-----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, R+8TlyPQPeFn74Nk/nlKzyxlisr86ZCeHTKodwC6lvvdgmqWgP2qWWBTJPpTMJKW LSJoYB3v6Yf7nrZxTvcG6A== 0000874214-99-000022.txt : 19990915 0000874214-99-000022.hdr.sgml : 19990915 ACCESSION NUMBER: 0000874214-99-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 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: 0130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10738 FILM NUMBER: 99711134 BUSINESS ADDRESS: STREET 1: 142 WEST 57TH ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125413300 10-Q 1 ANNTAYLOR STORES CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-10738 ANNTAYLOR STORES CORPORATION ---------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3499319 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 142 West 57th Street, New York, NY 10019 - ---------------------------------- ----- (Address of principal executive offices) (Zip Code) (212) 541-3300 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No ____. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding as of Class August 25, 1999 ----- --------------- Common Stock, $.0068 par value 31,537,672 - ------------------------------------------------------------------------------- INDEX TO FORM 10-Q Page No. -------- PART I. FINANCIAL INFORMATION Item 1.Financial Statements Condensed Consolidated Statements of Operations for the Quarters and Sixth Months Ended July 31, 1999 and August 1, 1998..................................... 3 Condensed Consolidated Balance Sheets at July 31, 1999 and January 30, 1999..................... 4 Condensed Consolidated Statements of Cash Flows for the Sixth Months Ended July 31, 1999 and August 1, 1998......................................... 5 Notes to Condensed Consolidated Financial Statements..... 6 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11 PART II.OTHER INFORMATION Item 1.Legal Proceedings........................................ 20 Item 2.Changes in Securities and Use of Proceeds................ 20 Item 4.Submission of Matters to a Vote of Security Holders...... 21 Item 5.Other Information........................................ 22 Item 6.Exhibits and Reports on Form 8-K......................... 22 - ------------------------------------------------------------------------------ 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ANNTAYLOR STORES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Quarters and Six Months Ended July 31, 1999 and August 1, 1998 (unaudited) Quarters Ended Six Months Ended -------------------- -------------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 (in thousands, except per share amounts) -------- -------- -------- -------- Net sales........................... $265,747 $223,393 $515,147 $421,563 Cost of sales ...................... 139,842 118,459 257,905 215,295 -------- -------- -------- -------- Gross profit ....................... 125,905 104,934 257,242 206,268 Selling, general and administrative expenses ........................ 97,612 84,289 194,768 165,418 Amortization of goodwill ........... 2,760 2,760 5,520 5,520 -------- -------- -------- -------- Operating income ................... 25,533 17,885 56,954 35,330 Interest expense ................... 1,263 4,247 5,584 8,974 Other expense, net ................. 142 57 810 237 -------- -------- -------- -------- Income before income taxes and extraordinary loss................ 24,128 13,581 50,560 26,119 Income tax provision ............... 10,755 6,537 22,432 12,656 -------- -------- -------- -------- Income before extraordinary loss ... 13,373 7,044 28,128 13,463 Extraordinary loss (net of income tax benefit of $641,000) ......... 962 -- 962 -- -------- -------- -------- -------- Net income.......................... $ 12,411 $ 7,044 $ 27,166 $ 13,463 ======== ======== ======== ======== Basic earnings per share of common stock: Basic earnings per share before extraordinary loss............ $ 0.47 $ 0.27 $ 1.03 $ 0.52 Extraordinary loss per share ... 0.03 -- 0.04 -- -------- -------- -------- ------- Basic earnings per share........ $ 0.44 $ 0.27 $ 0.99 $ 0.52 ======== ======== ======= ======= Diluted earnings per share of common stock: Diluted earnings per share before extraordinary loss.......................... $ 0.42 $ 0.27 $ 0.92 $ 0.52 Extraordinary loss per share ... 0.03 -- 0.03 -- -------- -------- -------- ------- Diluted earnings per share...... $ 0.39 $ 0.27 $ 0.89 $ 0.52 ======== ======= ======= ======= See accompanying notes to condensed consolidated financial statements. - ------------------------------------------------------------------------------- 4 ANNTAYLOR STORES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS July 31, 1999 and January 30, 1999 July 31, January 30, 1999 1999 --------- --------- (unaudited) (in thousands) ASSETS Current assets Cash and cash equivalents ........................ $ 90,603 $ 67,031 Accounts receivable, net ......................... 65,736 71,049 Merchandise inventories .......................... 134,388 136,748 Prepaid expenses and other current assets ........ 26,759 23,637 --------- --------- Total current assets ........................... 317,486 298,465 Property and equipment, net .......................... 163,180 151,785 Goodwill, net ........................................ 314,179 319,699 Deferred financing costs, net ........................ 5,817 2,627 Other assets ......................................... 2,213 2,841 --------- --------- Total assets ................................... $ 802,875 $ 775,417 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ................................. $ 62,302 $ 65,419 Accrued salaries and bonus ....................... 12,600 17,132 Accrued tenancy .................................. 7,423 8,465 Accrued expenses ................................. 27,170 37,535 Current portion of long-term debt ................ 1,256 1,206 --------- --------- Total current liabilities ...................... 110,751 129,757 Long-term debt ....................................... 113,661 103,951 Other liabilities .................................... 12,839 12,386 Commitments and contingencies Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary, AnnTaylor Finance Trust, Holding Solely Convertible Debentures ....................................... -- 96,624 Stockholders' equity Common stock, $.0068 par value; 120,000,000 shares authorized; 31,508,620 and 26,035,301 shares issued, respectively .......... 214 177 Additional paid-in capital ........................ 467,470 359,805 Warrants to acquire 2,814 shares of common stock... -- 46 Retained earnings ................................. 100,365 73,295 Deferred compensation on restricted stock ......... (2,036) (272) --------- --------- 566,013 433,051 Treasury stock, 15,948 and 17,201 shares, respectively, at cost .......................... (389) (352) --------- --------- Total stockholders' equity ...................... 565,624 432,699 --------- --------- Total liabilities and stockholders' equity ...... $ 802,875 $ 775,417 ========= ========= See accompanying notes to condensed consolidated financial statements. - ------------------------------------------------------------------------------- 5 ANNTAYLOR STORES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended July 31, 1999 and August 1, 1998 (unaudited) Six Months Ended ----------------------- July 31, August 1, 1999 1998 -------- -------- (in thousands) Operating activities: Net income....................................... $ 27,166 $ 13,463 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss ............................. 1,603 -- Provision for loss on accounts receivable ...... 481 748 Depreciation and amortization .................. 15,205 14,340 Amortization of goodwill ....................... 5,520 5,520 Non-cash interest .............................. 985 618 Amortization of deferred compensation .......... 382 266 Loss on disposal of property and equipment ..... 885 249 (Increase) decrease in: Receivables .................................. 4,832 (1,404) Merchandise inventories ...................... 2,360 (16,220) Prepaid expenses and other current assets .... (3,122) (2,794) Increase (decrease) in: Accounts payable ............................. (3,117) 17,789 Accrued expenses ............................. (15,939) 802 Other non-current assets and liabilities, net ........................... 1,082 (184) -------- -------- Net cash provided by operating activities ........ 38,323 33,193 Investing activities: Purchases of property and equipment .............. (27,486) (17,259) -------- -------- Net cash used by investing activities ............ (27,486) (17,259) Financing activities: Payments on mortgage ............................. (593) (549) Proceeds from exercise of stock options .......... 8,853 -- Repurchase of restricted stock ................... -- (19) Redemption of 8-3/4% Notes ....................... (101,375) -- Redemption of Company Obligated Mandatorily Redeemable Convertible Preferred Securities ..... (100) -- Proceeds from issuance of Convertible Debentures due 2019 ............................ 110,000 -- Payment of deferred financing costs .............. (4,050) (2,529) -------- -------- Net cash provided (used) by financing activities . 12,735 (3,097) -------- -------- Net increase in cash ............................... 23,572 12,837 Cash and cash equivalents, beginning of period ..... 67,031 31,369 -------- -------- Cash and cash equivalents, end of period........... $ 90,603 $ 44,206 ======== ======== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest......... $ 6,423 $ 9,161 ======== ======== Cash paid during the period for income taxes..... $ 19,956 $ 17,019 ======== ======== See accompanying notes to condensed consolidated financial statements. - -------------------------------------------------------------------------------- 6 ANNTAYLOR STORES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The condensed consolidated financial statements are unaudited but, in the opinion of management, contain all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for the 1999 interim period shown in this report are not necessarily indicative of results to be expected for the fiscal year. The January 30, 1999 condensed consolidated balance sheet amounts have been derived from the previously audited consolidated balance sheet of AnnTaylor Stores Corporation ("the Company"). Detailed footnote information is not included for the quarters ended July 31, 1999 and August 1, 1998. The financial information set forth herein should be read in conjunction with the Notes to the Company's Consolidated Financial Statements contained in the AnnTaylor Stores Corporation 1998 Annual Report to Stockholders. 2. NET INCOME PER SHARE Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock that are issuable by the Company upon the conversion of all outstanding warrants, stock options, and convertible securities. Basic and diluted earnings per share calculations follow: [Tables on next page] - ------------------------------------------------------------------------------- 7 ANNTAYLOR STORES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 2. Net Income per Share (continued) Quarters Ended -------------------------------------------- July 31, 1999 August 1, 1998 ---------------------- -------------------- (in thousands, except per share amounts) Per Per Share Share Income Shares Amount Income Shares Amount ======= ====== ===== ====== ====== ===== BASIC EARNINGS PER SHARE Income available to common stockholders before extraordinary loss ............ $13,373 28,257 $0.47 $7,044 25,644 $0.27 ===== ===== EFFECT OF DILUTIVE SECURITIES Warrants ......................... -- 2 -- 3 Stock options .................... -- 301 -- 130 Preferred Securities ............. -- 3,208 -- -- Convertible Debentures due 2019... 284 1,092 -- -- ------ ------ ----- ------ DILUTED EARNINGS PER SHARE Income available to common stockholders before extraordinary loss $13,657 32,860 $0.42 $7,044 25,777 $0.27 ======= ====== ===== ====== ====== ===== Six Months Ended -------------------------------------------- July 31, 1999 August 1, 1998 ---------------------- -------------------- (in thousands, except per share amounts) Per Per Share Share Income Shares Amount Income Shares Amount ------- ------ ----- ------- ------ ----- BASIC EARNINGS PER SHARE Income available to common stockholders before extraordinary loss...................... $28,128 27,222 $1.03 $13,463 25,644 $0.52 ==== ===== EFFECT OF DILUTIVE SECURITIES Warrants..................... -- 2 -- 3 Stock options................ -- 304 -- 78 Preferred Securities......... 1,297 4,165 -- -- Convertible Debentures due 2019 285 546 -- -- ------- ------ ------- ------ DILUTED EARNINGS PER SHARE Income available to common stockholders before extraordinary loss........ $29,710 32,239 $0.92 $13,463 25,725 $0.52 ======= ====== ===== ======= ====== ===== Conversion of the preferred securities into common stock is not included in the computation of diluted earnings per share for the quarter and six months ended August 1, 1998 due to the antidilutive effect of the conversion as of that date. - ------------------------------------------------------------------------------ 8 ANNTAYLOR STORES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. LONG-TERM DEBT The following summarizes long-term debt outstanding at July 31, 1999: (in thousands) Convertible Debentures due 2019, net of discount of $88,719,000...... $110,353 Mortgage............................. 4,564 -------- Total debt ....................... 114,917 Less current portion................. 1,256 -------- Total long-term debt.............. $113,661 ======== During the second quarter of Fiscal 1999, the Company completed the issuance of an aggregate of $199,072,000 principal amount at maturity of its Convertible Subordinated Debentures due 2019 ("Convertible Debentures"). The Convertible Debentures were sold at an original issue price of $552.56 per $1,000 prinicipal amount at maturity of Debenture. The net proceeds of the sale were applied to the redemption of the $100,000,000 outstanding 8-3/4% Subordinated Notes due 2000 (the "8-3/4% Notes") issued by AnnTaylor, Inc. ("Ann Taylor"). Cash interest is payable on the principal amount at maturity of the Convertible Debentures at the rate of 0.55% per annum. This interest rate and the accrual of original issue discount represent a yield to maturity on the Convertible Debentures of 3.75%. The Convertible Debentures are convertible at the option of the holders thereof initially into 12.078 shares of the Company's common stock per $1,000 principal amount at maturity of Debenture (equivalent to $45.75 per share of common stock). The Company's obligations with respect to the Convertible Debentures are guaranteed on a subordinated basis by Ann Taylor. On July 22, 1999, Ann Taylor redeemed all of its outstanding 8-3/4% Notes, at a redemption price of 101.375% of principal amount, plus accrued unpaid interest to the redemption date. The redemption of the 8-3/4% Notes resulted in an extraordinary charge to earnings in the second quarter and year to date period of $0.03 per share, net of income tax benefit. - ------------------------------------------------------------------------------- 9 ANNTAYLOR STORES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. LONG-TERM DEBT (CONTINUED) On June 29, 1999, the Company's special purpose financing vehicle, AnnTaylor Finance Trust, redeemed all of its outstanding 8-1/2% Company Obligated Mandatorily Redeemable Convertible Preferred Securities ("preferred securities"). All but $100,000 liquidation amount of the preferred securities were tendered for conversion into an aggregate of 5,116,717 shares of Company common stock prior to the conversion date, at a conversion price of $19.65 per share of common stock, or 2.545 shares of common stock per $50 liquidation amount of the security. Holders of preferred securities that were not tendered for conversion received 105.95% of the liquidation amount of the preferred securities redeemed, plus accrued distributions. 4. COMMON STOCK WARRANTS The Company's outstanding warrants to acquire, in the aggregate, 185 shares of common stock of the Company expired on July 15, 1999. The warrants became exercisable as a result of the initial public offering of the Company's common stock in May 1991. 5. ENTERPRISE-WIDE OPERATING INFORMATION The Company is a specialty retailer of women's apparel, shoes, and accessories. Given the economic characteristics of the store formats, the similar nature of the products sold, the type of customer and method of distribution, the operations of the Company are aggregated into one reportable segment. The Company believes that the customer base for its stores consists primarily of relatively affluent, fashion-conscious women from the ages of 25 to 55, and that the majority of its customers are working women with limited time to shop. 6. SUBSEQUENT EVENTS The Board of Directors of the Company has authorized a $40 million securities repurchase program. Pursuant to this program, purchases of shares of the Company's Common Stock and/or its Convertible Debentures due 2019 will be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of Common Stock will become treasury shares and may be used for general corporate and other purposes. Repurchased Debentures will be canceled. - -------------------------------------------------------------------------------- 10 ANNTAYLOR STORES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6. SUBSEQUENT EVENTS (CONTINUED) To facilitate the securities repurchase and the Company's capital expenditure program, on September 7, 1999 Ann Taylor entered into an amendment to its credit facility with its bank lending group that eliminated the credit agreement's limitation on annual capital expenditures, replacing it with a fixed charge coverage ratio covenant, and specifically permits the securities repurchase program. Additionally, Ann Taylor has elected to reduce the commitment of the lenders under the credit agreement by $25,000,000 to $125,000,000 from $150,000,000 effective September 3, 1999, and extended the term of the credit agreement to June 30, 2001. - ------------------------------------------------------------------------------- 11 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Quarters Ended Six Months Ended -------------- ---------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 ---- ---- ---- ---- Number of Stores: Open at beginning of period.... 371 339 365 324 Opened during period........... 16 4 27 20 Expanded during period*........ 2 1 2 3 Closed during period........... --- 1 5 2 Open at end of period.......... 387 342 387 342 Type of Stores Open at End of Period: Ann Taylor stores........... 313 293 Ann Taylor Factory Stores... 12 14 Ann Taylor Loft stores...... 62 35 - --------------- * Expanded stores are excluded from comparable store sales for the first year following expansion. QUARTER ENDED JULY 31, 1999 COMPARED TO QUARTER ENDED AUGUST 1, 1998 The Company's net sales in the second quarter of 1999 increased to $265,747,000 from $223,393,000 in the second quarter of 1998, an increase of $42,354,000 or 19.0%. The increase is attributable to the opening of new stores and an increase in comparable stores sales of 8.4%. Management believes that the comparable store sales increase was primarily attributable to favorable customer reaction to the Company's product offerings and merchandise assortment. Gross profit as a percentage of net sales increased to 47.4% in the second quarter of 1999 from 47.0% in the second quarter of 1998. This increase in gross margin primarily reflects a higher initial markup rate, reflecting on-going improvements achieved by the Company's sourcing division. Selling, general and administrative expenses represented 36.7% of net sales in the second quarter of 1999, compared to 37.7% of net sales in the second quarter of 1998. The decrease in selling, general, and administrative expenses as a percentage of net sales was primarily attributable to increased leverage on fixed expenses resulting from increased comparable store sales and improved operating efficiencies, partially offset by an increase in marketing expenditures in support of the Company's strategic initiatives to enhance the Ann Taylor brand. As a result of the foregoing, the Company had operating income of $25,533,000, or 9.6% of net sales, in the second quarter of 1999, compared to - ------------------------------------------------------------------------------ 12 operating income of $17,885,000, or 8.0% of net sales, in the second quarter of 1998. Amortization of goodwill was $2,760,000 in both the second quarter of 1999 and the second quarter of 1998. Operating income, without giving effect to goodwill amortization in either year, was $28,293,000, or 10.6% of net sales, in the second quarter of 1999 and $20,645,000, or 9.2% of net sales, in the second quarter of 1998. Interest expense was $1,263,000 in the second quarter of 1999 and $4,247,000 in the second quarter of 1998. The decrease in interest expense is attributable to the redemption during the second quarter of 1999 of the preferred securities and the 8-3/4% Notes, as well as greater interest income earned on cash on hand, offset in part by interest expense on the Convertible Debentures issued during the second quarter of 1999. The income tax provision was $10,755,000, or 44.6% of income before income taxes and extraordinary loss, in the second quarter of 1999, compared to $6,537,000, or 48.1% of income before income taxes, in the second quarter of 1998. The effective income tax rate for both periods was higher than the statutory rate primarily as a result of non-deductible goodwill amortization. On July 22, 1999 the Company applied the proceeds received from the issuance of its Convertible Debentures to redeem the outstanding 8-3/4% Notes. This resulted in an extraordinary charge to earnings in the second quarter of 1999 of $962,000, net of income tax benefit, or $0.03 per share on a diluted basis. As a result of the foregoing factors, the Company had net income of $12,411,000, or 4.7% of net sales, for the second quarter of 1999, compared to net income of $7,044,000, or 3.2% of net sales, for the second quarter of 1998. AnnTaylor Stores Corporation conducts no business other than the management of Ann Taylor. SIX MONTHS ENDED JULY 31, 1999 COMPARED TO SIX MONTHS ENDED AUGUST 1, 1998 The Company's net sales in the first six months of 1999 increased to $515,147,000 from $421,563,000 in the first six months of 1998, an increase of $93,584,000 or 22.2%. The increase is attributable to the opening of new stores and the expansion of existing stores and an increase in comparable store sales of 12.4%. Management believes that the increase in comparable store sales was primarily attributable to favorable customer reaction to the Company's product offerings and merchandise assortment. - -------------------------------------------------------------------------------- 13 Gross profit as a percentage of net sales increased to 49.9% in the first six months of 1999 from 48.9% in the first six months of 1998. This increase in gross margin primarily reflects a higher initial markup rate, reflecting on-going improvements achieved by the Company's sourcing division, and in the first quarter of 1999, a greater percentage of merchandise being sold at full price, offset in part by a higher markdown rate on goods that were sold below full price, compared with the first quarter of 1998. Selling, general and administrative expenses represented 37.8% of net sales in the first six months of 1999, compared to 39.2% of net sales in the first six months of 1998. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily attributable to increased leverage on fixed expenses resulting from increased comparable store sales and improved operating efficiencies, partially offset by an increase during the first quarter in the provision for management performance bonus expense and an increase in marketing expenditures in support of the Company's strategic initiatives to enhance the Ann Taylor brand. As a result of the foregoing, the Company had operating income of $56,954,000, or 11.1% of net sales, in the first six months of 1999, compared to operating income of $35,330,000, or 8.4% of net sales, in the first six months of 1998. Amortization of goodwill was $5,520,000 in each of the first six months of 1999 and 1998. Operating income, without giving effect to goodwill amortization, was $62,474,000, or 12.1% of net sales, in the 1999 period and $40,850,000, or 9.7% of net sales, in the 1998 period. Interest expense was $5,584,000 in the first six months of 1999 and $8,974,000 in the first six months of 1998. The decrease in interest expense is attributable to the redemption in the second quarter of 1999 of the preferred securities and the 8-3/4% Notes, and to greater interest income earned on cash on hand, offset in part by interest expense on the Convertible Debentures issued in the second quarter of 1999. The income tax provision was $22,432,000, or 44.4% of income before income taxes and extraordinary loss, in the 1999 period, compared to $12,656,000, or 48.5% of income before income taxes and extraordinary loss, in the 1998 period. The effective income tax rate for both periods differed from the statutory rate primarily because of non-deductible goodwill amortization. On July 22, 1999, the Company applied the proceeds received from the issuance of it's Convertible Debentures to redeem the outstanding 8-3/4% Notes. This resulted in an extraordinary charge to earnings in the first six months of Fiscal 1999 of $962,000, net of income tax benefit, or $0.03 per share on a diluted basis. As a result of the foregoing factors, the Company had net income of $27,166,000, or 5.3% of net sales, for the first six months of 1999, compared to net income of $13,463,000 or 3.2% of net sales, for the first six months of 1998. - ------------------------------------------------------------------------------- 14 FINANCIAL CONDITION For the first six months of 1999, net cash provided by operating activities totaled $38,323,000, primarily as a result of net income and non-cash operating expenses and a decrease in receivables, partially offset by decreases in accounts payable and accrued expenses. Cash used for investing activities during the first six months of 1999 amounted to $27,486,000, for the purchase of property and equipment. Cash provided by financing activities during the first six months of 1999 amounted to $12,735,000, primarily from the proceeds from the issuance of the Convertible Debentures and proceeds from exercises of employee stock options to purchase Company common stock, partially offset by the redemption of the 8-3/4% Notes and the payment of deferred financing costs related to the issuance of the Convertible Debentures. Merchandise inventories were $134,388,000 at July 31, 1999, compared to inventories of $136,748,000 at January 30, 1999. Merchandise inventories at July 31, 1999 and January 30, 1999 included approximately $33,789,000 and $32,329,000, respectively, of inventory associated with the Company's sourcing division, which is primarily finished goods in transit from factories. At July 31, 1999, there were no borrowings outstanding under Ann Taylor's $150,000,000 senior secured revolving credit facility ("the Credit Facility"). Loans outstanding under the Credit Facility at any time may not exceed $50,000,000. Maximum availability for loans and letters of credit under the Credit Facility is governed by a monthly borrowing base, determined by the application of specified rates against certain eligible assets. In September 1999, Ann Taylor entered into an amendment to its credit facility with its bank lending group that eliminated the credit agreement's limitation on annual capital expenditures, replacing it with a fixed charge coverage ratio test, and specifically permits a securities repurchase program. Additionally, Ann Taylor has elected to reduce the commitment of the lenders under the credit agreement by $25,000,000, to $125,000,000 from $150,000,000, effective September 3, 1999, and extended the term of the credit agreement to June 30, 2001. During the second quarter, the Company completed the issuance of the Convertible Debentures. The net proceeds of the sale were applied to the redemption of the 8-3/4% Notes issued by Ann Taylor. The Convertible Debentures were sold at an original issue price of $552.56 per $1,000 principal amount at maturity of Debenture and have an aggregate principal amount at maturity of $199,072,000. Cash interest is payable on the principal amount at maturity at the rate of 0.55% per annum. This interest rate and the accrual of original issue discount represent a yield to maturity on the Convertible Debentures of - -------------------------------------------------------------------------------- 15 3.75%. The Convertible Debentures are convertible at theoption of the holders thereof initially into 12.078 shares of the Company's common stock per $1,000 principal amount at maturity of Debenture (equivalent to $45.75 per share of common stock). The Company's obligations with respect to the Convertible Debentures are guaranteed on a subordinated basis by Ann Taylor. On July 22, 1999, Ann Taylor redeemed all of its outstanding 8-3/4% Notes at a redemption price of 101.375% of principal amount, plus accrued unpaid interest to the redemption date. On June 29, 1999, the Company's special purpose financing vehicle, AnnTaylor Finance Trust, redeemed all of its outstanding 8-1/2% Company Obligated Mandatorily Redeemable Convertible Preferred Securities ("preferred securities"). The preferred securities were issued in April 1996. All but $100,000 liquidation amount of the preferred securities were tendered for conversion into an aggregate of 5,116,717 shares of Company common stock prior to the conversion date, at a conversion price of $19.65 per share of common stock, or 2.545 shares of common stock per $50 liquidation amount of the security. Holders of preferred securities that were not tendered for conversion received 105.95% of the liquidation amount of the preferred securities redeemed, plus accrued distributions. On July 15, 1999, the Company's outstanding warrants to acquire, in the aggregate, 185 shares of common stock expired. The warrants had become exercisable as a result of the Company's initial public offering of the Company's common stock in 1991, and when exercised, entitled the owners thereof to acquire such shares at no additional cost. For Fiscal 1999, the Company's capital expenditures, which are primarily attributable to the Company's store expansion, renovation and refurbishment programs, and the investment in information systems, are expected to total approximately $55,000,000, of which $27,486,000 were incurred for the six months ended July 31, 1999. During the first six months of fiscal 1999, the Company opened 11 new Ann Taylor stores and 16 Ann Taylor Loft stores, including 4 locations that were converted from Ann Taylor stores. In addition, the Company completed the expansion of 2 Ann Taylor stores. The Company expects to open a total of 18 new Ann Taylor stores and 30 Ann Taylor Loft stores (including four Ann Taylor stores being converted to Ann Taylor Loft stores), and to expand or relocate a total of 10 Ann Taylor stores, in Fiscal 1999. - ------------------------------------------------------------------------------- 16 For Fiscal 2000, the Company expects its capital expenditures to total approximately $85,000,000, principally for the Company's store expansion, renovation and refurbishment programs and the continued investment in information systems. The Company intends to increase store square footage by approximately 500,000 square feet, or 22%, in Fiscal 2000, representing approximately 15 new Ann Taylor stores and approximately 70 new Ann Taylor Loft stores, and the expansion of 5 existing Ann Taylor stores. In order to finance its operations and capital requirements, the Company expects to use internally generated funds, trade credit and funds available to it under the Credit Facility. The Company believes that cash flow from operations and funds available under the Credit Facility are sufficient to enable it to meet its on-going cash needs for its business, as presently conducted, for the foreseeable future. On August 31, 1999, the Board of Directors of the Company authorized a $40 million securities repurchase program. Pursuant to this program, purchases of shares of the Company's Common Stock and/or its Convertible Debentures due 2019 will be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of Common Stock will become treasury shares and may be used for general corporate and other purposes. Repurchased Debentures will be cancelled. The Company expects to use internally generated funds to finance its securities repurchase program. YEAR 2000 STATUS Many computer systems use only two digits to identify a year (for example, "99" is used for the year "1999"). As a result, these systems may be unable to process accurately dates later than December 31, 1999, since they may recognize "00" as the year "1900", instead of the year "2000". This anomaly is often referred to as the "Year 2000 compliance" issue. Since 1997, the Company has been executing a plan to remediate or replace affected systems on a timely basis. Equipment and other non-information technology systems that use microchips or other embedded technology, such as certain conveyor systems at the Company's distribution center, are also covered by the Company's Year 2000 compliance project. The Company's Year 2000 compliance project includes four phases: (1) evaluation of the Company's owned or leased systems and equipment to identify potential Year 2000 compliance issues; (2) remediation or replacement of Company systems and equipment determined to be non-compliant (and testing of remediated - -------------------------------------------------------------------------------- 17 systems before returning them to production); (3) inquiry regarding Year 2000 readiness of material business partners and other third parties on whom the Company's business is dependent; and (4) development of contingency plans, where feasible, to address potential third party non-compliance or failure of material Company systems. The initial phase of the Company's Year 2000 compliance project was the evaluation of all software, hardware and equipment owned, leased or licensed by the Company, and identification of those systems and equipment requiring Year 2000 remediation. This analysis was completed during Fiscal 1998. All material computer software, hardware and equipment in the Company's sourcing offices located outside of the United States, and U.S. home offices, distribution center and retail stores that was not Year 2000 compliant has been remediated or replaced. Over the past few years, the Company's strategic plan has included significant investment in and modernization of many of the Company's computer systems. As a result, much of the costs and timing for replacement of certain of the Company's systems that were not Year 2000 compliant were already anticipated as part of the Company's planned information systems spending and did not need to be accelerated as a result of the Company's Year 2000 project. The total cost to the Company specifically associated with addressing the Year 2000 issue with respect to its systems and equipment has not been, and is not anticipated to be, material to the Company's financial position or results of operations in any given year. The Company estimates that the total additional cost of managing its Year 2000 project, remediating existing systems and replacing non-compliant systems, is approximately $2.4 million, of which approximately $1.3 million is being expensed as incurred (including $965,000 expensed in Fiscal 1998, and $165,000 in the first six months of Fiscal 1999), and $1.1 million which was capitalized (including $855,000 capitalized in Fiscal 1998 and approximately $175,000 in the first six months of 1999). Although the Company believes its Year 2000 compliance efforts with respect to its systems will be successful, any failure or delay could result in actual costs and timing differing materially from that presently contemplated, and in a disruption of business. The Company is developing a contingency plan to permit its primary operations to continue if the Company's modifications and conversions of its systems are not successfully completed on a timely basis, but the foregoing cost estimates do not take into account any expenditures arising out of a response to any such contingencies that materialize. The Company's cost estimates also do not include time or costs that may be incurred as a result of third parties' failure to become Year 2000 compliant on a timely basis. - -------------------------------------------------------------------------------- 18 The Company has been communicating with its business partners, including key manufacturers, vendors, banks and other third parties with whom it does business, to obtain information regarding their state of readiness with respect to the Year 2000 issue. During the first quarter of fiscal 1999, the Company completed an initial assessment of the Year 2000 readiness of those third parties whose services are most significant to the Company's business. The Company intends to continue to monitor the Year 2000 readiness of its key suppliers of goods and services during the year. Failure of third parties to remediate Year 2000 issues affecting their respective businesses on a timely basis, or to implement contingency plans sufficient to permit uninterrupted continuation of their businesses in the event of a failure of their systems, could have a material adverse effect on the Company's business and results of operations. Potential interruptions of such third parties' business or service to the Company resulting from Year 2000 issues will be addressed in the Company's contingency planning efforts, discussed below. The Company's Year 2000 compliance project includes development of a contingency plan designed to support critical business operations in the event of the occurrence of systems failures or the occurrence of reasonably likely worst case scenarios. The Company operates a large number of retail stores in widely disbursed geographical locations, and Company merchandise is manufactured by a large number of suppliers. The Company believes that these factors will help to mitigate the adverse impact of potential Year 2000 failures by third party suppliers or utilities. The Company believes that the most reasonably likely worst case scenarios would involve an interruption of the supply of merchandise to the Company's stores, as a result of the delay in completion of the Company's merchandise orders by manufacturers, or a delay in the delivery of merchandise to the Company's stores due to a disruption of service at ports of export or at the U.S. port of import, or a disruption in service by transportation providers, or a disruption in operation of the Company's distribution center. The Company has developed contingency plans for its business functions and is in the process of analyzing the plans to ensure their adequacy. The Company anticipates this evaluation will be completed by the end of the third quarter of Fiscal 1999. The Company may not be able to compensate adequately for business interruption caused by certain third parties. Potential risks include suspension or significant curtailment of service or significant delays by banks, utilities or common carriers, or at U.S. ports of entry. The Company's business also could be materially adversely affected by the failure of governmental agencies to address Year 2000 issues affecting the Company's operations. For example, a significant amount of the Company's merchandise is manufactured outside the United States, and the Company is dependent upon the issuance by foreign governmental agencies of export visas for, and upon the U.S. Customs Service to process and permit entry into the United States of, such merchandise. If failures in government systems result in the suspension or delay of these agencies' services, the Company could experience significant interruption or delays in its inventory flow. - -------------------------------------------------------------------------------- 19 The costs and timing for management's completion of Year 2000 compliance modification and testing processes, and management's assessment and contingency planning with respect to reasonably likely worst case scenarios, are based on management's best judgement and estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, the success of third parties' Year 2000 compliance efforts and other factors. There can be no assurance that these assumptions will be realized or that actual results will not vary materially. STATEMENT REGARDING FORWARD LOOKING DISCLOSURES Sections of this Quarterly Report on Form 10-Q, including the preceding Management's Discussion and Analysis of Financial Condition and Results of Operations, contain various forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations and business of the Company. Examples of forward-looking statements are statements that use the words "expect", "anticipate", "plan", "intend", "project", "believe" and similar expressions. These forward looking statements involve certain risks and uncertainties, and no assurance can be given that any of such matters will be realized. Actual results may differ materially from those contemplated by such forward looking statements as a result of, among other things, failure by the Company to predict accurately customer fashion preferences; a decline in the demand for merchandise offered by the Company; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of the Company's brand awareness and marketing programs; lack of sufficient customer acceptance of the Ann Taylor Loft concept in the moderate-priced women's apparel market; general economic conditions that are less favorable than expected or a downturn in the retail industry; the inability of the Company to locate new store sites or negotiate favorable lease terms for additional stores or for the expansion of existing stores; a significant change in the regulatory environment applicable to the Company's business; an increase in the rate of import duties or export quotas with respect to the Company's merchandise; financial or political instability in any of the countries in which the Company's goods are manufactured; any material adverse effects of the Year 2000 issue on the business of the Company or third parties with which the Company does business; or an adverse outcome of the litigation referred to in Note 5 to the Consolidated Financial Statements of the Company as of January 30, 1999 that materially and adversely affects the Company's financial condition. The Company assumes no obligation to update or revise any such forward looking statements, which speak only as of their date, even if experience or future events or changes make it clear that any projected financial or operating results implied by such forward-looking statements will not be realized. - -------------------------------------------------------------------------------- 20 PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS As previously disclosed in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 1999, the Company, Ann Taylor, certain current and former officers and directors of the Company and Ann Taylor, and Merrill Lynch & Co. ("Merrill Lynch") and certain of its affiliates, are defendants in a purported class action lawsuit, originally filed on April 26, 1996, by certain alleged stockholders of the Company in the United States District Court for the Southern District of New York. (Novak v. Kasaks, et al., No. 96 CIV 3073 (S.D.N.Y. 1996)). On or about December 15, 1998, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Second Circuit, seeking review of the District Court's November 9, 1998 order granting the defendants' motions to dismiss the amended complaint with prejudice for its failure to state a claim upon which relief may be granted and its failure to plead fraud with particularity. It is the Company's understanding that Merrill Lynch, its affiliates and the two directors who previously served on the Company's Board of Directors as representative of certain affiliates of Merrill Lynch, have reached a settlement with the plaintiffs, and the action as against these defendants has been remanded by the Court of Appeals to the District Court for proceedings in connection with that settlement. The appeal as against the remaining defendants, including the Company, has been fully briefed and is scheduled for oral argument before the Court of Appeals on September 15, 1999. Because this appeal is presently pending, any liability that may arise from this action cannot be predicted at this time. The Company believes that the amended complaint is without merit and intends to continue to defend the action vigorously. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the period covered by this report, the Company issued $199,072,000 of convertible debentures due 2019 guaranteed on a subordinated basis by AnnTaylor, Inc. (the "Convertible Debentures"). Approximately 2.4 million shares of common stock are issuable upon conversion of the Convertible Debentures. $180,975,000 of Convertible Debentures were originally issued by the Company on June 18, 1999 to qualified institutional buyers ("QIBs") in reliance on Rule 144A under the Securities Act of 1933. The initial purchasers of the Convertible Debentures were Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, and Bank America Securities LLC (the "Initial Purchasers"). The remaining $18,097,000 of Convertible Debentures were sold on July 15, 1999 pursuant to an over-allotment option granted to the Initial Purchasers in the Purchase Agreement, also in reliance on Rule 144A. - -------------------------------------------------------------------------------- 21 The Convertible Debentures were sold at an original issue price of $552.56 per $1,000 principal amount at maturity, or an aggregate issue price of $110,000,000. The aggregate underwriting commission to the Initial Purchasers was $3,300,000. The Convertible Debentures mature on June 18, 2019, and are convertible into 12.078 shares of common stock per $1,000 principal amount at maturity of Convertible Debenture. The convertible securities may be redeemed at the Company's option on or after June 18, 2004. The Bank of New York was named as trustee for the Convertible Debentures. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS As reported in the Company's Quarterly Report for the First Quarter ended May 1, 1999, AnnTaylor Stores Corporation's 1999 Annual Meeting of Stockholders was held on May 18, 1999. The following matters were voted upon and approved by the Company's stockholders at the meeting: 1. Mr. James J. Burke, Ms. Patricia DeRosa and Mr. Ronald W. Hovsepian were re-elected as Class II Directors of the Company for terms expiring in 2002. 19,145,829, 19,146,019, and 19,138,995 shares were voted in favor of, and 1,006,356, 1,006,166, and 1,013,190 were voted against, the reelection of Mr. Burke, Ms. DeRosa and Mr. Hovsepian, respectively. Mr. Gerald S. Armstrong, Mr. Wesley E. Cantrell and Ms. Hanne M. Merriman continued as Class III Directors with terms expiring in 2000 and Mr. Robert C. Grayson, Ms. Rochelle B. Lazarus, and Mr. J. Patrick Spainhour continued as Class I Directors with terms expiring in 2001. 2. The amendment of the Company's Restated Certificate of Incorporation to increase the number of shares of common stock the Corporation is authorized to issue from 40,000,000 to 120,000,000 was approved. 16,196,419 shares were voted in favor of, 3,945,425 shares were voted against, and 10,341 shares abstained from voting on, this proposal. 3. The adoption of the Company's Associate Discount Stock Purchase Plan was approved. 19,772,250 shares were voted in favor for, 143,810 shares were voted against, and 24,409 shares abstained from voting on, this proposal. 4. The appointment of Deloitte & Touche llp as the Company's independent auditors for the 1999 fiscal year was ratified. 20,131,509 shares were voted in favor of, 8,715 shares were voted against, and 11,961 shares abstained from voting on, this proposal. - -------------------------------------------------------------------------------- 22 ITEM 5. OTHER INFORMATION On August 31, 1999, the Board of Directors of the Company authorized a $40 million securities repurchase program. Pursuant to this program, purchases of shares of the Company's Common Stock and/or its Convertible Debentures due 2019 will be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of Common Stock will become treasury shares and may be used for general corporate and other purposes. Repurchased Debentures will be cancelled. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.1 Indenture, dated as of June 18, 1999, between the Company, Ann Taylor, and The Bank of New York, as Trustee relating to the Company's Convertible Subordinated Debentures due 2019. Incorporated by reference to Exhibit 4.01 to the Registration Statement of the Company filed on September 13, 1999. 4.2 Registration Rights Agreement, dated as of June 18, 1999, between the Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith and Banc America Securities LLC. Incorporated by reference to Exhibit 4.02 to the Registration Statement of the Company filed on September 13, 1999. 10.6.2 Amendment #2 to the Employment Agreement, dated August 12, 1999, between the Company and J. Patrick Spainhour. 10.19.6 First Amendment to the Credit Agreement, dated as of September 7, 1999, among Ann Taylor, Bank of America, N.A., Citibank, N.A., First Union National Bank and each of the other lenders party to the Credit Agreement, NationsBanc Montgomery Securities LLC, as Arranger, and Bank of America, as Administrative Agent. 27 Financial Data Schedule - -------------------------------------------------------------------------------- 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) (b) Reports on Form 8-K: The Company filed a report dated June 11, 1999 with the Commission on Form 8-K on June 15, 1999, and a report dated June 21, 1999 was filed with the Commission on Form 8-K on June 22, 1999, with respect to the Company's intention and subsequent completion of a sale, through a private placement, of a new issue of discounted convertible subordinated debentures due 2019 and that the proceeds of the offering were used in connection with the redemption, on July 22, 1999, of the $100,000,000 outstanding 83/4% subordinated notes due 2000 issued by the Company's wholly owned subsidiary AnnTaylor, Inc. - -------------------------------------------------------------------------------- 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AnnTaylor Stores Corporation Date: September 14, 1999 By: /s/ J. Patrick Spainhour -------------------- --------------------------- J. Patrick Spainhour Chairman and Chief Executive Officer Date: September 14, 1999 By: /s/ Barry Erdos ------------------- ---------------------------- Barry Erdos Executive Vice President - Chief Financial Officer and Treasurer EX-10 2 EXHIBIT 10.6.2 EXHIBIT 10.6.2 AMENDMENT #2 TO EMPLOYMENT AGREEMENT ------------------------------------ This AMENDMENT #2 (this "Amendment") is entered into on this 12th day of August, 1999, by and between ANNTAYLOR STORES CORPORATION (the "Company") and J. PATRICK SPAINHOUR (the "Executive"), and amends the Employment Agreement between the Company and the Executive, dated as of February 16, 1996, as previously amended by agreement dated as of August 23, 1996 (as so amended, the "Employment Agreement"). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the Company and the Executive agree as follows: 1. All capitalized terms used and not defined herein shall have the meanings ascribed to them in the Employment Agreement. 2. The first two sentences of Section 2 of the Employment Agreement are hereby amended as of the date hereof to read in their entirety as follows: The term of this Agreement shall continue through May 31, 2002, unless further extended or sooner terminated as provided in this Agreement. Commencing on June 1, 2002, and on each anniversary of such date thereafter (each date, an "Anniversary Date"), the term of the Executive's employment shall automatically be extended for one additional year, unless not later than six months prior to such Anniversary Date, either party shall have given notice (a "Nonrenewal Notice") to the other party that it does not which to extend this Agreement. 3. Section 5(a)(i) of the Employment Agreement is hereby amended to provide that, commencing June 1, 1999, Executive's annual base salary shall be increased to a rate of $850,000. 4. Section 5(a)(ii) of the Employment Agreement is hereby amended to increase Executive's annual Performance Percentage under the Company's Management Performance Compensation Plan to 80%, commencing with the Fiscal Year 1999 Performance Period under such plan. 5. (a) The Executive is hereby awarded twenty-five thousand (25,000) restricted shares of Company Common Stock under the Company's 1992 Stock Option and Restricted Stock and Unit Award Plan (the "Option Plan"). Executive's rights to such shares shall vest, and the restrictions thereon shall lapse, on March 8, 2000. =============================================================================== 2 (b) The Executive shall be awarded an additional 25,000 restricted shares under the Option Plan on March 8, 2000. Executive's rights to such 25,000 restricted shares shall vest, and the restrictions thereon shall lapse, on March 8, 2001, provided that the Company shall have achieved at least 110% of the net income provided for in the Company's fiscal year 2000 operating budget as approved by the Board of Directors of the Company in the ordinary course. If the Company shall not have achieved at least 110% of budgeted net income for fiscal year 2000, Executive's rights to such restricted shares shall not vest, and such restricted shares shall automatically be forfeited by Executive. (c) The Executive shall be awarded an additional 25,000 restricted shares under the Option Plan on March 8, 2001. Executive's rights to such 25,000 restricted shares shall vest, and the restrictions thereon shall lapse, on March 8, 2002, provided that the Company shall have achieved at least 110% of the net income provided for in the Company's fiscal year 2001 operating budget as approved by the Board of Directors of the Company in the ordinary course. If the Company shall not have achieved at least 110% of budgeted net income for fiscal year 2001, Executive's rights to such restricted shares shall not vest, and such restricted shares shall automatically be forfeited by Executive. (d) The Company shall enter into a Restricted Stock Award Agreement with the Executive for each of the above grants of restricted shares, incorporating the vesting terms set forth above with respect to each such grant, and otherwise on the terms and conditions set forth in the form of Restricted Stock Award Agreement previously approved by the Compensation Committee of the Board of Directors for restricted stock awards under the Option Plan, including, but not limited to, terms providing for accelerated exercisability upon the occurrence of an Acceleration Event (as defined in the Option Plan). 6. (a) Executive is hereby awarded a non-qualified stock option to purchase 250,000 shares of Common Stock under the Option Plan, having an exercise price of $44.25. Such option shall become exercisable commencing March 8, 2002, provided that Executive has remained continuously employed by the Company through such date. The option shall contain such other terms and conditions as are set forth in the Company's standard stock option agreements applicable to "time-vesting" options, including, but not limited to, accelerated exercisability upon the occurrence of an Acceleration Event (as defined in the Option Plan). (b) Executive is also hereby awarded a "super-incentive" non-qualified performance-vesting stock option to purchase 100,000 shares of Common Stock under the Option Plan, having an exercise price of $44.25. Such option shall become exercisable as follows: -2- ============================================================================= 3 (i) 50,000 of the option shares shall vest and become exercisable on March 8, 2000, if the Company shall have achieved earnings per share for the fiscal year 1999 of at least $***; (ii) the remaining 50,000 of the option shares shall vest and become exercisable on March 8, 2001, if the Company shall have achieved earnings per share for the fiscal year 2000 of at least $***; (iii)if the Company shall not have achieved the earnings target specified in clause (i) or (ii), but the Company shall have achieved cumulative earnings per share aggregating at least $*** for the three fiscal year period from fiscal 1999 through fiscal 2001, then any option shares that did not vest pursuant to clause (i) or (ii), shall vest and become exercisable on March 8, 2002; and (iv) any option shares that shall not have vested pursuant to any of clauses (i), (ii), or (iii) above by March 8, 2002 shall lapse and such portion of the option shall be canceled, immediately upon determination thereof. The Company shall enter into a Stock Option Agreement with the Executive for the above stock option grant, incorporating the vesting terms set forth above, and otherwise substantially on the terms and conditions set forth in the form of the Company's standard Stock Option Agreement applicable to "performance vesting" options previously approved by the Compensation Committee of the Board of Directors, including, but not limited to, terms providing for accelerated exercisability upon the occurrence of an Acceleration Event (as defined in the Option Plan). (c) On January 31, 2000, Executive shall be awarded an additional "super-incentive" non-qualified performance-vesting stock option to purchase 100,000 shares of Common Stock under the Option Plan, having an exercise price equal to the Fair Market Value of the Common Stock on the date of grant, determined in accordance with the Option Plan. Such option shall become vested with respect to 100% of the option shares, on March 8, 2002, provided that (i) the Company shall have achieved earnings per share for the fiscal year 2001 of at least $***, or the Company shall have achieved cumulative earnings per share aggregating at least $*** for the three fiscal year period from fiscal 1999 through fiscal 2001, and (ii) Executive has remained continuously employed by the Company through such date. If the Company shall not have achieved the earnings per share target for fiscal year 2001, such option shall lapse and be canceled, immediately upon determination thereof. If the Fair Market Value of the Common Stock on January 31, 2000, determined in accordance with the Option Plan, is greater than $44.25, then the number of shares subject to the option to be granted -3- ================================================================================ 4 pursuant to this section shall be increased to equal the product of 100,000 multiplied by a fraction, the numerator of which is the Fair Market Value of the Common Stock on January 31, 2000 and the denominator of which is $44.25. The Company shall enter into a Stock Option Agreement with the Executive for such stock option grant, incorporating the vesting terms set forth above, and otherwise substantially on the terms and conditions set forth in the form of the Company's standard Stock Option Agreement applicable to "performance vesting" options previously approved by the Compensation Committee of the Board of Directors, including, but not limited to, terms providing for accelerated exercisability upon the occurrence of an Acceleration Event (as defined in the Option Plan). 7. (a) For purposes of this Amendment, a "fiscal year" of the Company shall mean the fiscal year commencing on the Sunday closest to January 31 in the year mentioned (for example, "fiscal year 1999" means the fiscal year that began on February 2, 1999 and ends on January 29, 2000). (b) For purposes of Sections 5(b) and 5(c), net income shall mean that net income set forth on the Company's audited consolidated operating statement for the fiscal year in question. (c) For purposes of Sections 6(b) and 6(c), earnings per share shall mean the net earnings per share, on a diluted basis, set forth on the Company's audited consolidated operating statement for the fiscal year in question. 8. From and after the date hereof, the term "Agreement" as used in the Employment Agreement, shall mean the Employment Agreement as amended by this Amendment, and the Employment Agreement, as so amended, shall continue in full force and effect. 9. Sections 11 through 17 of the Employment Agreement are hereby made a part of, and are incorporated by this reference into, this Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment this 12th day of August, 1999. ANNTAYLOR STORES CORPORATION EXECUTIVE By: /S/ Rochelle B. Lazarus /s/ J. Patrick Spainhour --------------------------------- ------------------------- Rochelle B. Lazarus, Director J. PATRICK SPAINHOUR *** Confidential Treatment Requested EX-10 3 EXHIBIT 10.19.6 EXHIBIT 10.19.6 EXECUTION COPY FIRST AMENDMENT dated as of September 7, 1999 (this "First ----- Amendment"), to the Credit Agreement dated as of June 30, --------- 1998 (the "Credit Agreement"), among AnnTaylor, Inc., a ------------------ Delaware corporation (the "Borrower"), Bank of America -------- National Trust and Savings Association, now known as Bank of America, N.A. ("Bank of America"), Citibank, N.A. ----------------- ("Citibank"), First Union National Bank and each of the -------- other lenders party to the Credit Agreement, NationsBanc Montgomery Securities LLC, now known as BancAmerica Securities LLC, as Arranger, Bank of America, as Administrative Agent (the "Administrative Agent"), Citicorp -------------------- USA and First Union Capital Markets, as Syndication Agents, and Bank of America, Citibank and First Union National Bank, as Issuing Banks. The Borrower has requested the Administrative Agent and the Lenders to make certain changes to the Credit Agreement. The parties hereto have agreed, subject to the terms and conditions hereof, to amend the Credit Agreement as provided herein. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement (the Credit Agreement, as amended by, and together with, this First Amendment, and as hereinafter amended, modified, extended or restated from time to time, being called the "Amended Agreement"). ----------------- Accordingly, the parties hereto hereby agree as follows: SECTION 1.01. Amendment to Section 1.01. (a) Section 1.01 of the Credit -------------------- ----- Agreement is hereby amended by deleting the definition of "Fixed Charge Coverage Ratio" in its entirety and by substituting the following in lieu thereof: ""Fixed Charge Coverage Ratio" shall mean, for any period, the ------------------------------ quotient obtained by dividing (a) EBITDAR minus Capital Expenditures, ----- plus an amount equal to 40% (Forty percent) of the unencumbered cash as reflected on the financial statements delivered pursuant to Sections 6.01(a) and (b) by (b) the sum of (i) Interest Expense plus ---- (ii) Rental Expense." (b) Section 1.01 of the Credit Agreement is hereby amended by deleting the first sentence of the definition of "Pricing Ratio" in its entirety and by substituting the following in lieu thereof: ""Pricing Ratio" shall mean, during any fiscal quarter, the -------------- quotient obtained by dividing (a) EBITR by (b) the sum of (i) Interest Expense plus (ii) Rental Expense for the period of four ---- consecutive fiscal quarters ended on the last day of the immediately preceding fiscal quarter." - -------------------------------------------------------------------------------- 2 (b) Section 1.01 of the Credit Agreement is hereby amended by adding the following definition in the appropriate alphabetical location: ""EBITDAR" shall mean, for any period, the sum of the amounts ------- for such period, of (a) Net Income, plus (b) to the extent Net Income ---- is reduced thereby (i) all charges for amortization of intangibles and depreciation, (ii) Interest Expense, (iii) income tax expense and (iv) extraordinary losses plus (c) Rental Expense, minus (d) ---- ----- extraordinary gains (net of taxes)." SECTION 1.02. Amendments to Section 8.05. Section 8.05 is hereby amended -------------------------- by deleting the word "and" at the end of clause (h), deleting the period at the end of clause (i) and replacing it with the phrase "; and" and adding the following clause to the end thereof: "(j) (i) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct of indirect, of any shares of Common Stock of ATSC now or hereafter outstanding or (ii) any payment or prepayment of principal of, premium, if any, or interest on, and any redemption, purchase, retirement or defeasance of, or sinking fund or similar payment with respect to any Subordinated Debt; provided that (A) -------- the aggregate consideration paid pursuant to this clause (j) shall not exceed $40,000,000 and (B) immediately prior to and after giving effect thereto, no Event of Default shall have occurred and be continuing." SECTION 1.03. Amendment to Section 8.15. Section 8.15 of the Credit ---------------------------- Agreement is hereby deleted in its entirety and the following is hereby substituted in lieu thereof: "8.15. [Intentionally Omitted]" SECTION 1.04. Representations and Warranties. The Borrower hereby -------------------------------- represents and warrants to each Lender, each Issuing Bank, the Syndication Agents and the Administrative Agent, as follows: (a) The representations and warranties set forth in Article V of the Amended Agreement, and in each other Loan Document, are true and correct in all material respects on and as of the date hereof and on and as of the First Amendment Effective Date (as hereinafter defined) with the same effect as if made on and as of the date hereof or the First Amendment Effective Date, as the case may be, except to the extent such representations and warranties expressly relate solely to an earlier date. (b) The Borrower is in compliance with all the terms and conditions of the Amended Agreement and the other Loan Documents on its part to be observed or performed and no Event of Default has occurred or is continuing. (c) The execution, delivery and performance by the Borrower of this First Amendment have been duly authorized by the Borrower. - -------------------------------------------------------------------------------- 3 (d) This First Amendment constitutes the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms. (e) The execution, delivery and performance by the Borrower of this First Amendment will not (i) constitute a tortious interference with any Contractual Obligation of any Person, any liability resulting from which would have or be reasonably expected to have a Material Adverse Effect, or (ii) conflict with or violate the Borrower's Certificate of Incorporation or By-Laws or (iii) conflict with, result in a breach of or constitute (with or without notice or lapse of time or both) a default under any Requirement of Law or material Contractual Obligation of ATSC or of the Borrower or any Subsidiary of the Borrower or (iv) result in or require the creation or imposition of any Lien whatsoever upon any of the properties or assets of ATSC, the Borrower or any Subsidiary of the Borrower (other than Liens in favor of the Administrative Agent or the Issuing Banks arising pursuant to the Loan Documents or Liens permitted pursuant to Section 8.02(b) of the Credit Agreement), or (v) require any approval of stockholders, unless such approval has been obtained. SECTION 1.05. Effectiveness. This First Amendment shall become effective ------------- only upon satisfaction of the following conditions precedent (the first date upon which each such condition has been satisfied being herein called the "First ----- Amendment Effective Date"): - ------------------------- (a) the Administrative Agent shall have received duly executed counterparts of this First Amendment which, when taken together, bear the authorized signatures of the Borrower and the Requisite Lenders. (b) The Administrative Agent shall be satisfied that the representations and warranties set forth in Section 1.04 of this First Amendment are true and correct on and as of the First Amendment Effective Date. (c) There shall not be any action pending or any judgment, order or decree in effect which, in the judgment of the Administrative Agent or the Lenders, is likely to restrain, prevent or impose materially adverse conditions upon performance by the Borrower of its obligations under the Amended Agreement. (d) The Administrative Agent shall have received such other documents, legal opinions, instruments and certificates relating to this First Amendment as they shall reasonably request and such other documents, legal opinions, instruments and certificates shall be satisfactory in form and substance to the Administrative Agent and the Lenders. All corporate and other proceedings taken or to be taken in connection with this First Amendment and all documents incidental thereto, whether or not referred to herein, shall be satisfactory in form and substance to the Administrative Agent and the Lenders. (e) The Borrower shall have paid all fees and expenses referred to in Section 1.07 of this First Amendment. - -------------------------------------------------------------------------------- 4 SECTION 1.06. APPLICABLE LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED --------------- BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 1.07. Expenses. The Borrower shall pay (i) all reasonable -------- out-of-pocket expenses incurred by the Administrative Agent and the Lenders in connection with the preparation, negotiations execution, delivery and enforcement of this First Amendment, including, but not limited to, the reasonable fees and disbursements of counsel to the Administrative Agent and (ii) an amendment fee in the aggregate amount of 8 basis points on the aggregate Commitments of the Lenders as of the First Amendment Effective Date, payable to each of the Lenders executing this First Amendment, pro rata according to their respective commitments (the "Amendment Fee"). ------------- SECTION 1.08. Counterparts. This First Amendment may be executed in any ------------ number of counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one agreement. Delivery of an executed counterpart of a signature page to this First Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this First Amendment. SECTION 1.09. Loan Documents. Except as expressly set forth herein, the -------------- amendments provided herein shall not by implication or otherwise limit, constitute a waiver of, or otherwise affect the rights and remedies of the Lenders, the Administrative Agent, the Issuing Banks or the Arranger under the Amended Agreement or any other Loan Document, nor shall they constitute a waiver of any Event of Default, nor shall they alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Amended Agreement or any other Loan Document. Each of the amendments provided herein shall apply and be effective only with respect to the provisions of the Amended Agreement specifically referred to by such amendments. Except as expressly amended herein, the Amended Agreement and the other Loan Documents shall continue in full force and effect in accordance with the provisions thereof. As used in the Amended Agreement, the terms "Agreement", "herein", "hereinafter", "hereunder", "hereto" and words of similar import shall mean, from and after the date hereof, the Amended Agreement. [signature pages to follow] - -------------------------------------------------------------------------------- 5 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed by duly authorized officers, all as of the date first above written. ANNTAYLOR, INC., as Borrower by /s/ Barry Erdos ----------------------------------- Name: Barry Erdos Title: E.V.P. C.F.O. & Treasurer - -------------------------------------------------------------------------------- 6 BANK OF AMERICA, N.A., as Issuing Bank and as a Lender by /s/ Bill Manley ------------------------------------ Name: Bill Manley Title: Managing Director - -------------------------------------------------------------------------------- 7 AMSOUTH BANK, as a Lender by /s/ Kathleen F. Kerlinger ------------------------------------- Name: Kathleen F. Kerlinger Title: Attorney-in-fact - -------------------------------------------------------------------------------- 8 FIRST UNION NATIONAL BANK, as Issuing Bank and as a Lender by ----------------------------------- Name: Title: - -------------------------------------------------------------------------------- 9 HELLER FINANCIAL, INC., as a Lender by /s/ Dennis Graham ---------------------------------- Name: Dennis Graham Title: Assistant Vice President - -------------------------------------------------------------------------------- 10 NATIONAL CITY COMMERCIAL FINANCE, INC., as a Lender by /s/Elizabeth M. Lynch ----------------------------------- Name: Elizabeth M. Lynch Title: Senior Vice President - -------------------------------------------------------------------------------- 11 TRANSAMERICA BUSINESS CREDIT CORPORATION, as a Lender by /s/ Perry Vavoules ------------------------------------ Name: Perry Vavoules Title: Senior Vice President - -------------------------------------------------------------------------------- 12 JACKSON NATIONAL LIFE INSURANCE COMPANY, as a Lender by ------------------------------------ Name: Title: - -------------------------------------------------------------------------------- 13 CITICORP USA, as a Lender by /s/ John W. Pokowsky --------------------------------- Name: John W. Pokowsky Title: Managing Director Structured Finance Division - -------------------------------------------------------------------------------- 14 CITIBANK, N.A., as an Issuing Bank by /s/ John W. Pokowsky --------------------------------- Name: John W. Pokowsky Title: Managing Director Structured Finance Division - -------------------------------------------------------------------------------- 15 FREMONT FINANCIAL CORPORATION, as a Lender by /s/ Ruth Yang -------------------------------- Name: Ruth Yang Title: Credit Analyst - -------------------------------------------------------------------------------- 16 LASALLE NATIONAL BANK, as a Lender by /s/ Robert Corsentino -------------------------------- Name: Robert Corsentino Title: Senior Vice President - -------------------------------------------------------------------------------- 17 SUMMIT BANK, as a Lender by /s/ Yuri Piltser ------------------------------ Name: Yuri Piltser Title: Vice President EX-27 4 FDS --
5 THIS SUMMARY CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CNSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000874214 ANNTAYLOR STORES CORPORATION 1,000 6-MOS JAN-29-2000 JUL-31-1999 90,603 0 66,447 711 134,388 317,486 290,110 126,930 802,875 110,751 110,353 0 0 214 565,410 802,875 515,147 515,147 257,905 257,905 201,098 0 5,584 50,560 22,432 28,128 0 962 0 27,166 0.99 0.89
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