Convertible Debentures ......................................... 96,624 96,391 Stockholders' equity Common stock, $.0068 par value; 40,000,000 shares authorized; 26,035,301 and 25,657,590 shares issued, respectively ............................... 177 174 Additional paid-in capital ......................... 359,805 350,647 Warrants to acquire 2,814 shares of common stock ... 46 46 Retained earnings .................................. 73,295 34,204 Deferred compensation on restricted stock .......... (272) (737) ------- ------- 433,051 384,334 Treasury stock, 17,201 and 12,659 shares, respectively, at cost ............................................ (352) (227) ------- ------- Total stockholders' equity ......................... 432,699 384,107 ------- ------- Total liabilities and stockholders' equity.......... $ 775,417 $ 683,661 ========= ========= See accompanying notes to consolidated financial statements. ============================================================================== ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Fiscal Years Ended January 30, 1999, January 31, 1998 and February 1, 1997 (in thousands)
Common Stock Additional Warrants Restricted Treasury Stock ----------------- Paid-In -------- Retained Stock --------------- Shares Amount Capital Shares Amount Earnings Awards Shares Amount ------ ------ ------- ------ ------- -------- ------ ------ ------ Balance at February 3, 1996...... 23,128 $ 157 $311,284 37 $596 $14,120 $ (33) 45 $(436) Net income....................... --- --- --- --- --- 8,667 --- --- --- Exercise of stock options and related tax benefit........... 18 --- 216 --- --- --- --- --- --- Exercise of warrants............. --- --- 314 (34) (550) --- --- (34) 236 Issuance of stock for Sourcing Acquisition.................. 2,348 16 35,984 --- --- --- --- --- --- Amortization of discount on preferred securities......... --- --- --- --- --- (174) --- --- --- Activity related to common stock issued as employee incentives.................... 104 1 1,747 --- --- --- (1,557) 1 (6) ------ --- ------- ---- ---- ------ ------ --- -- Balance at February 1, 1997...... 25,598 174 349,545 3 46 22,613 (1,590) 12 (206) Net income....................... --- --- --- --- --- 11,824 --- --- --- Exercise of stock options and related tax benefit........... 48 --- 890 --- --- --- --- 1 (10) Amortization of discount on preferred securities......... --- --- --- --- --- (233) --- --- --- Activity related to common stock issued as employee incentives.................... 12 --- 212 --- --- --- 853 --- (11) ------ --- ------- ---- ---- ------ ------ --- -- Balance at January 31, 1998...... 25,658 174 350,647 3 46 34,204 (737) 13 (227) Net income....................... --- --- --- --- --- 39,324 --- --- --- Exercise of stock options and related tax benefit........... 373 3 9,061 --- --- --- --- 3 (106) Amortization of discount on preferred securities......... --- --- --- --- --- (233) --- --- --- Activity related to common stock issued as employee incentives.................... 4 --- 97 --- --- --- 465 1 (19) ------ --- ------- ---- ---- ------ ------ --- -- Balance at January 30, 1999...... 26,035 $ 177 $359,805 3 $46 $73,295 $ (272) 17 $(352) ====== ==== ======== ==== ==== ======= ====== === =====
See accompanying notes to consolidated financial statements. =============================================================================== ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended January 30, 1999, January 31, 1998 and February 1, 1997
Fiscal Years Ended --------------------------------------------- January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- (in thousands) Operating activities: Net income .......................................... $ 39,324 $ 11,824 $ 8,667 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss .................................. -- 303 -- Equity earnings in CAT .............................. -- -- (1,402) Provision for loss on accounts receivable ........... 1,476 1,795 1,803 Depreciation and amortization ....................... 28,783 27,803 26,208 Amortization of goodwill ............................ 11,040 11,040 10,086 Amortization of deferred compensation ............... 465 1,065 191 Non-cash interest ................................... 1,290 1,419 1,574 Deferred income taxes ............................... 3,966 (2,687) (985) Loss on disposal of property and equipment .......... 4,175 248 3,209 Change in assets and liabilities net of effects from purchase of sourcing division: Decrease (increase) in receivables .................. (12,314) 1,599 4,987 Decrease (increase) in merchandise inventories ...... (39,514) 3,003 9,342 Decrease (increase) in prepaid expenses and other current assets ................................ (5,581) 1,894 247 Decrease in other non-current assets and liabilities, net ................................................. 679 2,861 738 Increase in accounts payable and accrued liabilities 41,746 9,422 2,867 ------ ----- ----- Net cash provided by operating activities ........... 75,535 71,589 67,532 ------ ----- ----- Investing activities: Purchases of property and equipment ................. (45,131) (22,945) (16,107) Purchase of sourcing division ....................... -- -- (227) ------ ----- ----- Net cash used by investing activities ............... (45,131) (22,945) (16,334) ------ ----- ----- Financing activities: Repayments under revolving credit facility .......... -- -- (101,000) Net proceeds from issuance of preferred securities .. -- -- 95,984 Repayment of term loan .............................. -- (24,500) -- Term loan prepayment penalty ........................ -- (184) -- Payments of mortgage ................................ (1,119) (416) (266) Repayments under receivables facility ............... -- -- (40,000) Proceeds from exercise of stock options ............. 9,036 869 210 Payment of financing costs .......................... (2,659) (69) (384) ------ ----- ----- Net cash provided by (used by) financing activities . 5,258 (24,300) (45,456) ------ ----- ----- Net increase in cash ................................ 35,662 24,344 5,742 Cash, beginning of year ............................. 31,369 7,025 1,283 ------ ----- ----- Cash, end of year ................................... $ 67,031 $ 31,369 $ 7,025 ====== ====== ===== Supplemental disclosures of cash flow information: Cash paid during the year for interest .............. $ 18,582 $ 19,251 $ 22,689 ====== ====== ===== Cash paid during the year for income taxes .......... $ 33,934 $ 17,220 $ 8,990 ====== ====== =====
See accompanying notes to consolidated financial statements. ============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ann Taylor is a leading national specialty retailer of better quality women's apparel, shoes and accessories sold principally under the Ann Taylor brand name. BASIS OF PRESENTATION The consolidated financial statements include the accounts of AnnTaylor Stores Corporation (the "Company") and AnnTaylor, Inc. ("Ann Taylor"). The Company has no material assets other than the common stock of Ann Taylor and the common securities of AnnTaylor Finance Trust, a special purpose financing vehicle, and conducts no business other than the management of Ann Taylor. All intercompany accounts have been eliminated in consolidation. Certain Fiscal 1997 and 1996 amounts have been reclassified to conform to the Fiscal 1998 presentation. FISCAL YEAR The Company follows the standard fiscal year of the retail industry, which is a 52 or 53 week period ending on the Saturday closest to January 31 of the following calendar year. All fiscal years presented included 52 weeks. FINANCE SERVICE CHARGE INCOME Income from finance service charges relating to customer receivables, which is deducted from selling, general and administrative expenses, amounted to $8,422,000 for Fiscal 1998, $8,568,000 for Fiscal 1997 and $9,024,000 for Fiscal 1996. MERCHANDISE INVENTORIES Merchandise inventories are stated at the lower of average cost or market. Effective February 1, 1998, the Company elected to change its method of inventory valuation from the retail method to the average cost method. The Company believes the average cost method is a preferable method for matching the cost of merchandise with the revenues generated. The cumulative effect of this accounting change on February 1, 1998 was not material, and therefore no disclosure is noted on the Consolidated Statement of Operations. The effect of this accounting change on Fiscal 1998 net income was an increase of $1,272,000, or $0.04 per share on a diluted basis. It is not possible to determine the effect of the change on income in any previously reported fiscal years. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets (3 to 40 years) or, in the case of leasehold improvements, over the lives of the respective leases, if shorter. =============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED FINANCING COSTS Deferred financing costs are being amortized using the interest method over the term of the related debt. Accumulated amortization at January 30, 1999 and January 31, 1998 was $3,119,000 and $4,427,000, respectively. GOODWILL Goodwill relating to the 1989 acquisition of Ann Taylor by the Company is being amortized on a straight-line basis over 40 years. Goodwill relating to the 1996 Sourcing Acquisition (see Note 14) is being amortized on a straight-line basis over 25 years. Accumulated amortization at January 30, 1999 and January 31, 1998 was $98,891,000 and $87,851,000, respectively. On an annual basis, the Company compares the carrying value of its goodwill to an estimate of the Company's fair value to evaluate the reasonableness of the carrying value and remaining amortization period. Fair value is computed using projections of future non-discounted cash flows. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires an asset and liability method of accounting for deferred income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized, and income or expense is recorded, for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which is effective for the Company for the quarter ended October 30, 1999. SFAS No. 133 establishes accounting and reporting standards for derivatives and for hedging activities. Management is currently evaluating the impact of this standard and believes its adoption will not affect the Company's consolidated financial position, results of operations or cash flows. =============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In March 1998, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which is effective for the Company for fiscal years beginning after December 15, 1998. The application of SOP 98-1 is not anticipated to have a material impact on the Company's consolidated financial statements. 2. LONG-TERM DEBT The following table summarizes long-term debt outstanding at January 30, 1999 and January 31, 1998:
January 30, 1999 January 31, 1998 ---------------- ---------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- (in thousands) Mortgage.................................... $ 5,157 $ 5,157 $ 6,276 $ 6,276 8 3/4% Notes ............................... 100,000 101,875 100,000 100,500 - - - - ------- ------- ------- ------- Total debt ................................. 105,157 107,032 106,276 106,776 ------- ------- ------- ------- Less current portion ..................... 1,206 1,206 1,119 1,119 Total long-term debt...................... $103,951 $105,826 $105,157 $105,657 ======== ======== ======== ========
In accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the Company determined the estimated fair value of its financial instruments using quoted market information, as available. As judgement is involved, the estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. On June 30, 1998, Ann Taylor entered into a new $150,000,000 senior secured revolving credit facility (the "Credit Facility") with a syndicate of lenders. This facility replaced Ann Taylor's then-existing $122,000,000 bank credit agreement that was scheduled to expire in July 1998 and also resulted in the non-renewal by Ann Taylor's sourcing division of its $50,000,000 credit facility and in the non-renewal by AnnTaylor Funding, Inc. of a $40,000,000 accounts receivable facility. The Credit Facility is used by Ann Taylor for the issuance of commercial and standby letters of credit and to provide funds for other general corporate purposes. Loans outstanding under the Credit Facility at any time may not exceed $50,000,000. The Company did not make any borrowings under the loan provisions of the Credit Facility during Fiscal 1998 and there were no loans outstanding at fiscal year end. The outstanding loan balance is required to be reduced to zero for the thirty-day period commencing January 1 each year. This cleandown period was achieved for January 1999. 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 advance rates against certain eligible assets. Based on this calculation, the maximum amount available for loans and letters of credit under the Credit Facility at January 30, 1999 was approximately $131,054,000. Commercial and standby letters of credit outstanding under the Credit Facility at January 30, 1999 were approximately $65,763,000. ============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. LONG-TERM DEBT (CONTINUED) Amounts outstanding under the Credit Facility bear interest at a rate equal to, at Ann Taylor's option, the lead lender's Base Rate or Eurodollar Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%, respectively. In addition, Ann Taylor is required to pay the lenders a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%, respectively. The Credit Facility contains financial and other covenants, including limitations on indebtedness, liens, investments and capital expenditures, restrictions on dividends or other distributions to stockholders and maintenance of certain financial ratios including specified levels of net worth. For Fiscal 1998, the capital expenditure limit was $52,000,000. For Fiscal 1999, capital expenditures are limited to a maximum of $55,000,000. The lenders have been granted a pledge of the common stock of Ann Taylor and certain of its subsidiaries, and a security interest in substantially all other tangible and intangible assets, including accounts receivable, trademarks, inventory, store furniture and fixtures, of Ann Taylor and its subsidiaries, as collateral for Ann Taylor's' obligations under the Credit Facility. The Credit Facility matures on June 30, 2000 and includes an automatic one-year extension, contingent upon the satisfaction of certain conditions. In addition, the commitments under the Credit Facility terminate on February 16, 2000 unless Ann Taylor's outstanding 8 3/4% Subordinated Notes due 2000 (the "8 3/4% Notes") are refinanced on or prior to such date with the proceeds of subordinated debt or capital stock, the terms and conditions of which are reasonably satisfactory to the Requisite Lenders under the Credit Facility. On June 28, 1993, Ann Taylor issued $110,000,000 principal amount of its 8 3/4% Notes. The outstanding principal amount of these notes as of January 30, 1999 was $100,000,000. In July 1993, Ann Taylor entered into a $110,000,000 (notional amount) interest rate swap agreement, which had the effect of converting the Company's interest obligations on the 8 3/4% Notes to a variable rate. Under the agreement, the Company received a fixed rate of 4.75% and paid a floating rate based on LIBOR, as determined in six month intervals. The swap agreement matured in July 1996. Net receipts or payments under the agreement were recognized as adjustments to interest expense. Ann Taylor and its wholly owned subsidiary AnnTaylor Distribution Services, Inc. are parties to a $7,000,000 seven-year mortgage loan maturing in Fiscal 2002. The loan is secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $130,000. The mortgage loan balance at January 30, 1999 was $5,157,000. The aggregate principal payments of all long-term obligations are as follows: Fiscal Year (in thousands) ----------- 1999........................................... $ 1,206 2000........................................... 101,300 2001........................................... 1,401 2002........................................... 1,250 ------- Total....................................... $105,157 ======== =============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. PREFERRED SECURITIES In April and May of Fiscal 1996, the Company completed the sale of an aggregate of $100,625,000 of 8 1/2% Company-Obligated Mandatorily Redeemable Convertible Preferred Securities (the "preferred securities") issued by its financing vehicle, AnnTaylor Finance Trust, a Delaware business trust (the "Trust"). The preferred securities have a liquidation preference of $50 per security ($100,625,000 in the aggregate) and are convertible at the option of the holders thereof into the Company's common stock at a conversion rate of 2.545 shares of common stock for each preferred security (equivalent to $19.65 per share of common stock, which represented a 20% premium to the $16.375 closing price of the common stock on the New York Stock Exchange at the date of the execution of the purchase agreement relating to the sale of the preferred securities). The sole assets of the Trust are $103,700,000 of 8 1/2% Convertible Subordinated Debentures of the Company maturing on April 15, 2016. A total of 2,012,500 preferred securities were issued, and are convertible into an aggregate of 5,121,812 shares of the Company's common stock. The Company received net proceeds of $95,984,000 in connection with the sale of the preferred securities. The carrying value and estimated fair value of the preferred securities at January 30, 1999 were $96,624,000 and $196,219,000, respectively. 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS A summary of activity in the allowance for doubtful accounts for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 is as follows: Fiscal Years Ended ----------------------------------- January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- (in thousands) Balance at beginning of year ............ $ 812 $ 811 $ 736 Provision for loss on accounts receivable 1,476 1,795 1,803 Accounts written off .................... (1,468) (1,794) (1,728) ------ ------ ------ Balance at end of year .................. $ 820 $ 812 $ 811 ======= ======= ======= 5. COMMITMENTS AND CONTINGENCIES RENTAL COMMITMENTS Ann Taylor occupies its retail stores and administrative facilities under operating leases, most of which are non-cancelable. Some leases contain renewal options for periods ranging from one to ten years under substantially the same terms and conditions as the original leases. Most of the store leases require Ann Taylor to pay a specified minimum rent, plus a contingent rent based on a percentage of the store's net sales in excess of a specified threshold. In addition, most of the leases require Ann Taylor to pay real estate taxes, insurance and certain common area and maintenance costs in addition to the future minimum lease payments shown below. ============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum lease payments under non-cancelable operating leases at January 30, 1999 are as follows: Fiscal Year (in thousands) ----------- 1999.........................................$ 78,042 2000......................................... 77,068 2001......................................... 73,767 2002......................................... 71,265 2003......................................... 64,978 2004 and thereafter.......................... 252,340 ------- Total........................................$ 617,460 ======= Rent expense for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 was as follows: Fiscal Years Ended -------------------------------------- January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- (in thousands) Minimum rent ................... $66,358 $59,495 $55,571 Percentage rent................. 2,414 1,671 2,433 ----- ----- ----- Total .......................... $68,772 $61,166 $58,004 ====== ====== ====== LITIGATION The Company has been named as a defendant in several legal actions arising from its normal business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position, results of operations or liquidity of the Company. In addition, the Company, Ann Taylor, certain directors and former officers and directors of the Company and Ann Taylor, Merrill Lynch & Co. ("ML&Co.") and certain affiliates of ML&Co. have been named as defendants in a purported class action lawsuit filed in April 1996 by certain alleged stockholders alleging that the Company and the other defendants engaged in a fraudulent scheme and course of business that operated a fraud or deceit on purchasers of the Company's common stock during the period from February 3, 1994 through May 4, 1995. On March 10, 1998, the Court issued an Opinion dismissing the complaint. The Court's Opinion granted the plaintiffs leave to amend and re-file the complaint within thirty days of the date of the Opinion, and an amended complaint was filed by the plaintiffs on April 9, 1998. On November 9, 1998, the Court issued an Opinion dismissing, with prejudice, the amended complaint. On or about December 15, 1998, the plaintiffs filed a notice of appeal to the U.S District Court of Appeals, Second Circuit, seeking review of the Appellate Court's decision. The appeal is presently pending, and 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 defend the action vigorously. 6. 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 preferred securities. Basic and diluted earnings per share calculations follow: ============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. NET INCOME PER SHARE (CONTINUED)
Fiscal Years Ended ------------------------------------------------------------------------------------- January 30, 1999 January 31, 1998 February 1, 1997 ----------------------- ----------------------------- --------------------------- (In thousands, except per share amounts) Per Per Per Share Share Share Income Shares Amount Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ ------ ------ ------ Basic Earnings per Share Income available to common stockholders before extraordinary loss 39,324 25,715 $1.53 $11,997 25,628 $0.47 $8,667 23,981 $0.36 Effect of Dilutive Securities Warrants ................. -- 3 -- 3 -- 22 Stock options ............ -- 166 -- 62 -- 57 Preferred securities ..... 5,189 5,122 -- -- -- -- ----- ----- ----- ------ ---- ----- Diluted Earnings per Share Income available to common stockholders before extraordinary loss 44,513 31,006 $1.44 $11,997 25,693 $0.47 $8,667 24,060 $0.36 ====== ====== ===== ======= ====== ===== ====== ====== =====
Conversion of the preferred securities into common stock is not included in the computation of diluted earnings per share for the fiscal years ended January 31, 1998 and February 1, 1997 due to the antidilutive effect of the conversion as of such dates. 7. ENTERPRISE-WIDE OPERATING INFORMATION In Fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information", which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, major customers and the material countries in which the entity holds assets and reports revenues. 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. ============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. OTHER EQUITY COMMON STOCK WARRANTS At January 30, 1999, the Company had outstanding warrants to acquire, in the aggregate, 2,814 shares of the common stock of the Company (the "Warrants"). The Warrants, when exercised, entitle the holders thereof to acquire such shares, subject to adjustment, at no additional cost. The Warrants became exercisable as a result of the initial public offering of the Company's common stock in May 1991, and expire on July 15, 1999. PREFERRED STOCK At January 30, 1999, January 31, 1998 and February 1, 1997, there were 2,000,000 shares of preferred stock, par value $0.01, authorized and unissued. 9. PROPERTY AND EQUIPMENT Property and equipment consists of the following: Fiscal Years Ended ------------------------ January 30, January 31, 1999 1998 ---- ---- (in thousands) Land and building.......................... $ 8,683 $ 8,625 Leasehold improvements..................... 93,168 85,332 Furniture and fixtures..................... 153,395 136,314 Construction in progress................... 11,059 6,422 ------- ------- 266,305 236,693 Less accumulated depreciation and amortization 114,520 97,083 ------- ------ Net property and equipment............ $151,785 $139,610 ======== ======== 10. STOCK OPTION PLANS In 1989 and 1992, the Company established stock option plans. At January 30, 1999 71,683 shares of common stock were reserved for issuance under the 1989 plan and 2,601,906 shares of common stock were reserved for issuance under the 1992 plan. Under the terms of both plans, the exercise price of any option may not be less than 100% of the fair market value of the common stock on the date of grant. Stock options granted prior to 1994 generally vest over a five year period, with 20% becoming exercisable immediately upon grant of the option and 20% per year for the next four years. Stock options granted since 1994 generally vest either (i) over a four year period, with 25% becoming exercisable on each of the first four anniversaries of the grant, or (ii) in seven or nine years with accelerated vesting upon the achievement of specified earnings or stock price targets within a five year period. All stock options granted under the 1989 plan and the 1992 plan expire ten years from the date of grant. At January 30, 1999, there were 21,077 shares under the 1989 plan and 1,260,614 shares under the 1992 plan available for future grant. ============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. STOCK OPTIONS PLANS (CONTINUED) The Company accounts for the stock options in accordance with Accounting Principles Board Opinion No. 25, under which no compensation costs have been recognized for stock option awards. Had compensation costs of option awards been determined under a fair value alternative method as stated in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company would have been required to prepare a fair value model for such options and record such amount in the financial statements as compensation expense. Proforma net income before extraordinary loss and net income per share before extraordinary loss after taking into account such expense would have been $38.4 million and $1.41, respectively for Fiscal 1998, $11.0 million and $0.43, respectively, for Fiscal 1997, and $8.2 million and $0.34, respectively, for Fiscal 1996. For purposes of this calculation, the Company arrived at the fair value of each stock grant at the date of grant by using the Black Scholes option pricing model with the following weighted average assumptions used for grants for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997: risk-free interest rate of 5.4%, 6.2% and 5.8%, respectively; expected life of 4.0 years, 5.0 years and 4.3 years, respectively; and expected volatility of 59.4%, 67.9% and 55.2%, respectively. The following summarizes stock option transactions for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997: Weighted Number Option Prices Average Price of Shares ------------- ------------- --------- Outstanding Options February 3, 1996 $6.80 - $44.125 $ 28.00 1,554,177 Granted ............................ $11.00-$21.625 $ 17.52 463,500 Exercised .......................... $ 6.80 $ 6.80 (18,234) Canceled ........................... $11.50-$42.75 $ 27.31 (335,358) --------- Outstanding Options February 1, 1997 $ 6.80-$44.125 $22.69 1,664,085 Granted ............................ $14.25-$22.75 $20.60 590,000 Exercised .......................... $ 6.80-$20.00 $15.45 (47,436) Canceled ........................... $11.50-$39.75 $25.11 (585,557) --------- Outstanding Options January 31, 1998 $ 6.80-$44.125 $21.20 1,621,092 Granted ............................ $14.00-$36.25 $17.52 306,574 Exercised .......................... $ 6.80-$36.25 $19.09 (373,544) Canceled ........................... $ 6.80-$42.50 $23.68 (162,224) --------- Outstanding Options January 30, 1999 $ 6.80-$44.125 $20.67 1,391,898 ========= At January 30, 1999, January 31, 1998 and February 1, 1997 there were exercisable 696,596 options, 450,776 options and 660,290 options, respectively, which have weighted average exercise prices of $19.76 per share, $19.02 per share and $21.03 per share, respectively. In 1994, the Company's 1992 stock option plan was amended and restated to include restricted stock and unit awards. A unit represents the right to receive the cash value of a share of common stock on the date the restrictions on the unit lapse. The restrictions on grants generally lapse over a four year period from the date of the grant. In the event a grantee terminates employment with the Company, any restricted stock or restricted units remaining subject to restrictions are forfeited. During 1997 and 1998, certain executives were awarded restricted common stock and, in some cases restricted units. The resulting unearned compensation expense, based upon the market value on the date of grants, was charged to stockholders' equity and is being amortized over the restricted period. =============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. EXECUTIVE COMPENSATION Effective August 23, 1996, a former executive and Director of the Company and Ann Taylor resigned from her position. See Note 13 for a discussion of the Company's obligations under the former executive's employment agreement. Upon this resignation, the Company's then-President and Chief Operating Officer J. Patrick Spainhour was promoted to the position of Chairman and Chief Executive Officer. In connection with this promotion, Mr. Spainhour was granted 75,000 shares of restricted common stock. The resulting unearned compensation expense of $1,171,875, based on the market value on the date of the grant, was charged to stockholders' equity and is being amortized over the restricted period applicable to these shares. Additionally, as of December 9, 1996, the President and Chief Operating Officer of the Company received a grant of 30,000 restricted shares of common stock and 20,000 restricted units. The resulting unearned compensation expense of $592,500, based on the market value on the date of the grant, was charged to stockholders' equity and is being amortized over the restricted period applicable to these shares. As of January 30, 1999, 35,000 shares of restricted stock and 6,667 restricted units had not yet vested. 12. EXTRAORDINARY ITEM On July 2, 1997, the Company used available cash to prepay $24,500,000, the outstanding balance of its term loan due September 1998, which resulted in an extraordinary charge to earnings in Fiscal 1997 of $173,000, net of income tax benefit. 13. NONRECURRING CHARGES STUDIO SHOE STORES CLOSING In connection with the planned closing of all of the Company's Ann Taylor Studio shoe stores, announced in January 1997, the Company recorded a pre-tax charge of $3,600,000 in Fiscal 1996. Of the total impairment loss, $2,500,000 represented impairment of long-lived assets such as properties and store fixtures and $1,100,000 pertained to lease and other related costs for these locations until the properties are sublet. RESIGNATION OF A FORMER EXECUTIVE Effective August 23, 1996, a former executive and Director of the Company and Ann Taylor resigned. In connection with this resignation, a one-time pre-tax charge of $3,500,000 was recorded in Fiscal 1996 relating to the estimated costs of the Company's obligations under the former executive's employment contract with the Company. RETIREMENT OF ASSETS In the fourth quarter of Fiscal 1998, the Company recorded a $3,633,000 non-cash pre-tax charge for the retirement of certain assets. This charge related to the write-off of the net book value of the assets relinquished during the renovation of the Company's corporate offices. ============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MERRILL LYNCH AND ITS AFFILIATES At January 30, 1999, certain affiliates of ML&Co. held approximately 6.7% of the Company's outstanding common stock. Two of the members of the Board of Directors of the Company and Ann Taylor serve as representatives of ML&Co. and its affiliates. As a result, ML&Co. and such affiliates are in a position to influence the management of the Company and Ann Taylor. In Fiscal 1996, the Company paid approximately $1,207,500 to ML&Co. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill Lynch") in connection with their services as placement agents for the sale of the preferred securities (see Note 3). The Company agreed to indemnify ML&Co. and Merrill Lynch, as placement agents, against certain liabilities, including certain liabilities under the federal securities law, in connection with the sale of the preferred securities. SOURCING ACQUISITION In Fiscal 1995, the Company purchased approximately 16% of its merchandise directly from Cygne Designs, Inc. ("Cygne") and an additional 38% of its merchandise through the Company's direct sourcing joint venture with Cygne known as CAT. On September 20, 1996 (the "Effective Date"), pursuant to the Stock and Asset Purchase Agreement dated as of June 7, 1996, by and among the Company, Ann Taylor, Cygne and Cygne Group F.E. Limited (as amended, the "Purchase Agreement"), Ann Taylor acquired the entire interest of Cygne in CAT and certain of the assets (the "Assets") of the Ann Taylor Woven Division of Cygne (the "Division") that were used for sourcing merchandise for Ann Taylor (the "Sourcing Acquisition"). As a result of the Sourcing Acquisition, CAT became an indirect wholly owned subsidiary of the Company. CAT was subsequently merged into Ann Taylor and now performs all of Ann Taylor's direct sourcing functions, including those previously provided by the Division, as a division of Ann Taylor. For financial reporting purposes, the transaction has been accounted for as of the Effective Date under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Accounting for Business Combinations". In consideration for Cygne's interest in CAT and the Assets, the Company paid (i) 2,348,145 shares of common stock of the Company having an aggregate value, as of the Effective Date, of $36,000,000, (ii) $3,200,000 in cash as payment for inventory and fixed assets and (iii) approximately $6,500,000 in cash in settlement of open accounts payable by Ann Taylor to Cygne for merchandise delivered by Cygne prior to the closing. The Company also assumed certain liabilities related to the operations of the Division. The purchase price was subject to post-closing adjustments based upon final determination of the value of certain of the assets purchased and liabilities assumed. As of February 1, 1997, certain post-closing adjustments reduced the net cash paid to approximately $227,000. The total purchase price to the Company of the Sourcing Acquisition has been allocated to the tangible and intangible assets and liabilities of CAT and the Division that were acquired, based on estimates of their respective fair values. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 25 years. The following unaudited proforma consolidated data for the Company for the fiscal year ended February 1, 1997 has been presented to reflect the Sourcing Acquisition as if it had occurred at the beginning of such period: =============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED) Fiscal Year Ended February 1, 1997 ----------------- Actual Proforma ------ -------- (in thousands, except per share amounts) Net sales......................................$ 798,117 $798,117 Net income.....................................$ 8,667 $11,595 Basic and diluted earnings per share...........$ 0.36 $ 0.45 Weighted average shares........................ 23,981 25,458 Weighted average shares, assuming dilution..... 24,060 25,537 The proforma data set forth above does not purport to be indicative of the results that actually would have occurred if the Sourcing Acquisition had occurred at the beginning of the period presented or of results which may occur in the future. A summary of the noncash activity that occurred in the fiscal year ended February 1, 1997 in conjunction with the Sourcing Acquisition is as follows: (in thousands) Fair value of assets acquired ............................. $ 4,727 Excess of purchase price over the fair value of net assets acquired.................................. 38,340 Ann Taylor's previous investment in CAT.................... (6,840) Issuance of the Company's common stock..................... (36,000) ------- Cash paid ................................................. $ 227 ======= 15. INCOME TAXES The provision for income taxes for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 consists of the following: Fiscal Years Ended ------------------------------------ January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- (in thousands) Federal: Current...........................$ 21,589 $14,427 $ 9,898 Deferred.......................... 2,748 (1,917) (802) ------ ------ ------- Total federal................... 24,337 12,510 9,096 ------ ------ ------- State and local: Current........................... 7,869 5,538 3,844 Deferred.......................... 1,217 (769) (152) ------ ------ ------- Total state and local........... 9,086 4,769 3,692 ------ ------ ------- Foreign: Current........................... 156 187 187 Deferred.......................... --- --- --- ------ ------ ------- Total foreign................... 156 187 187 ------ ------ ------- Total.............................$ 33,579 $17,466 $12,975 ======== ======= ======= ============================================================================= ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. INCOME TAXES (CONTINUED) The reconciliation between the provision for income taxes and the provision for income taxes at the federal statutory rate for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 is as follows:
Fiscal Years Ended -------------------------------------- January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- (in thousands) Income before income taxes and extraordinary loss ............................................... $ 72,903 $ 29,463 $ 21,642 ======== ======== ======== Federal statutory rate ............................. 35% 35% 35% ======== ======== ======== Provision for income taxes at federal statutory rate $ 25,516 $ 10,312 $ 7,575 State and local income taxes, net of federal income tax benefit ................................. 4,660 3,800 2,273 Non-deductible amortization of goodwill ............ 3,500 3,500 3,429 Unremitted earnings of foreign subsidiaries ........ (188) (314) (382) Other .............................................. 91 168 80 -------- -------- -------- Provision for income taxes.......................... $ 33,579 $ 17,466 $ 12,975 ======== ======== ========
The tax effects of significant items comprising the Company's net deferred tax assets as of January 30, 1999 and January 31, 1998 are as follows: January 30, 1999 January 31, 1998 ---------------- ---------------- (in thousands) Current: Inventory.................................. $ 128 $ 2,854 Accrued expenses........................... 3,812 4,269 Real estate................................ (1,686) (1,634) Other...................................... --- --- ------ ------- Total current............................... $ 2,254 $ 5,489 ======= ======= Noncurrent: Depreciation and amortization.............. $ (5,510) $ (4,982) Rent expense............................... 4,786 4,364 Other...................................... 276 901 ------ ------- Total noncurrent............................ $ (448) $ 283 ======= ======= Income taxes provided reflect the current and deferred tax consequences of events that have been recognized in the Company's financial statements or tax returns. U.S. federal income taxes are provided on unremitted foreign earnings except those that are considered permanently reinvested, which at January 30, 1999 amounted to approximately $6,864,000. However, if these earnings were not considered permanently reinvested, under current law, the incremental tax on such undistributed earnings would be approximately $2,149,000. ============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. RETIREMENT PLANS SAVINGS PLAN. Ann Taylor maintains a defined contribution 401(k) savings plan for substantially all full-time employees of Ann Taylor and its subsidiaries. Participants may contribute to the plan an aggregate of up to 10% of their annual earnings. Ann Taylor makes a matching contribution of 50% with respect to the first 3% of each participant's annual earnings contributed to the plan. Ann Taylor's contributions to the plan for Fiscal 1998, Fiscal 1997 and Fiscal 1996 were $592,000, $519,000 and $390,000, respectively. PENSION PLAN. Substantially all full-time employees of Ann Taylor and its subsidiaries are covered under a noncontributory defined benefit pension plan. Through December 31, 1997, the pension plan was a "cash balance pension plan". Each participant accrued a benefit based on compensation and years of service with Ann Taylor. As of January 1, 1998, the Plan was amended and the formula to calculate benefits was changed to a career average formula. The new career average formula was used to determine the funding status of the plan beginning in Fiscal 1997. Ann Taylor's funding policy for the plan is to contribute annually the amount necessary to provide for benefits based on accrued service and projected pay increases. Plan assets consist primarily of cash, equity and fixed income securities. In Fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which standardizes the disclosure requirements for pension and other postretirement benefits, eliminates certain disclosures, and requires additional information on the changes in the benefit obligations and fair value of plan assets. The following table provides information for the Pension Plan at January 30, 1999, January 31, 1998 and February 1, 1997: Fiscal Years Ended --------------------------------- January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- (in thousands) Change in benefit obligation: Benefit obligation, beginning of year ....... $ 3,820 $ 3,413 $ 2,893 Service cost ................................ 669 571 981 Interest .................................... 292 250 212 Plan amendments ............................. -- 81 -- Actuarial loss (gain) ....................... 348 (103) (316) Benefits paid ............................... (487) (392) (357) ------ ------ ------ Benefit obligation, end of year.............. 4,642 3,820 3,413 ------ ------ ------ Change in plan assets: Fair value of plan assets, beginning of year 5,128 4,745 2,537 Actual return on plan assets ................ 1,205 907 2,333 Employer contribution (refund) .............. 1,640 (132) 232 Benefits paid ............................... (487) (392) (357) ------ ------ ------ Fair value of plan assets, end of year ...... 7,486 5,128 4,745 ------ ------ ------ Funded status (fair value of plan assets less benefit obligation) ......................... 2,844 1,308 1,332 Unrecognized net actuarial gain ............. (1,675) (1,361) (802) Unrecognized prior service cost ............. 69 75 -- ------ ------ ------ Prepaid benefit cost......................... $ 1,238 $ 22 $ 530 ====== ======= ======= ============================================================================== ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. RETIREMENT PLANS (CONTINUED) Net pension cost includes the following components: Fiscal Years Ended ------------------------------------ January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- Service cost..............................$ 669 $ 571 $ 981 Interest cost............................. 292 250 213 Expected return on assets................. (481) (409) (218) Amortization of prior gains............... (61) (42) (9) Amortization of prior service cost........ 6 6 --- ----- ------- -------- Net periodic pension cost.................$ 425 $ 376 $ 967 ======== ======== ========= For the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997, the following actuarial assumptions were used: Fiscal Years Ended January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- Discount rate............................. 6.75% 7.50% 8.00% Long-term rate of return on assets........ 9.00% 9.00% 9.00% Rate of increase in future compensation... 4.00% 4.00% 4.00% 17. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarter ------------------------------------- First Second Third Fourth ----- ------ ----- ------ (in thousands, except per share amounts) Fiscal 1998 Net sales .......................... $198,170 $223,393 $227,535 $262,841 Gross profit ....................... 101,334 104,934 124,418 125,529 Net income ......................... $ 6,419 $ 7,044 $ 14,074 $ 11,787 ======== ======== ======== ======== Basic earnings per share ........... $ 0.25 $ 0.27 $ 0.55 $ 0.46 ======== ======== ======== ======== Diluted earnings per share ......... $ 0.25 $ 0.27 $ 0.50 $ 0.42 ======== ======== ======== ======== Fiscal 1997 Net sales .......................... $197,064 $184,999 $187,200 $211,765 Gross profit ....................... 98,636 85,354 92,732 92,550 Income before extraordinary loss ... 6,475 985 2,185 2,352 Extraordinary loss ................. -- 173 -- -- -------- -------- -------- -------- Net income ......................... $ 6,475 $ 812 $ 2,185 $ 2,352 ======== ======== ======== ======== Basic and diluted earnings per share before extraordinary loss .......... $ 0.25 $ 0.04 $ 0.09 $ 0.09 Extraordinary loss per share ....... -- 0.01 -- -- -------- -------- -------- -------- Basic and diluted earnings per share $ 0.25 $ 0.03 $ 0.09 $ 0.09 ======== ======== ======== ======== In the fourth quarter of Fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share". All previously reported per share information has been recalculated. The sum of the quarterly per share data may not equal the annual amounts due to changes in the weighted average shares and share equivalents outstanding. EX-10 2 EXHIBIT 10.3.11 EXHIBIT 10.3.11 ELEVENTH AMENNDMENT TO LEASE ---------------------------- ELEVENTH AMENDMENT TO LEASE, made this 15th day of May 1998, by and between PACIFIC METROPOLITAN CORPORATION, a Delaware Corporation (successor-in-interest to Carven Associates) having an office at 3000 Executive Parkway, Suite 236, San Ramon, California 94583 ("Landlord") and ANNTAYLOR, INC. a Delaware corporation having an office at 142 West 57th Street, New York, New York 10019 ("Tenant"). WITNESSETH ---------- WHEREAS, under date of March 17, 1989, Landlord and Tenant entered into a lease as amended pursuant to agreements dated November 14, 1990 (First Amendment), October 1, 1993 (Extension and Amendment), April 14, 1994 (Modification of Amendment and Extension to Lease), March 14, 1995 (Fifth Amendment), January 5, 1996 (Sixth Amendment), June 5, 1996 (Seventh Amendment), the undated (Eight Amendment) May 13, 1997 (Ninth Amendment), and May 21, 1997 (Tenth Amendment), together, collectively referred to as the "Lease" affecting the entire second (2nd), third (3rd), fourth (4th), fifth (5th), sixth (6th), seventh (7th), eighth (8th) fourteenth (14th) and a portion of the seventeenth (17th) floor (the "Premises"), in commercial condominium unit (the "Building") of which the Premises form a part known by the street address of 142 West 57th Street, New York, New York; WHEREAS, Landlord and Tenant are desirous of further amending said Lease in the manner set forth below: 1. The following Section shall be inserted after Section I of Article 45 of the Lease: "J. (i) Landlord has approved Tenant's Plans (the "Renovation Plans") for Tenant's Work, consisting of renovating the Premises, a copy of such Renovation Plans being attached hereto as Exhibit A to Eleventh Amendment to Lease (such work, the "Renovation"). In lieu of the letter of credit required to be delivered by Tenant under Section H (ii) of this Article 45, and subject to the provisions of this Section J, Landlord agrees to accept a $1,000,000 cash security deposit (the "Construction Deposit") as security for the faithful performance and completion by Tenant of the Renovation in accordance with the Renovation Plans and the terms of this Lease, including, without limitation, this Article 45. The Construction Deposit shall be deposited by Landlord with a bank selected by Landlord in an interest bearing account. (ii) Tenant agrees that in the event that a default which relates to the improper performance by Tenant of the Renovation in accordance with the Renovation Plans or the terms of this Lease, or Tenant's failure to pay sums to contractors or materialmen, or others, incurred in connection with the =============================================================================== Renovation or Tenant's failure to obtain all permits, authorizations, certificates or other approvals required in connection with or as a result of the Renovation under applicable regulations or the terms of the Lease (collectively, the "Renovation Approvals"), then Landlord may (a) use or apply the whole or any part of the Construction Deposit reasonably necessary to cure such default, as determined in Landlord's sole discretion or (b) retain the Construction Deposit on account of any damages or deficiency accrued before or after summary proceedings or other reentry by Landlord occasioned in whole or in part by such default. (iii) Provided (a) there is then no uncured default which relates to the improper performance by Tenant of the Renovation in accordance with the Renovation Plans and the terms of this Lease and (b) Landlord has received general releases and waivers of lien from all contractors, subcontractors and materialmen involved in the performance of the Renovation and the materials furnished in connection therewith and satisfactory evidence of the payment in full for the Renovation and (c) Landlord has received satisfactory evidence of the Renovation Approvals, the remainder of the Construction Deposit less applied portions and the accrued interest thereon (less any bank fees or expenses) shall be returned to Tenant within thirty (30) days after request by Tenant therefor. (iv) Tenant shall cause the Renovation to commence prior to June 1, 1998 and be completed on or prior to September 1, 1999. The Renovation shall be performed on a maximum of two (2) floors of the Premises at any one time. After the Renovation is completed on any one floor, Tenant must, prior to the commencement of the Renovation on any additional floor, provide Landlord with (a) general releases and waivers of lien from all contractors, subcontractors and materialmen involved in the performance of the Renovation of such completed floor and the materials furnished in connection therewith, (b) satisfactory evidence of the Renovation Approvals and (c) evidence of the payment in full for the Renovation of such completed floor. 2. The terms of this agreement cannot be changed orally, but only by an instrument in writing executed by both parties. Except as herein expressly modified, the Lease, as amended, is unmodified and is ratified and confirmed in all respects. 4. The terms, covenants and provisions contained in this Agreement are binding and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this Agreement as of the day and year first above written. LANDLORD: PACIFIC METROPOLITAN CORPORATION By: /s/ David A. Hennefer --------------------- David A. Hennefer Assistant Secretary TENANT: ANNTAYLOR, INC. By: /s/ Valerie Richardson ---------------------- Valerie Richardson Senior Vice President Real Estate and Development EX-21 3 SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF ANNTAYLOR STORES CORPORATION AnnTaylor Finance Trust, a Delaware statutory business trust AnnTaylor, Inc., a Delaware corporation AnnTaylor Travel, Inc., a Delaware corporation AnnTaylor Distribution Services, Inc., a Delaware corporation AnnTaylor Loft, Inc., a Delaware corporation EX-23 4 AUDITORS CONSENT Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in AnnTaylor Stores Corporation's Registration Statements No. 33-31505 on Form S-8, No. 33-50688 on Form S-8, No. 33-54387 on Form S-8, No. 33-52389 on Form S-8, No. 33-55629 on Form S-8, No. 333-32977 on Form S-8 and No. 333-37145 on Form S-8 of our report dated March 8, 1999 appearing in the Annual Report on Form 10-K of AnnTaylor Stores Corporation for the year ended January 30, 1999. DELOITTE & TOUCHE LLP NEW YORK, NEW YORK March 26, 1999 EX-27 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000874214 AnnTaylor Stores Corporation 1000 12-MOS JAN-30-1999 JAN-30-1999 67031 0 71869 820 136748 298465 266305 114520 775417 129757 100000 0 0 177 432522 775417 911939 911939 455724 365195 365195 0 18117 72903 33579 39324 0 0 0 39324 1.53 1.44
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