-----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, IZd9mcSQgl6xaPiUoD3AFfFBl9DzjlskXOoexcRihFXcFIu+4T6vYMSHpouoZ8wG qoy95kroEbhc6A+2M6Rx5w== 0000874214-99-000029.txt : 19991215 0000874214-99-000029.hdr.sgml : 19991215 ACCESSION NUMBER: 0000874214-99-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991214 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: 99773948 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 October 30, 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 November 26, 1999 ----- ----------------- Common Stock, $.0068 par value 30,718,407 ================================================================================ INDEX TO FORM 10-Q ------------------ Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended October 30, 1999 and October 31, 1998........................ 3 Condensed Consolidated Balance Sheets at October 30, 1999 and January 30, 1999.............. 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 30, 1999 and October 31, 1998................................... 5 Notes to Condensed Consolidated Financial Statements.. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................... 18 Item 6. Exhibits and Reports on Form 8-K...................... 19 ================================================================================ 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ANNTAYLOR STORES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Quarters and Nine Months Ended October 30, 1999 and October 31, 1998 (unaudited) Quarters Ended Nine Months Ended -------------- ----------------- Oct. 30, Oct. 31, Oct. 30, Oct. 31, 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands except per share amounts) Net sales................................. $272,289 $227,535 $787,436$ $649,098 Cost of sales............................. 122,414 103,117 380,319 318,412 -------- ------- -------- -------- Gross profit.............................. 149,875 124,418 407,117 330,686 Selling, general and administrative expenses................................ 108,122 91,571 302,890 256,989 Amortization of goodwill.................. 2,760 2,760 8,280 8,280 -------- ------- -------- -------- Operating income.......................... 38,993 30,087 95,947 65,417 Interest expense.......................... 866 4,718 6,450 13,692 Other expense, net........................ 541 73 1,351 310 -------- ------- -------- -------- Income before income taxes and extraordinary loss..................... 37,586 25,296 88,146 51,415 Income tax provision..................... 16,138 11,222 38,570 23,878 -------- ------- -------- -------- Income before extraordinary loss.......... 21,448 14,074 49,576 27,537 Extraordinary loss (net of income tax benefit of $641,000)................ --- --- 962 --- Net income................................$ 21,448 $ 14,074 $ 48,614 $ 27,537 ======== ======== ======== ======== Basic earnings per share of common stock: Basic earnings per share before extraordinary loss..................$ 0.68 $ 0.55 $ 1.73 $ 1.07 Extraordinary loss per share.......... --- --- 0.03 --- -------- ------- -------- -------- Basic earnings per share..............$ 0.68 $ 0.55 $ 1.70 $ 1.07 ======== ======= ======== ======== Diluted earnings per share of common stock: Diluted earnings per share before extraordinary loss .................$ 0.65 $ 0.50 $ 1.58 $ 1.02 Extraordinary loss per share.......... --- --- 0.03 --- -------- ------- -------- -------- Diluted earnings per share............$ 0.65 $ 0.50 $ 1.55$ $ 1.02 ======== ======= ======== ======== See accompanying notes to condensed consolidated financial statements. ================================================================================ 4 ANNTAYLOR STORES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS October 30, 1999 and January 30, 1999 October 30, January 30, 1999 1999 ---- ---- (unaudited) (in thousands) ASSETS Current assets Cash and cash equivalents........................ $ 50,467 $ 67,031 Accounts receivable, net......................... 77,244 71,049 Merchandise inventories.......................... 165,334 136,748 Prepaid expenses and other current assets........ 29,673 23,637 -------- -------- Total current assets........................... 322,718 298,465 Property and equipment, net.......................... 171,440 151,785 Goodwill, net ....................................... 311,419 319,699 Deferred financing costs, net ....................... 5,661 2,627 Other assets......................................... 3,568 2,841 -------- ==------ Total assets................................... $814,806 $775,417 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable................................. $ 65,672 $ 65,419 Accrued salaries and bonus....................... 19,537 17,132 Accrued tenancy.................................. 8,235 8,465 Accrued expenses................................. 31,626 37,535 Current portion of long-term debt................ 1,282 1,206 -------- -------- Total current liabilities...................... 126,352 129,757 Long-term debt....................................... 114,072 103,951 Other liabilities.................................... 13,341 12,386 Commitments and contingencies Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of AnnTaylor Finance Trust Holding Solely Convertible Debentures of the Company...................................... --- 96,624 Stockholders' equity Common stock, $.0068 par value; 120,000,000 shares authorized; 31,554,120 and 26,035,301 shares issued, respectively 214 177 Additional paid-in capital....................... 469,276 359,805 Warrants to acquire 2,814 shares of common stock. --- 46 Retained earnings................................ 121,813 73,295 Deferred compensation on restricted stock........ (3,057) (272) -------- -------- 588,246 433,051 Less treasury stock, 715,948 and 17,201 shares, respectively, at cost.......................... (27,205) (352) -------- -------- Total stockholders' equity................. 561,041 432,699 -------- -------- Total liabilities and stockholders' equity. $814,806 $775,417 ======== ======== See accompanying notes to condensed consolidated financial statements. ================================================================================ 5 ANNTAYLOR STORES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended October 30, 1999 and October 31, 1998 (unaudited) Nine Months Ended ----------------- October 30, October 31, 1999 1998 ---- ---- (in thousands) Operating activities: Net income........................................... % 48,614 $ 27,537 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss................................ 1,603 --- Provision for loss on accounts receivable......... 672 1,086 Depreciation and amortization..................... 22,882 21,798 Amortization of goodwill.......................... 8,280 8,280 Non-cash interest................................. 1,982 955 Amortization of deferred compensation............. 1,151 301 Deferred income taxes............................. (2,000) (218) Loss on disposal of property and equipment........ 1,217 336 (Increase) decrease in: Receivables................................... (6,867) (10,642) Merchandise inventories....................... (28,586) (51,292) Prepaid expenses and other current assets..... (5,036) (2,947) Increase (decrease) in: Accounts payable.............................. 253 19,707 Accrued expenses.............................. (3,734) 13,133 Other non-current assets and liabilities, net. 1,229 149 ------- ------- Net cash provided by operating activities............ 41,660 28,183 ------- ------- Investing activities: Purchases of property and equipment.................. (43,755) (30,502) ------- ------- Net cash used by investing activities................ (43,755) (30,502) ------- ------- Financing activities: Payments on mortgage................................. (897) (832) Proceeds from exercise of stock options.............. 8,869 581 Issuance of restricted stock......................... --- 97 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 --- Repurchase of Common Stock............................ (26,816) --- Payment of deferred financing costs................... (4,150) (2,653) ------- ------- Net cash used by financing activities................. (14,469) (2,826) ------- ------- Net decrease in cash.................................... (16,564) (5,145) Cash, beginning of period............................... 67,031 31,369 ------- ------- Cash, end of period..................................... $ 50,467 $ 26,224 ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest.............. $ 6,804 $ 11,675 ======= ======= Cash paid during the period for income taxes.......... $ 34,334 $ 23,080 ======= ======= 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 October 30, 1999 and October 31, 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 ----------------------------------------------- October 30, 1999 October 31, 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 $21,448 31,408 $0.68 $14,074 25,671 $0.55 ===== ===== EFFECT OF DILUTIVE SECURITIES Warrants --- --- --- 3 Stock options --- 270 --- 240 Preferred Securities --- --- 1,297 5,120 Convertible Debentures due 2019 626 2,404 --- --- ------ ------ ------ ------ DILUTED EARNINGS PER SHARE Income available to common stockholders $22,074 34,082 $0.65 $15,371 31,034 $0.50 ======= ====== ===== ======= ====== ===== Nine Months Ended ----------------------------------------------- October 30, 1999 October 31, 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 $49,576 28,617 $1.73 $27,537 25,653 $1.07 ===== ===== EFFECT OF DILUTIVE SECURITIES Warrants --- 1 --- 3 Stock options --- 292 --- 110 Preferred Securities 1,297 2,776 3,892 5,120 Convertible Debentures due 2019 911 1,165 --- ---- ------ ------ ------ ------ DILUTED EARNINGS PER SHARE Income available to common stockholders before extraordinary loss $51,784 32,851 $1.58 $31,429 30,886 $1.02 ======= ====== ===== ======= ====== ===== ================================================================================ 8 ANNTAYLOR STORES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. LONG-TERM DEBT The following summarizes long-term debt outstanding at October 30, 1999: (in thousands) Convertible Debentures due 2019, net of discount of $87,978,000............ $ 111,094 Mortgage................................... 4,260 ------- Total debt ............................. 115,354 Less current portion....................... 1,282 ------- Total long-term debt.................... $ 114,072 ======= To facilitate the securities repurchase program discussed in Note 5 and the Company's capital expenditure program, on September 7, 1999 AnnTaylor, Inc. ("Ann Taylor") entered into an amendment to its senior secured revolving credit facility (the "Credit Facility") with its bank lending group that eliminated the Credit Facility'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 elected to reduce the commitment of the lenders under the Credit Facility by $25,000,000 to $125,000,000 from $150,000,000 effective September 3, 1999, and the term of the Credit Facility was extended to June 30, 2001. 4. 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. ================================================================================ 9 ANNTAYLOR STORES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. SECURITIES REPURCHASE PROGRAM During the third quarter of Fiscal 1999, the Board of Directors authorized a program under which the Company was authorized to purchase up to $40 million of the Company's common stock and/or its convertible debentures due 2019 (the "Convertible Debentures") through open market purchases and/or in privately negotiated transactions. As of October 30, 1999, 700,000 shares of the Company's common stock had been repurchased for an aggregate purchase price of $26,816,000. During November 1999, the Company purchased an additional 332,500 shares of its common stock for an aggregate purchase price of $13,118,000, completing the securities repurchase program. All of the repurchased shares became treasury shares and may be used for general corporate and other purposes. No Convertible Debentures were repurchased under the program. ================================================================================ 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Quarters Ended Nine Months Ended -------------- ----------------- Oct. 30, Oct. 31, Oct. 30, Oct. 31, 1999 1998 1999 1998 ---- ---- ---- ---- Number of Stores: Open at beginning of period.. 387 342 365 324 Opened during period......... 17 17 44 37 Expanded during period*...... 5 3 7 6 Closed during period......... 2 --- 7 2 Open at end of period........ 402 359 402 359 Type of Stores Open at End of Period: Ann Taylor stores............ 318 303 Ann Taylor Factory Stores.... 11 14 Ann Taylor Loft stores....... 73 42 - ---------------------------- * Expanded stores are excluded from comparable store sales for the first year following expansion. QUARTER ENDED OCTOBER 30, 1999 COMPARED TO QUARTER ENDED OCTOBER 31, 1998 The Company's net sales in the third quarter of 1999 increased to $272,289,000 from $227,535,000 in the third quarter of 1998, an increase of $44,754,000 or 19.7%. The increase is attributable to the opening of new stores, expansion of certain stores and an increase in comparable store sales of 8.1%. Management believes that the comparable store sales increase was primarily attributable to the favorable customer reaction to the Company's product offerings and merchandise assortment. Gross profit as a percentage of net sales increased to 55.0% in the third quarter of 1999 from 54.7% in the third quarter of 1998. Selling, general and administrative expenses represented 39.7% of net sales in the third quarter of 1999, compared to 40.2% of net sales in the third 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 and an increase in third party credit charges resulting from the increase in third party charge sales as a percentage of total sales. ================================================================================ 11 As a result of the foregoing, the Company had operating income of $38,993,000, or 14.3% of net sales, in the third quarter of 1999, compared to operating income of $30,087,000, or 13.2% of net sales, in the third quarter of 1998. Amortization of goodwill was $2,760,000 in both the third quarter of 1999 and the third quarter of 1998. Operating income, without giving effect to goodwill amortization in either year, was $41,753,000, or 15.3% of net sales, in the third quarter of 1999 and $32,847,000, or 14.4% of net sales, in the third quarter of 1998. Interest expense was $866,000 in the third quarter of 1999 and $4,718,000 in the third 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 $16,138,000, or 42.9% of income before income taxes, in the third quarter of 1999, compared to $11,222,000, or 44.4% of income before income taxes, in the third 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. As a result of the foregoing factors, the Company had net income of $21,448,000, or 7.9% of net sales, for the third quarter of 1999, compared to net income of $14,074,000, or 6.2% of net sales, for the third quarter of 1998. AnnTaylor Stores Corporation conducts no business other than the management of Ann Taylor. NINE MONTHS ENDED OCTOBER 30, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 31, 1998 The Company's net sales in the first nine months of 1999 increased to $787,436,000 from $649,098,000 in the first nine months of 1998, an increase of $138,338,000 or 21.3%. The increase is attributable to the opening of new stores, the expansion of existing stores and an increase in comparable store sales of 10.9%. 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. Gross profit as a percentage of net sales increased to 51.7% in the first nine months of 1999 from 50.9% in the first nine 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, ================================================================================ 12 offset in part by a higher markdown rate on goods that were sold below full price. Gross margin also benefited in the first quarter of 1999 from a greater percentage of merchandise being sold at full price compared to the first quarter of 1998. Selling, general and administrative expenses represented 38.5% of net sales in the first nine months of 1999, compared to 39.6% of net sales in the first nine 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 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 $95,947,000, or 12.2% of net sales, in the first nine months of 1999, compared to operating income of $65,417,000, or 10.1% of net sales, in the first nine months of 1998. Amortization of goodwill was $8,280,000 in each of the first nine months of 1999 and 1998. Operating income, without giving effect to goodwill amortization, was $104,227,000, or 13.2% of net sales, in the 1999 period and $73,697,000, or 11.4% of net sales, in the 1998 period. Interest expense was $6,450,000 in the first nine months of 1999 and $13,692,000 in the first nine 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 $38,570,000, or 43.8% of income before income taxes and extraordinary loss, in the 1999 period, compared to $23,878,000, or 46.4% of income before income taxes 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 its Convertible Debentures to redeem the outstanding 8-3/4% Notes. This resulted in an extraordinary charge to earnings in the first nine 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 $48,614,000, or 6.2% of net sales, for the first nine months of 1999, compared to net income of $27,537,000 or 4.2% of net sales, for the first nine months of 1998. ================================================================================ 13 FINANCIAL CONDITION For the first nine months of 1999, net cash provided by operating activities totaled $41,660,000, primarily as a result of net income and non-cash operating expenses, partially offset by increases in merchandise inventories, prepaid expenses and other assets, and accounts receivable, and a decrease in accrued expenses. Cash used for investing activities during the first nine months of 1999 amounted to $43,755,000, for the purchase of property and equipment. Cash used by financing activities during the first nine months of 1999 amounted to $14,469,000, reflecting the redemption of the 8-3/4% Notes, the repurchase of Company common stock and the payment of deferred financing costs related to the issuance of the Convertible Debentures, partially offset by the proceeds from the issuance of the Convertible Debentures and proceeds from exercises of employee stock options to purchase Company common stock. Merchandise inventories were $165,334,000 at October 30, 1999, compared to inventories of $136,748,000 at January 30, 1999. Merchandise inventories at October 30, 1999 and January 30, 1999 included approximately $15,539,000 and $32,329,000, respectively, of inventory associated with the Company's sourcing division, which is primarily finished goods in transit from factories. In September 1999, Ann Taylor entered into an amendment to its Credit Facility 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 elected to reduce the commitment of the lenders under the Credit Facility by $25,000,000, to $125,000,000 from $150,000,000 and the term of the Credit Facility was extended to June 30, 2001. At October 30, 1999, there were no borrowings outstanding under 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. 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 $43,755,000 were incurred for the nine months ended October 30, 1999. During the first nine months of fiscal 1999, the Company opened 17 new Ann Taylor stores and 27 Ann Taylor Loft stores, including 4 locations that were converted from Ann Taylor stores. In addition, the Company completed the expansion of 7 Ann Taylor stores. The Company expects to open a total of 18 new Ann Taylor stores and 29 Ann Taylor Loft stores (including four Ann Taylor stores being converted to Ann Taylor ================================================================================ 14 Loft stores), and to expand or relocate a total of 8 Ann Taylor stores, in Fiscal 1999. 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. During the third quarter of Fiscal 1999, the Board of Directors authorized a program under which the Company was authorized to purchase up to $40 million of the Company's common stock and/or its Convertible Debentures through open market purchases and/or in privately negotiated transactions. As of October 30, 1999, 700,000 shares of the Compan's common stock had been repurchased for an aggregate purchase price of $26,816,000. During November 1999, the Company purchased an additional 332,500 shares of its common stock for an aggregate purchase price of $13,118,000, completing the securities repurchase program. All of the repurchased shares became treasury shares and may be used for general corporate and other purposes. No Convertible Debentures were repurchased. 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 ================================================================================ 15 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 $275,000 in the first nine 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 nine 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. 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 has continued to monitor the Year 2000 readiness of its key suppliers of goods and services throughout 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 ================================================================================ 16 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 has analyzed the plans to ensure their adequacy to address potential disruption to the extent practicable. 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, 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. ================================================================================ 17 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 Part II, Item 1 of this quarterly report on Form 10-Q 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. ================================================================================ 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1999 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 November 9, 1998, the District Court issued an order granting the defendant's motion to dismiss the amended complaint with prejudice for its failure to plead fraud with particularity. 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 order. Merrill Lynch, its affiliates and the two directors who previously served on the Company's Board of Directors as representatives of certain affiliates of Merrill Lynch, have reached a proposed settlement with the plaintiffs, which provides, among other things, for the establishment of a settlement fund in the amount of $3,000,000 plus interest, which is subject to court approval. 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 District Court has certified the class only for the purpose of effecting the proposed settlement. The settling parties seek the entry of a contribution bar order that purportedly would bar and enjoin any non-settling defendant from making any claim for contribution against any of the settling defendants or released parties. A settlement hearing has been set by the District Court for December 14, 1999. The appeal as against the remaining defendants, including the Company, is pending before the Second Circuit Court of Appeals. As a result, 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. ================================================================================ 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: The Company filed a report dated December 6, 1999 with the Commission on Form 8-K, correcting the unaudited consolidated balance sheet for AnnTaylor Stores Corporation as of October 30, 1999 that was included in the Company's third quarter earnings press release issued to the public on November 16, 1999, and in the prospectus dated November 23, 1999 that is part of Amendment No. 1 to the Registration Statement on Form S-3 filed by the Company and AnnTaylor, Inc. with the Securities and Exchange Commission on November 23, 1999 (Registration Nos. 333-86955 and 333-86955-01). ================================================================================ 20 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: December 14, 1999 By: /s/ J. Patrick Spainhour ------------------ ------------------------- J. Patrick Spainhour Chairman and Chief Executive Officer Date: December 14, 1999 By: /s/ Barry Erdos ------------------ ------------------------- Barry Erdos Executive Vice President - Chief Financial Officer and Treasurer EX-27 2 FDS --
5 THIS SUMMARY 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 CORP 1,000 9-MOS JAN-29-2000 OCT-30-1999 50,467 0 65,822 627 165,334 322,718 302,757 131,317 814,806 126,352 111,094 0 0 214 560,827 814,806 787,436 787,436 380,319 380,319 312,521 0 6,450 88,146 38,570 49,576 0 962 0 48,614 1.70 1.55
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