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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended January 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 1-11980
ANNTAYLOR, INC.
---------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0297083
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
(212) 541-3300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Each Class Name of each exchange on which registered
8-3/4% SUBORDINATED NOTES DUE 2000 THE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No _____.
As of February 26, 1999, 1 share of Common Stock was outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
The registrant meets the conditions set forth in General Instruction I
(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
==============================================================================
PART I
ITEM 1. BUSINESS
GENERAL
AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading national
specialty retailer of better quality women's apparel, shoes and accessories sold
primarily under the Ann Taylor brand name. The Company believes that "Ann
Taylor" is a highly recognized national brand that defines a distinct fashion
point of view. Ann Taylor merchandise represents classic styles, updated to
reflect current fashion trends. The Company's stores offer a full range of
career and casual separates, weekend wear, dresses, tops, accessories and shoes,
coordinated as part of a total wardrobing strategy. This total wardrobing
strategy is reinforced by an emphasis on customer service. Ann Taylor sales
associates are trained to assist customers in merchandise selection and wardrobe
coordination, helping them achieve the "Ann Taylor look" while reflecting the
customers' personal styles.
As of January 30, 1999, the Company operated 365 stores in 41 states and
the District of Columbia, under the names Ann Taylor, Ann Taylor Factory Store
and Ann Taylor Loft. Of the 306 stores operated under the Ann Taylor name,
approximately three-quarters are located in regional malls and upscale specialty
retail centers, with the balance located in downtown and village locations.
These stores represent the Company's core merchandise line. The Company believes
that the customer base for its Ann Taylor stores consists primarily of
relatively affluent, fashion-conscious women from the ages of 25 to 55, and that
the majority of its customers are working women with limited time to shop, who
are attracted to Ann Taylor by its focused merchandising and total wardrobing
strategies, personalized customer service, efficient store layouts and continual
flow of new merchandise.
As of January 30, 1999, the Company operated 46 Ann Taylor Loft stores.
Ann Taylor Loft is a separate moderate-price store for women who appreciate the
Ann Taylor style but are more cost conscious. Merchandise is designed uniquely
for these stores and is sold under the Ann Taylor Loft label. The first 30 of
the Company's Ann Taylor Loft stores were located in factory outlet centers,
including some Ann Taylor Factory Stores that, in 1996, were converted to Loft
stores after the introduction of the Loft concept. In 1998, the Company opened
its first 16 Ann Taylor Loft stores outside the factory outlet center
environment, primarily in regional malls and strip shopping centers focused on
the moderate-priced consumer. Management believes that Ann Taylor Loft
represents a significant opportunity for the Company to compete in the
moderately-priced women's apparel market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Statement Regarding
Forward-Looking Disclosures".
The Company also operates 13 Ann Taylor Factory stores in factory outlet
centers that serve primarily as a clearance vehicle for merchandise from Ann
Taylor stores. Many of these stores also offer a limited selection of original
priced Ann Taylor Loft merchandise.
The Company was incorporated under the laws of the state of Delaware in
1986. All of the outstanding capital stock of the Company, consisting of one
share of common stock, is owned by AnnTaylor Stores Corporation ("ATSC"). Ann
Taylor was acquired by ATSC in a leveraged buyout transaction in 1989.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURES
Sections of this Annual Report contain various forward looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995, with
respect to the financial condition, results of operations and business of the
Company. These forward looking statements involve certain risks and
uncertainties, and no assurance can be given that any of such matters will be
realized. Actual results may differ materially from those contemplated by such
forward looking statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Statement Regarding Forward
Looking Disclosures".
==============================================================================
ITEM 2. PROPERTIES
As of January 30, 1999, the Company operated 365 stores, all of which were
leased. The store leases typically provide for initial terms of ten years,
although some leases have shorter or longer initial periods, and grant the
Company the right to extend the term for one or two additional five-year
periods. Most of the store leases require Ann Taylor to pay a specified minimum
rent, plus a contingent rent based on a percentage of the store's net sales in
excess of a specified threshold. Most of the leases also require Ann Taylor to
pay real estate taxes, insurance and certain common area and maintenance costs.
Ann Taylor leases corporate offices at 142 West 57th Street in New York
City and office space at 1372 Broadway in New York City. The Company also leases
office space in New Haven, Connecticut.
Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution Services,
Inc., owns its 256,000 square foot distribution center located in Louisville,
Kentucky. Nearly all Ann Taylor merchandise is distributed to the Company's
stores through this facility. The parcel on which the Louisville distribution
center is located comprises approximately 20 acres and could accommodate
possible future expansion of the facility.
ITEM 3. LEGAL PROCEEDINGS
On April 26, 1996, certain alleged stockholders of ATSC filed a purported
class action lawsuit in the United States District Court Southern District of
New York, against ATSC, the Company, certain directors and former officers of
ATSC and the Company, ML&Co. and certain affiliates of ML&Co. (Novak v. Kasaks,
et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The complaint alleged causes of
action under Section 10(b) and Section 20(a) of the Securities Exchange Act of
1934, as amended, by alleging that ATSC and the other defendants engaged in a
fraudulent scheme and course of business that operated a fraud or deceit on
purchasers of ATSC's common stock during the period commencing February 3, 1994
through May 4, 1995 due to alleged false and misleading statements about the
Company and ATSC. The complaint sought, among other things, certification as a
class action on behalf of all purchasers of common stock during the period
commencing February 3, 1994 through May 4, 1995, the awarding of compensatory
damages to the plaintiffs and purported members of the class, the awarding of
costs, including pre-judgment and post-judgment interest, reasonable attorneys'
fees and expert witness fees to the plaintiffs and purported members of the
class and equitable and/or injunctive relief. On March 10, 1998, the Court
granted the defendants' motions to dismiss the complaint. The Court found that
the complaint failed to state a claim upon which relief may be granted, and
failed to plead fraud with particularity and an inability to do so. The Court's
Opinion granted the plaintiffs leave to amend and re-file the complaint within
thirty days of the date of the Opinion, and the plaintiffs filed an amended
complaint on April 9, 1998. On November 9, 1998, the Court issued an Opinion
dismissing, with prejudice, the amended complaint. On or about December 15,
1998, the plaintiffs filed a notice of appeal to the U.S District Court of
Appeals, Second Circuit, seeking review of the Appellate Court's decision. This
appeal is presently pending, and any liability that may arise from this action
cannot be predicted at this time. The Company believes that the amended
complaint is without merit and intends to defend the action vigorously.
The Company is also a party to routine litigation incident to its
business. Although the amount of any liability that could arise with respect to
these actions cannot be accurately predicted, in the opinion of the Company, any
such liability will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
===============================================================================
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no public market for the common stock of the Company. All of the
outstanding stock of the Company, consisting of one share of common stock, is
owned by ATSC.
The payment of dividends by Ann Taylor to ATSC is subject to certain
restrictions under the Company's bank credit agreement and the indenture
relating to the Company's 8 3/4% Subordinated Notes due 2000. From time to time,
the Company pays dividends to ATSC in amounts sufficient to fund ATSC's
operating expenses. Further, in connection with the 8 1/2% Company-Obligated
Mandatorily Redeemable Convertible Preferred Securities (the "preferred
securities") issued by ATSC's financing vehicle, AnnTaylor Finance Trust (the
"Trust"), the Company has made dividend payments to ATSC in amounts sufficient
to allow ATSC to pay interest on certain debentures issued by ATSC to the Trust.
In August 1998, the Company declared a dividend of a promissory note to ATSC, in
the original principal amount of $100,625,000 (the "Note Payable to ATSC"). The
Note Payable to ATSC has interest and payment terms substantially similar to the
terms of the debentures issued by ATSC to the Trust. See Note 2 to the
Consolidated Financial Statements of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SALES
The following table sets forth certain sales and store data for the
periods indicated:
Fiscal Year Ended
--------------------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1996
(52 weeks) (52 weeks) (52 weeks)
---------- ----------- -----------
Net sales ($000)....................... $911,939 $ 781,028 $ 798,117
Total net sales increase
(decrease) percentage
(52 week basis)................ 16.8% (2.1)% 10.6%
Comparable store sales
increase (decrease)
percentage (52 week basis)..... 7.9% (5.5)% 1.8%
Net sales per average
square foot.................... $ 474 $ 445 $ 476
Total store square footage
at end of period .............. 2,038,000 1,808,000 1,705,000
Number of
New stores..................... 45 27 11
Expanded stores................ 8 9 7
Closed stores.................. 4 12 8
Total stores open at end
of period...................... 365 324 309
The Company's net sales do not show significant seasonal variation,
although net sales in the fourth quarter have historically been moderately
higher than in the other quarters. As a result, the Company has not had
significant overhead and other costs generally associated with large seasonal
variations.
===============================================================================
RESULTS OF OPERATIONS
The following table sets forth operating statement data expressed as a
percentage of net sales for the periods indicated:
Fiscal Year
---------------------------
1998 1997 1996
---- ---- ----
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales.......................... 50.0 52.7 55.6
---- ---- ----
Gross profit....................... 50.0 47.3 44.4
Selling, general and
administrative expenses............. 38.4 39.5 36.5
Studio shoe stores closing expense..... --- --- 0.4
Employment contract separation
expense............................. --- --- 0.4
Retirement of assets................... 0.4 --- ---
Amortization of goodwill............... 1.2 1.4 1.3
--- --- ---
Operating income................... 10.0 6.4 5.8
Interest expense....................... 2.0 2.6 3.1
Other expense, net..................... --- --- ---
---- ---- ----
Income before income taxes
and extraordinary loss 8.0 3.8 2.7
Income tax provision........... 3.7 2.3 1.6
---- ---- ----
Income before extraordinary loss 4.3 1.5 1.1
Extraordinary loss............. --- --- ---
---- ---- ----
Net income..................... 4.3% 1.5% 1.1%
==== ==== ====
FISCAL 1998 COMPARED TO FISCAL 1997
The Company's net sales increased to $911,939,000 in Fiscal 1998 over
$781,028,000 in Fiscal 1997, an increase of $130,911,000, or 16.8%. Comparable
store sales for Fiscal 1998 increased 7.9%, compared to a decrease of 5.5% in
Fiscal 1997. Management believes that the sales increase was primarily
attributable to the opening of new stores, the expansion of existing stores, and
a net increase in comparable store sales in 1998, as a result of improved
customer acceptance of the Company's product offerings and merchandise
assortment.
Gross profit as a percentage of net sales increased to 50.0% in 1998 from
47.3% in 1997. As discussed in Note 1 to the Consolidated Financial Statements,
the Company elected in Fiscal 1998 to change the method by which the Company
accounts for inventory, from the retail method to the average cost method. The
effect of this accounting change on Fiscal 1998 net income was an increase of
$1,272,000. Under the retail method, gross margin as a percentage of net sales
would have been approximately 49.8%. The increase in gross margin reflects
continued merchandise margin improvements resulting from the maturation of the
Company's sourcing organization, since the acquisition of the Company's sourcing
joint venture two years ago, as well as a reduction in markdowns as a percentage
of sales. See discussion of Sourcing Acquisition in Note 10 to the Company's
Consolidated Financial Statements.
Selling, general and administrative expenses were $349,955,000, or 38.4%
of net sales, in 1998, compared to $308,232,000, or 39.5% of net sales, in 1997.
The decrease in selling, general and administrative expenses as a percentage of
net sales was primarily attributable to increased leverage on fixed expenses
resulting from increased comparable store sales. The benefits of this leverage
were partially offset by an increase in the provision for management performance
bonus expense, and an increase in marketing expenditures in support of the
Company's strategic initiatives to enhance the Ann Taylor brand.
===============================================================================
Operating income increased to $91,587,000, or 10.0% of net sales, in 1998
from $50,000,000, or 6.4% of net sales, in 1997. Operating income in 1998 was
reduced by $3,633,000, or 0.4% of net sales, for the retirement of certain
assets in connection with the renovation of the Company's corporate offices.
Amortization of goodwill was $11,040,000, or 1.2% of net sales, in 1998 compared
to $11,040,000, or 1.4% of net sales, in 1997. Operating income without giving
effect to such amortization was $102,627,000, or 11.2% of net sales, in 1998 and
$61,040,000, or 7.8% of net sales, in 1997.
Interest expense was $18,117,000 in 1998 compared to $19,989,000 in 1997.
The decrease in interest expense was primarily attributable to a decrease in the
Company's outstanding long-term debt, resulting in part from the prepayment in
July 1997 of a $24,500,000 term loan referred to below, and to greater interest
income earned on cash on hand. The weighted average interest rate on the
Company's outstanding indebtedness at January 30, 1999 was 8.60% compared to
8.59% at January 31, 1998.
The income tax provision was $33,579,000, or 46.1% of income before income
taxes, in the 1998 period, compared to $17,466,000, or 59.3% of income before
income taxes and extraordinary loss, in 1997. The effective tax rates for both
periods were higher than the statutory rates, primarily as a result of
non-deductible goodwill expense. Without giving effect to such non-deductible
goodwill amortization, the Company's effective income tax rate was 40% of income
before income taxes in the 1998 period, compared to 43% before income taxes and
extraordinary loss in the 1997 period. The decrease in the effective income tax
rate resulted primarily from the implementation of additional state tax planning
and from an increase in the amount of income earned outside the United States by
the Company's non-U.S. sourcing subsidiaries.
As a result of the foregoing factors, the Company had net income of
$39,324,000, or 4.3% of net sales, for 1998, compared to net income of
$11,824,000, or 1.5% of net sales, for 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
The Company's net sales decreased to $781,028,000 in Fiscal 1997 from
$798,117,000 in Fiscal 1996, a decrease of $17,089,000, or 2.1%. Comparable
store sales for Fiscal 1997 decreased 5.5% compared to Fiscal 1996. Management
believes that the decreases were primarily attributable to lower customer
acceptance of certain of the Company's merchandise offerings and, to a lesser
extent, planned decreases in promotional inventory for certain periods during
the year.
Gross profit as a percentage of net sales increased to 47.3% in 1997 from
44.4% in 1996. This increase was primarily attributable to benefits achieved by
the Company's sourcing division.
Selling, general and administrative expenses were $308,232,000, or 39.5%
of net sales, in 1997, compared to $291,027,000, or 36.5% of net sales, in 1996.
The increase in selling, general and administrative expenses as a percentage of
net sales was primarily attributable to increased tenancy expense related to
increased retail square footage, investments in certain strategic initiatives,
such as marketing and enhanced merchandising information systems, and decreased
leverage on fixed expenses due to lower sales in 1997.
Operating income increased to $50,000,000, or 6.4% of net sales, in 1997
from $46,461,000, or 5.8% of net sales, in 1996. Operating income in 1996 was
reduced by $3,500,000, or 0.4% of net sales, representing the estimated costs of
the Company's obligations under a former executive's employment contract
following her resignation in August 1996, and by a one-time charge of
$3,600,000, or 0.4% of net sales, relating to the planned closing of all nine
Ann Taylor Studio shoe stores announced in January 1997. Amortization of
goodwill was $11,040,000, or 1.4% of net sales, in 1997 compared to $10,086,000,
or 1.3% of net sales, in 1996. Operating income without giving effect to such
amortization was $61,040,000, or 7.8% of net sales, in 1997 and $56,547,000, or
7.1% of net sales, in 1996.
===============================================================================
Interest expense was $19,989,000 in 1997 compared to $24,416,000 in 1996.
The decrease in interest expense was primarily attributable to a decrease in the
Company's outstanding long-term debt, resulting in part from the prepayment in
July 1997 of a $24,500,000 term loan referred to below, and to greater interest
income earned on cash on hand. The weighted average interest rate on the
Company's outstanding indebtedness at January 31, 1998 was 8.59% compared to
8.63% at February 1, 1997.
The income tax provision was $17,466,000, or 59.3% of income before income
taxes and extraordinary loss, in the 1997 period compared to $12,975,000, or
60.0% of income before income taxes, in 1996. The effective tax rates for both
periods were higher than the statutory rates, primarily as a result of
non-deductible goodwill expense.
On July 2, 1997, the Company used available cash to prepay the outstanding
balance of a $24,500,000 term loan due September 1998. This loan repayment
resulted in an extraordinary charge to earnings in Fiscal 1997 of $173,000, net
of income tax benefit.
As a result of the foregoing factors, the Company had net income of
$11,824,000, or 1.5% of net sales, for 1997, compared to net income of
$8,667,000, or 1.1% of net sales, for 1996.
CHANGES IN FINANCIAL POSITION
Accounts receivable increased to $71,049,000 at the end of 1998 from
$60,211,000 at the end of 1997, an increase of $10,838,000, or 18.0%. This
increase was primarily attributable to construction allowance receivables, which
increased $6,501,000 to $12,485,000 in 1998, and to third party credit card
receivables (American Express, MasterCard, and Visa) which increased $2,182,000
and Ann Taylor credit card receivables, which increased $2,097,000, due to
increased sales.
Merchandise inventories increased to $136,748,000 at January 30, 1999 from
$97,234,000 at January 31, 1998, an increase of $39,514,000, or 40.6%. The
increase in merchandise inventories is primarily due to inventory purchased for
new store square footage, planned increases in inventory levels and the early
shipment or receipt of Spring merchandise. Merchandise inventories at January
30, 1999 and January 31, 1998 included approximately $32,329,000 and
$21,124,000, respectively, of inventory associated with the Company's sourcing
division. Inventory attributed to the sourcing division is principally finished
goods in transit from factories. Total square footage increased to approximately
2,038,000 square feet at January 30, 1999 from approximately 1,808,000 square
feet at January 31, 1998. Merchandise inventory on a per square foot basis,
excluding inventory associated with the Company's sourcing division, was
approximately $51 at the end of 1998, compared to approximately $42 at the end
of 1997, an increase of approximately 21.4%. Inventory turned 5.0 times in 1998
compared to 5.1 times in 1997, excluding inventory associated with the Company's
sourcing division. Inventory turnover is determined by dividing cost of sales by
the average of the cost of inventory at the beginning and end of the period
(excluding inventory associated with the sourcing division).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flow from
operations and borrowings available under the revolving credit facility
described below. The following table sets forth material measures of the
Company's liquidity:
Fiscal Year
------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Cash provided by operating activities........ $ 75,535 $ 71,589 $ 67,532
Working capital........................... $168,708 $122,181 $118,850
Current ratio............................. 2.30:1 2.39:1 2.53:1
Debt to equity ratio...................... .48:1 .22:1 .28:1
Cash provided by operating activities, as presented on the consolidated
statements of cash flows, increased in 1998 principally as a result of earnings,
noncash charges, and an increase in accounts payable and accrued liabilities,
offset by increases in merchandise inventories, receivables and prepaid expenses
and other current assets.
==============================================================================
On June 30, 1998, the Company entered into a new $150,000,000 senior
secured revolving credit facility (the "Credit Facility") with a syndicate of
lenders. This facility replaced the Company's then-existing $122,000,000 bank
credit agreement that was scheduled to expire in July 1998 and also resulted in
the non-renewal by the Company's sourcing division of its $50,000,000 credit
facility and in the non-renewal by AnnTaylor Funding, Inc. of a $40,000,000
accounts receivable facility. The Credit Facility is used by the Company for the
issuance of commercial and standby letters of credit and to provide funds for
other general corporate purposes.
Loans outstanding under the Credit Facility at any time may not exceed
$50,000,000. The Company did not make any borrowings under the loan provisions
of the Credit Facility during Fiscal 1998, and there were no loans outstanding
at fiscal year end. The outstanding loan balance is required to be reduced to
zero for the thirty-day period commencing January 1 each year. This cleandown
period was achieved for January 1999. Maximum availability for loans and letters
of credit under the Credit Facility is governed by a monthly borrowing base,
determined by the application of specified advance rates against certain
eligible assets. Based on this calculation, the maximum amount available for
loans and letters of credit under the Credit Facility at January 30, 1999 was
approximately $131,054,000. Commercial and standby letters of credit outstanding
under the Credit Facility at January 30, 1999 were approximately $65,763,000.
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at the Company's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%,
respectively. In addition, the Company is required to pay the lenders a
quarterly commitment fee on the unused revolving loan commitment amount at a
rate ranging from 0.375% to 0.5% per annum. Fees for outstanding commercial and
standby letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens, investments and capital expenditures,
restrictions on dividends or other distributions to ATSC's stockholders and
maintenance of certain financial ratios including specified levels of net worth.
For Fiscal 1998, the capital expenditure limit was $52,000,000. For Fiscal 1999,
capital expenditures are limited to a maximum of $55,000,000.
The lenders have been granted a pledge of the common stock of ATSC and
certain of its subsidiaries, and a security interest in substantially all other
tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of the Company and its subsidiaries, as
collateral for the Company's obligations under the Credit Facility.
The Credit Facility matures on June 30, 2000 and includes an automatic
one-year extension, contingent upon the satisfaction of certain conditions. In
addition, the commitments under the Credit Facility terminate on February 16,
2000 unless the Company's outstanding 8 3/4% Subordinated Notes due 2000 (the "8
3/4% Notes") are refinanced on or prior to such date with the proceeds of
subordinated debt or capital stock, the terms and conditions of which are
reasonably satisfactory to the Requisite Lenders under the Credit Facility.
In April and May of 1996, ATSC completed the sale of an aggregate of
$100,625,000 of preferred securities issued by its financing vehicle, AnnTaylor
Finance Trust. The preferred securities have a liquidation preference of $50 per
security and are convertible at the option of the holders thereof into shares of
common stock of ATSC at a conversion rate of 2.545 shares of common stock
for each preferred security. A total of 2,012,500 preferred securities were
issued, and are convertible into an aggregate of 5,121,812 shares of common
stock, representing approximately 16% of ATSC's outstanding common stock as of
January 30, 1999. ATSC received net proceeds of $95,984,000 in connection with
the sale of the preferred securities and applied $94,000,000 to reduce
outstanding borrowings under the Company's then-existing revolving credit
facility.
The Company and its wholly owned subsidiary, AnnTaylor Distribution
Services, Inc., are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage
balance at January 30, 1999 was $5,157,000.
===============================================================================
The Company's capital expenditures totaled $45,131,000, $22,945,000, and
$16,107,000 in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Capital
expenditures were primarily attributable to the Company's store expansion,
renovation, and refurbishment programs, as well as the investment the Company
made in certain information systems and, in Fiscal 1998, the Company's corporate
offices. The Company expects its total capital expenditure requirements in
Fiscal 1999 will be approximately $50,000,000, including capital for new store
construction for a planned square footage increase of approximately 275,000
square feet, or 13.5%, as well as capital to support continued investments in
information systems. The actual amount of the Company's capital expenditures
will depend in part on the number of stores opened, expanded and refurbished and
on the amount of construction allowances the Company receives from the landlords
of its new or expanded stores.
Dividends and distributions from the Company to ATSC are restricted by the
Credit Facility and the Indenture for the 8 3/4% Notes.
In order to finance its operations and capital requirements, the Company
expects to use internally generated funds, trade credit and funds available to
it under the Credit Facility. The Company believes that cash flow from
operations and funds available under the Credit Facility are sufficient to
enable it to meet its on-going cash needs for its business, as presently
conducted, for the foreseeable future.
Effective February 1, 1998, the Company elected to change its method of
inventory valuation from the retail method to the average cost method. The
Company believes the average cost method is a preferable method for matching the
cost of merchandise with the revenues generated. The cumulative effect of this
accounting change on February 1, 1998 was not material, and therefore no
disclosure is noted on the Consolidated Statement of Operations. The effect of
this accounting change on Fiscal 1998 net income was an increase of $1,272,000
on a diluted basis. It is not possible to determine the effect of the change on
income in fiscal periods ending prior to February 1, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which is effective for the Company for
the quarter ended October 30, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivatives and for hedging activities. Management is
currently evaluating the impact of this standard and believes its adoption will
not affect the Company's consolidated financial position, results of operations
or cash flows.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for the
Company for fiscal years beginning after December 15, 1998. The application of
SOP 98-1 is not anticipated to have a material impact on the Company's
consolidated financial statements.
YEAR 2000 STATUS
Many computer systems use only two digits to identify a year (for example,
"99" is used for the year "1999"). As a result, these systems may be unable to
process accurately dates later than December 31, 1999, since they may recognize
"00" as the year "1900", instead of the year "2000". This anomaly is often
referred to as the "Year 2000 compliance" issue. Since 1997, the Company has
been executing a plan to remediate or replace affected systems on a timely
basis. Equipment and other non-information technology systems that use
microchips or other embedded technology, such as certain conveyor systems at the
Company's distribution center, are also covered by the Company's Year 2000
compliance project.
The Company's Year 2000 compliance project includes four phases: (1)
evaluation of the Company's owned or leased systems and equipment to identify
potential Year 2000 compliance issues; (2) remediation or replacement of Company
systems and equipment determined to be non-compliant (and testing of remediated
systems before returning them to production); (3) inquiry regarding Year 2000
readiness of material business partners and other third parties on whom the
Company's business is dependent; and (4) development of contingency plans, where
feasible, to address potential third party non-compliance or failure of material
Company systems.
==============================================================================
The initial phase of the Company's Year 2000 compliance project was the
evaluation of all software, hardware and equipment owned, leased or licensed by
the Company, and identification of those systems and equipment requiring Year
2000 remediation. This analysis was completed during Fiscal 1998.
All computer hardware in the Company's U.S. home offices and distribution
center that was not Year 2000 compliant has been remediated or replaced, and all
computer hardware in the Company's retail stores that was not Year 2000
compliant will be remediated or replaced by the end of the first quarter of
Fiscal 1999. Of those software systems that were found not to be Year 2000
compliant, approximately 90% of all material systems have been remediated or
replaced by Year 2000 compliant software. The Company anticipates that all
remaining material systems, including certain operating systems used in the
Company's distribution center, will be remediated or replaced by the end of the
second quarter of Fiscal 1999. Hardware and software unique to the Company's
sourcing offices located outside the United States are scheduled to be
remediated or replaced by the end of the second quarter of Fiscal 1999.
The Company engaged a consultant to assist in the evaluation of the
equipment used in the Company's distribution center (other than computer
software and hardware, which were included in the analysis and remediation
efforts described above). This equipment evaluation has been completed, and
remediation or replacement of distribution center equipment found not to be Year
2000 compliant is scheduled to be completed by the end of the second quarter of
Fiscal 1999.
Over the past few years, the Company's strategic plan has included
significant investment in and modernization of many of the Company's computer
systems. As a result, much of the costs and timing for replacement of certain of
the Company's systems that were not Year 2000 compliant were already anticipated
as part of the Company's planned information systems spending and did not need
to be accelerated as a result of the Company's Year 2000 project. The total cost
to the Company specifically associated with addressing the Year 2000 issue with
respect to its systems and equipment has not been, and is not anticipated to be,
material to the Company's financial position or results of operations in any
given year. The Company estimates that the total additional cost of managing its
Year 2000 project, remediating existing systems and replacing non-compliant
systems, is approximately $2.1 million, of which approximately $1.1 million will
be expensed as incurred (including $965,000 expensed in Fiscal 1998), and $1
million which will be capitalized (including $855,000 capitalized in Fiscal
1998).
Although the Company believes its Year 2000 compliance efforts with
respect to its systems will be successful, any failure or delay could result in
actual costs and timing differing materially from that presently contemplated,
and in a disruption of business. The Company is developing a contingency plan to
permit its primary operations to continue if the Company's modifications and
conversions of its systems are not successfully completed on a timely basis, but
the foregoing cost estimates do not take into account any expenditures arising
out of a response to any such contingencies that materialize. The Company's cost
estimates also do not include time or costs that may be incurred as a result of
third parties' failure to become Year 2000 compliant on a timely basis.
The Company is communicating with its business partners, including key
manufacturers, vendors, banks and other third parties with whom it does
business, to obtain information regarding their state of readiness with respect
to the Year 2000 issue. Failure of third parties to remediate Year 2000 issues
affecting their respective businesses on a timely basis, or to implement
contingency plans sufficient to permit uninterrupted continuation of their
businesses in the event of a failure of their systems, could have a material
adverse effect on the Company's business and results of operations. Assessment
of third party Year 2000 readiness is expected to be substantially completed by
the end of the first quarter of Fiscal 1999. The Company will not be able to
determine its most reasonably likely worst case scenarios until assessment of
third parties' Year 2000 compliance is completed.
===============================================================================
The Company's Year 2000 compliance project also includes development of a
contingency plan designed to support critical business operations in the event
of the occurrence of systems failures or the occurrence of reasonably likely
worst case scenarios. The Company anticipates that contingency plans will be
substantially developed by the end of the second quarter of Fiscal 1999.
The Company may not be able to compensate adequately for business
interruption caused by certain third parties. Potential risks include suspension
or significant curtailment of service or significant delays by banks, utilities
or common carriers, or at U.S. ports of entry. The Company's business also could
be materially adversely affected by the failure of governmental agencies to
address Year 2000 issues affecting the Company's operations. For example, a
significant amount of the Company's merchandise is manufactured outside the
United States, and the Company is dependent upon the issuance by foreign
governmental agencies of export visas for, and upon the U.S. Customs Service to
process and permit entry into the United States of, such merchandise. If
failures in government systems result in the suspension or delay of these
agencies' services, the Company could experience significant interruption or
delays in its inventory flow.
The costs and timing for management's completion of Year 2000 compliance
modification and testing processes are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, the success of third parties'
Year 2000 compliance efforts and other factors. There can be no assurance that
these assumptions will be realized or that actual results will not vary
materially.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURES
Sections of this Annual Report on Form 10-K, including the preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain various forward looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, with respect to the
financial condition, results of operations and business of the Company. Examples
of forward-looking statements are statements that use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar expressions.
These forward looking statements involve certain risks and uncertainties, and no
assurance can be given that any of such matters will be realized. Actual results
may differ materially from those contemplated by such forward looking statements
as a result of, among other things, failure by the Company to predict accurately
customer fashion preferences; a decline in the demand for merchandise offered by
the Company; competitive influences; changes in levels of store traffic or
consumer spending habits; effectiveness of the Company's brand awareness and
marketing programs; lack of sufficient customer acceptance of the Ann Taylor
Loft concept in the moderate-priced women's apparel market; general economic
conditions that are less favorable than expected or a downturn in the retail
industry; the inability of the Company to locate new store sites or negotiate
favorable lease terms for additional stores or for the expansion of existing
stores; a significant change in the regulatory environment applicable to the
Company's business; an increase in the rate of import duties or export quotas
with respect to the Company's merchandise; financial or political instability in
any of the countries in which the Company's goods are manufactured; any material
adverse effects of the Year 2000 issue on the business of the Company or third
parties with which the Company does business; or an adverse outcome of the
litigation referred to in "Legal Proceedings" that materially and adversely
affects the Company's financial condition. The Company assumes no obligation to
update or revise any such forward looking statements, which speak only as of
their date, even if experience or future events or changes make it clear that
any projected financial or operating results implied by such forward-looking
statements will not be realized.
===============================================================================
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company mantains the majority of its cash and cash equivalents in
financial instruments with original maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of the financial
instruments, a change of 100 basis points in interest rates would not have a
material effect on the Company's financial condition.
The Company's outstanding long-term debt as of January 31, 1999 bears
interest at fixed rates; therefore, the Company's results of operations would
only be affected by interest rate changes to the extent that fluctuating rate
loans are outstanding under the Credit Facility. As of January 31, 1999, the
Company has no such amounts outstanding. Future borrowings would be affected by
interest rate changes; however, the Company does not believe that a change of
100 basis points in interest rates would have a material effect on the Company's
financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company for the
years ended January 30, 1999, January 31, 1998 and February 1, 1997 are included
as a part of this Report (See Item 14):
Consolidated Statements of Operations for the fiscal years ended January
30, 1999, January 31, 1998 and February 1, 1997.
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998.
Consolidated Statements of Cash Flows for the fiscal years ended January
30, 1999, January 31, 1998 and February 1, 1997.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
==============================================================================
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) List of documents filed as part of this Annual Report:
The following consolidated financial statements of the
Company and the independent auditors' report are included
on pages 18 through 36 and are filed as part of this
Annual Report:
Consolidated Statements of Operations for the fiscal
years ended January 30, 1999, January 31, 1998 and
February 1, 1997; Consolidated Balance Sheets as of
January 30, 1999 and January 31, 1998; Consolidated
Statements of Cash Flows for the fiscal years ended
January 30, 1999, January 31, 1998, and February 1, 1997;
Notes to Consolidated Financial Statements; Independent
Auditors' Report.
(b) Reports on Form 8-K
The Company filed a report with the Commission on Form 8-K dated
November 9, 1998 with respect to the dismissal of the amended
complaint, filed in April 1998, of the purported class action lawsuit
against ATSC, Ann Taylor, certain officers and directors of ATSC and
Ann Taylor, ML&Co. and certain affiliates of ML&Co. The Company filed a
report with the Commission on Form 8-K dated December 17, 1998 with
respect to the plaintiffs' filing of a notice of appeal of such
dismissal.
(c) Exhibits
The exhibits listed below are filed as a part of this Annual Report.
EXHIBIT NUMBER
--------------
3.1 Certificate of Incorporation of the Company, as amended.
Incorporated by reference to Exhibit 3.3 to the Registration
Statement of ATSC and Ann Taylor filed on May 3, 1989
(Registration No. 33-28522).
3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.4 to
the Registration Statement of ATSC and Ann Taylor filed on
May 3, 1989 (Registration No. 33-28522).
4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet
Bank, N.A., as Trustee, including the form of Subordinated Note
due 2000. Incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K of Ann Taylor filed on July 7, 1993.
4.1.1 Instrument of Resignation, Appointment and Acceptance, dated as of
December 1, 1995, among Ann Taylor, Fleet Bank, N.A., as
Resigning Trustee, and Norwest Bank Minnesota, N.A., the
Successor Trustee. Incorporated by reference to Exhibit 4.1.1
to the Annual Report on Form 10-K of the Company filed on
April 8, 1996.
10.1 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18 to
the Registration Statement of ATSC and Ann Taylor filed on
May 3, 1989 (Registration No. 33-28522).
10.1.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to
Exhibit 10.15.1 to the Annual Report on Form 10-K of the
Company filed on April 30, 1993.
10.2 Lease, dated as of March 17, 1989, between Carven Associates and Ann
Taylor concerning the West 57th Street headquarters. Incorporated
by reference to Exhibit 10.21 to the Registration Statement of
ATSC and Ann Taylor filed on May 3, 1989 (Registration No.
33-28522).
===============================================================================
EXHIBIT NUMBER
- --------------
10.2.1 First Amendment to Lease, dated as of November 14, 1990, between
Carven Associates and Ann Taylor. Incorporated by reference
to Exhibit 10.17.1 to the Registration Statement of ATSC filed on
April 11, 1991 (Registration No. 33-39905).
10.2.2 Second Amendment to Lease, dated as of February 28, 1993, between
Carven Associates and Ann Taylor. Incorporated by reference
to Exhibit 10.17.2 to the Annual Report on Form 10-K of ATSC
filed on April 29, 1993.
10.2.3 Extension and Amendment to Lease dated as of October 1, 1993, between
Carven Associates and Ann Taylor. Incorporated by reference
to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter
ended October 30, 1993 filed on November 26, 1993.
10.2.4 Modification of Amendment and Extension to Lease, dated as of April
14, 1994 between Carven Associates and Ann Taylor. Incorporated
by reference to Exhibit 10.15.4 to the Annual Report on Form
10-K of ATSC filed on April 28, 1995.
10.2.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven
Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.15.5 to the Annual Report on Form 10-K of ATSC filed
on April 28, 1995.
10.2.6 Sixth Amendment to Lease, dated as of January 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated
by reference to Exhibit 10.8.6 to the Annual Report on Form 10-K
of ATSC filed on April 30, 1998.
10.2.7 Seventh Amendment to Lease, dated as of June 5, 1996, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference
to Exhibit 10.8.7 to the Annual Report on Form 10-K of ATSC
filed on April 30, 1998.
10.2.8 Eighth Amendment to Lease, undated, between Pacific Metropolitan
Corporation and Ann Taylor. Incorporated by reference to Exhibit
10.8.8 to the Annual Report on Form 10-K of ATSC filed on
April 30, 1998.
10.2.9 Ninth Amendment to Lease, dated as of May 13, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.9 to the Annual Report on Form 10-K of
ATSC filed on April 30, 1998.
10.2.10 Tenth Amendment to Lease, dated as of May 21, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.10 to the Annual Report on Form 10-K
of ATSC filed on April 30, 1998.
10.2.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.3.1 to the Annual Report on Form 10-K of
ATSC filed on March 26, 1999.
10.3 Tax Sharing Agreement, dated as of July 13, 1989, between ATSC and
Ann Taylor. Incorporated by reference to Exhibit 10.24 to
Amendment No. 2 to the Registration Statement of ATSC and
Ann Taylor filed on July 13, 1989 (Registration No. 33-28522).
10.4 Employment Agreement dated as of February 1, 1994 between ATSC and
Sally Frame Kasaks. Incorporated by reference to Exhibit 10.8 to
the Form 10-Q of ATSC for the Quarter ended October 29, 1994
filed on December 9, 1994.
10.5 Employment Agreement dated February 16, 1996 between ATSC and J.
Patrick Spainhour. Incorporated by reference to Exhibit 10.4 to
the Annual Report on Form 10-K of ATSC filed on April 8, 1996.
===============================================================================
EXHIBIT NUMBER
- --------------
10.5.1 Amendment to the Employment Agreement, dated August 23, 1996, between
ATSC and J. Patrick Spainhour. Incorporated by reference to Exhibit
10.11.1 to the Annual Report on Form 10-K of ATSC filed on May 1,
1997.
10.6 Employment Agreement dated November 25, 1996 between ATSC and
Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to Form
10-Q of ATSC for the Quarter ended November 2, 1996 filed on December
17, 1996.
10.7 Employment Agreement dated September 20, 1996 between Ann Taylor and
Dwight F. Meyer. Incorporated by reference to Exhibit 10.4 to the
Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed
on December 17, 1996.
10.8 Separation Agreement dated July 15, 1997 between Ann Taylor and Barry
Shapiro. Incorporated by reference to Exhibit 10.15 to the Annual
Report on Form 10-K of ATSC filed on April 30, 1998.
10.9 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted
Stock and Unit Award Plan, Amended and Restated as of February 23,
1994 (the "1992 Option Plan"). Incorporated by reference to Exhibit
10.15 to the Annual Report on Form 10-K of ATSC filed on May 1, 1997.
10.9.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan, as
approved by stockholders on June 18, 1997. Incorporated by reference
to Exhibit 10.15.1 to the Form 10-Q of ATSC for the Quarter Ended
August 2, 1997 filed on September 12, 1997.
10.9.2 Amendment to the AnnTaylor Stores Corporation Amended and Restricted
1992 Stock Option and Restricted Stock and Unit Award Plan dated as
of January 16, 1998. Incorporated by reference to Exhibit 10 of Form
8-K of ATSC filed on March 12, 1998.
10.9.3 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan dated as
of May 2, 1998. Incorporated by reference to Exhibit 10.16.3 to the
Form 10-Q of ATSC for the Quarter ended April 2, 1998 filed on June
16, 1998.
10.10 AnnTaylor Stores Corporation Amended and Restated Management
Performance Compensation Plan, as approved by stockholders on June
18, 1997. Incorporated by reference to Exhibit 10.16 to the Form 10-Q
of ATSC for the Quarter Ended August 2, 1997 filed on September 12,
1997.
10.10.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan dated as of March 12, 1998.
Incorporated by reference to Exhibit 10.17.1 to the Annual Report on
Form 10-K of ATSC filed on April 30, 1998.
10.11 Associate Stock Purchase Plan. Incorporated by reference
to Exhibit 10.31 to the Form 10-Q of ATSC for the
Quarter Ended October 31, 1992 filed on December 15,
1992.
10.12 AnnTaylor Stores Corporation Deferred Compensation Plan.
Incorporated by reference to Exhibit 10.33 to the
Annual Report on Form 10-K of ATSC filed on April 28,
1995.
10.12.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation
Plan as approved by the Board of Directors on August 11, 1995.
Incorporated by reference to Exhibit 10.33.11 to the Form 10-Q of
ATSC for the Quarter Ended July 29, 1995 filed on September 11, 1995.
===============================================================================
EXHIBIT NUMBER
- --------------
10.13 Mortgage, Assignment of Rents and Leases, Security Agreement and
Fixture Financing Statement dated November 20, 1995, between
AnnTaylor Distribution Services, Inc., as Mortgagor, and General
Electric Capital Assurance Company, as Mortgagee. Incorporated by
reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the
Quarter ended October 28, 1995 filed on December 8, 1995.
10.14 Promissory Note dated November 20, 1995 from Ann Taylor and AnnTaylor
Distribution Services, Inc., collectively as Borrower, to General
Electric Capital Assurance Company, as Lender. Incorporated by
reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for the
Quarter ended October 28, 1995 filed on December 8, 1995.
10.15 Stock and Asset Purchase Agreement, dated as of June 7, 1996, by and
among ATSC, Ann Taylor, Cygne and Cygne Group (F.E.) Limited.
Incorporated by reference to Exhibit 2 to the Registrants' Current
Report on Form 8-K filed on June 10, 1996.
10.15.1 Amendment to Stock and Asset Purchase Agreement, dated as of August
27, 1996, by and among ATSC, Ann Taylor, Cygne and Cygne Group (F.E.)
Limited. Incorporated by reference to Exhibit 3 to the Registrants'
Current Report on Form 8-K filed on August 30, 1996.
10.15.2 Stockholders Agreement, dated as of September 20, 1996, among ATSC,
Cygne and Cygne Group (F.E.) Limited, a Hong Kong corporation and
wholly owned subsidiary of Cygne. Incorporated by reference to
Exhibit 10.26.2 to the Annual Report on Form 10-K of ATSC filed on
May 1, 1997.
10.15.3 Consulting Agreement, dated as of September 20, 1996, by and between
ATSC, Cygne and Mr. Irving Benson. Incorporated by reference to
Exhibit 10.26.4 to the Annual Report on Form 10-K of ATSC filed on
May 1, 1997.
10.16 Commitment Letter dated as of May 7, 1998 among the Company, Bank of
America National Trust and Savings Association, BancAmerica Robertson
Stephens, Citicorp USA and CoreStates Bank, N.A. Incorporated by
reference to Exhibit 10.27 to the Form 10-Q of ATSC for the Quarter
Ended May 2, 1998 filed on June 16, 1998.
10.17 Credit Agreement, dated as of June 30, 1998 among the Company, Bank
of America, Citicorp USA and First Union National Bank, as Co-Agents,
the financial institutions from time to time party thereto,
BancAmerica Robertson Stephens, as Arranger, and Bank of America, as
Administrative Agent. Incorporated by reference to Exhibit 10.28 to
the Form 10-Q of ATSC for the Quarter Ended August 1, 1998 filed on
September 14, 1998.
10.17.1 Trademark Security Agreement, dated as of June 30, 1998, made by Ann
Taylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.1 to the Form 10-Q of ATSC
for the Quarter Ended August 1, 1998 filed on September 14, 1998.
10.17.2 Guaranty, dated as of June 30, 1998, made by the Company in favor of
Bank of America, as Administrative Agent. Incorporated by reference
to Exhibit 10.28.2 to the Form 10-Q of ATSC for the Quarter Ended
August 1, 1998 filed on September 14, 1998.
10.17.3 Security and Pledge Agreement, dated as of June 30, 1998, made by
ATSC in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.3 to the Form 10-Q of ATSC
for the Quarter Ended August 1, 1998 filed on September 14, 1998.
==============================================================================
EXHIBIT NUMBER
- --------------
10.17.4 Security and Pledge Agreement, dated as of June 30, 1998 made by
AnnTaylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.4 to the Form 10-Q of ATSC
for the Quarter Ended August 1, 1998 filed on September 14, 1998.
10.17.5 Subsidiary Guaranty, dated as of June 30, 1998 made by AnnTaylor
Distribution Services in favor of Bank of America, as Administrative
Agent. Incorporated by reference to Exhibit 10.28.5 to the Form 10-Q
of ATSC for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.18 AnnTaylor Stores Corporation Long-Term Cash Incentive Compensation
Plan, as approved by stockholders on June 17, 1998. Incorporated by
reference to Exhibit A to the Proxy Statement dated May 1, 1998 filed
on May 6, 1998.
18 Preferability letter relating to the change in accounting principle.
Incorporated by reference to Exhibit 18 to the Form 10-Q of ATSC for
the Quarter Ended May 2, 1998 filed on June 16, 1998.
27 Financial Data Schedule.
==============================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANNTAYLOR, INC.
By: /s/ J. Patrick Spainhour
------------------------
J. Patrick Spainhour
Chairman and Chief
Executive Officer
Date: March 26, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/ J. Patrick Spainhour Chairman and Chief Executive March 26, 1999
- ------------------------- Officer and Director ---------------
J. Patrick Spainhour
/s/ Patricia DeRosa President and Chief March 26, 1999
- -------------------------- Operating Officer --------------
Patricia DeRosa and Director
/s/ Walter J. Parks Senior Vice President - March 26, 1999
- -------------------------- Chief Financial Officer --------------
Walter J. Parks and Treasurer
/s/ James M. Smith Vice President and Controller March 26, 1999
- ------------------------- Principal Accounting Officer --------------
James M. Smith
/s/ Gerald S. Armstrong Director March 26, 1999
- ------------------------- --------------
Gerald S. Armstrong
/s/ James J. Burke, Jr. Director March 26, 1999
- ----------------------- --------------
James J. Burke, Jr.
/s/ Wesley E. Cantrell Director March 26, 1999
- ---------------------- --------------
Wesley E. Cantrell
/s/ Robert C. Grayson Director March 26, 1999
- ----------------------- --------------
Robert C. Grayson
/s/ Ronald W. Hovsepian Director March 26, 1999
- ----------------------- --------------
Ronald W. Hovsepian
/s/ Rochelle B. Lazarus Director March 26, 1999
- ----------------------- --------------
Rochelle B. Lazarus
/s/ Hanne M. Merriman Director March 26, 1999
- ----------------------- --------------
Hanne M. Merriman
===============================================================================
ANNTAYLOR , INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Independent Auditors' Report............................. 19
Consolidated Financial Statements:
Consolidated Statements of Operations for the
fiscal years ended January 30, 1999,
January 31, 1998 and February 1, 1997............. 20
Consolidated Balance Sheets as of January 30,
1999 and January 31, 1998......................... 21
Consolidated Statements of Cash Flows for the
fiscal years ended January 30, 1999,
January 31, 1998 and February 1, 1997............. 22
Notes to Consolidated Financial Statements.......... 23
===============================================================================
INDEPENDENT AUDITORS' REPORT
To the Stockholder of ANNTAYLOR, INC.:
We have audited the accompanying consolidated financial statements of Ann
Taylor, Inc. and its subsidiaries, listed in the accompanying index. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries at January 30, 1999 and January 31, 1998 and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 30, 1999 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of inventory valuation to the average cost method
from the retail method.
DELOITTE & TOUCHE LLP
New York, New York
March 8, 1999
==============================================================================
ANNTAYLOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended January 30, 1999, January 31, 1998 and
February 1, 1997
Fiscal Years Ended
-------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Net sales..........................$911,939 $781,028 $798,117
Cost of sales...................... 455,724 411,756 443,443
------- ------- -------
Gross profit....................... 456,215 369,272 354,674
Selling, general and
administrative expenses.......... 349,955 308,232 291,027
Studio shoe stores closing expense. --- --- 3,600
Employment contract separation
expense.......................... --- --- 3,500
Retirement of assets............... 3,633 --- ---
Amortization of goodwill........... 11,040 11,040 10,086
------ ------ ------
Operating income................... 91,587 50,000 46,461
Interest expense................... 18,117 19,989 24,416
Other expense, net................. 567 548 403
------ ----- -----
Income before income taxes and
extraordinary loss............... 72,903 29,463 21,642
Income tax provision............... 33,579 17,466 12,975
------ ------ ------
Income before extraordinary loss... 39,324 11,997 8,667
Extraordinary loss (net of
income tax benefit of
$130,000)........................ --- 173 ---
------ ----- -----
Net income.....................$39,324 $ 11,824 $ 8,667
====== ====== =====
See accompanying notes to consolidated financial statements.
==============================================================================
ANNTAYLOR, INC.
CONSOLIDATED BALANCE SHEETS
January 30, 1999 and January 31, 1998
January 30, January 31,
1999 1998
---- ----
ASSETS (in thousands)
Current assets
Cash and cash equivalents.................$ 67,031 $31,369
Accounts receivable, net.................. 71,049 60,211
Merchandise inventories................... 136,748 97,234
Prepaid expenses and other current assets. 23,637 21,291
------- -------
Total current assets.................. 298,465 210,105
Property and equipment, net................. 151,785 139,610
Goodwill, net............................... 319,699 330,739
Deferred financing costs, net............... 2,627 1,258
Other assets................................ 2,841 1,949
------ -------
Total assets..........................$ 775,417 $683,661
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable..........................$ 65,419 $38,185
Accrued salaries and bonus............... . 17,132 5,848
Accrued tenancy........................... 8,465 6,727
Gift certificates redeemable.............. 7,008 5,935
Accrued expenses.......................... 30,527 30,110
Current portion of long-term debt......... 1,206 1,119
-------- -------
Total current liabilities............. 129,757 87,924
Long-term debt.............................. 204,576 105,157
Other liabilities........................... 12,386 10,082
Commitments and contingencies
Stockholder's equity
Common stock, $1.00 par value;
1,000 shares authorized;
1 share issued and outstanding........... 1 1
Additional paid-in capital................ 354,762 445,886
Retained earnings......................... 73,935 34,611
------- -------
Total stockholder's equity............ 428,698 480,498
------- -------
Total liabilities and stockholder's
equity $775,417 $683,661
======== ========
See accompanying notes to consolidated financial statements.
==============================================================================
ANNTAYLOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended January 30, 1999, January 31, 1998 and
February 1, 1997
Fiscal Years Ended
-----------------------------
Jan. 30, Jan. 31, Feb. 1,
1999 1998 1997
---- ---- ----
(in thousands)
Operating activities:
Net income.................................. $ 39,324 $ 11,824 $ 8,667
Adjustments to reconcile net income
to net cash provided by
operating activities:
Extraordinary loss...................... --- 303 ---
Equity earnings in CAT.................. --- --- (1,402)
Provision for loss on
accounts receivable 1,476 1,795 1,803
Depreciation and amortization............ 28,783 27,803 26,208
Amortization of goodwill................. 11,040 11,040 10,086
Amortization of deferred compensation.... 465 1,065 191
Non-cash interest........................ 1,290 1,419 1,574
Deferred income taxes.................... 3,966 (2,687) (985)
Loss on disposal of property and
equipment.............................. 4,175 248 3,209
Change in assets and liabilities
net of effects from
purchase of sourcing division:
Decrease (increase) in receivables (12,314) 1,599 4,987
Decrease (increase) in merchandise
inventories................... (39,514) 3,003 9,342
Decrease (increase) in prepaid
expenses and
other current assets........... (5,581) 1,894 247
Decrease in other non-current
assets and liabilities,
net............................ 679 2,861 738
Increase in accounts payable and
accrued liabilities............ 41,746 9,422 2,867
------ ----- -----
Net cash provided by operating activities.... 75,535 71,589 67,532
Investing activities:
Purchases of property and equipment.......... (45,131) (22,945) (16,107)
Purchase of sourcing division................ --- --- (227)
----- ------ ------
Net cash used by investing activities........ (45,131) (22,945) (16,334)
------ ------ -------
Financing activities:
Repayments under revolving credit facility... --- --- (101,000)
Parent company contribution.................. 9,036 869 96,194
Repayment of term loan....................... --- (24,500) ---
Term loan prepayment penalty................. --- (184) ---
Payments of mortgage......................... (1,119) (416) (266)
Repayments under receivables facility........ --- ------ (40,000)
Payment of financing costs................... (2,659) (69) (384)
------ ------ ------
Net cash provided by (used by) financing
activities................................. 5,258 (24,300) (45,456)
------ ------ ------
Net increase in cash............................ 35,662 24,344 5,742
Cash, beginning of year......................... 31,369 7,025 1,283
------ ------ ------
Cash, end of year............................... $ 67,031 $ 31,369 $ 7,025
====== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest....... $ 18,582 $ 19,251 $22,689
====== ====== =======
Cash paid during the year for income taxes... $ 33,934 $ 17,220 $ 8,990
====== ====== =======
See accompanying notes to consolidated financial statements.
===============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ann Taylor, Inc. (the "Company" or "Ann Taylor") is a leading national
specialty retailer of better quality women's apparel, shoes and accessories sold
principally under the Ann Taylor brand name.
All of the outstanding capital stock of the Company, consisting of one
share of common stock is owned by AnnTaylor Stores Corporation ("ATSC").
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts have been eliminated in
consolidation.
Certain Fiscal 1997 and 1996 amounts have been reclassified to conform to
the Fiscal 1998 presentation.
FISCAL YEAR
The Company follows the standard fiscal year of the retail industry, which
is a 52 or 53 week period ending on the Saturday closest to January 31 of the
following calendar year. All fiscal years presented included 52 weeks.
FINANCE SERVICE CHARGE INCOME
Income from finance service charges relating to customer receivables,
which is deducted from selling, general and administrative expenses, amounted to
$8,422,000 for Fiscal 1998, $8,568,000 for Fiscal 1997 and $9,024,000 for Fiscal
1996.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of average cost or market.
Effective February 1, 1998, the Company elected to change its method of
inventory valuation from the retail method to the average cost method. The
Company believes the average cost method is a preferable method for matching the
cost of merchandise with the revenues generated. The cumulative effect of this
accounting change on February 1, 1998 was not material, and therefore no
disclosure is noted on the Consolidated Statement of Operations. The effect of
this accounting change on Fiscal 1998 net income was an increase of $1,272,000.
It is not possible to determine the effect of the change on income in any
previously reported fiscal years.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
assets (3 to 40 years) or, in the case of leasehold improvements, over the lives
of the respective leases, if shorter.
=============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the interest method
over the term of the related debt. Accumulated amortization at January 30, 1999
and January 31, 1998 was $3,119,000 and $4,427,000, respectively.
GOODWILL
Goodwill relating to the 1989 acquisition of Ann Taylor by ATSC is being
amortized on a straight-line basis over 40 years. Goodwill relating to the 1996
Sourcing Acquisition (see Note 10) is being amortized on a straight-line basis
over 25 years. Accumulated amortization at January 30, 1999 and January 31, 1998
was $98,891,000 and $87,851,000, respectively. On an annual basis, the Company
compares the carrying value of its goodwill to an estimate of the Company's fair
value to evaluate the reasonableness of the carrying value and remaining
amortization period. Fair value is computed using projections of future
non-discounted cash flows.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires an asset and liability method of accounting for deferred income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized, and income or expense is recorded, for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Pursuant to a Tax Sharing Agreement, ATSC and the Company have agreed to
elect to file consolidated income tax returns for federal income tax purposes
and may elect to file such returns in states and other relevant jurisdictions
that permit such an election, for income tax purposes. With respect to such
consolidated income tax returns, the Tax Sharing Agreement generally requires
the Company to pay to ATSC the entire tax shown to be due on such consolidated
returns, provided that the amount paid by the Company shall not exceed the
amount of taxes that would have been owed by the Company on a stand-alone basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which is effective for the Company for
the quarter ended October 30, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivatives and for hedging activities. Management is
currently evaluating the impact of this standard and believes its adoption will
not affect the Company's consolidated financial position, results of operations
or cash flows.
==============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which is effective
for the Company for fiscal years beginning after December 15, 1998. The
application of SOP 98-1 is not anticipated to have a material impact on the
Company's consolidated financial statements.
2. LONG-TERM DEBT
The following table summarizes long-term debt outstanding at January 30,
1999 and January 31, 1998:
January 30, 1999 January 31, 1998
-------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
Mortgage............................ $ 5,157 $ 5,157 $ 6,276 $ 6,276
8 3/4% Notes........................... 100,000 101,875 100,000 100,500
Note payable to ATSC................ 100,625 100,625 --- ---
------- ------- ------- -------
Total debt................... 205,782 207,657 106,276 106,776
Less current portion................ 1,206 1,206 1,119 1,119
------- ------- ------- -------
Total long-term debt......... $204,576 $206,451 $105,157 $105,657
======== ======== ======== ========
In accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the
Company determined the estimated fair value of its financial instruments using
quoted market information, as available. As judgement is involved, the estimates
are not necessarily indicative of the amounts the Company could realize in a
current market exchange.
On June 30, 1998, the Company entered into a new $150,000,000 senior
secured revolving credit facility (the "Credit Facility") with a syndicate of
lenders. This facility replaced the Company's then-existing $122,000,000 bank
credit agreement that was scheduled to expire in July 1998 and also resulted in
the non-renewal by the Company's sourcing division of its $50,000,000 credit
facility and in the non-renewal by AnnTaylor Funding, Inc. of a $40,000,000
accounts receivable facility. The Credit Facility is used by the Company for the
issuance of commercial and standby letters of credit and to provide funds for
other general corporate purposes.
Loans outstanding under the Credit Facility at any time may not exceed
$50,000,000. The Company did not make any borrowings under the loan provisions
of the Credit Facility during Fiscal 1998 and there were no loans outstanding at
fiscal year end. The outstanding loan balance is required to be reduced to zero
for the thirty-day period commencing January 1 each year. This cleandown period
was achieved for January 1999. Maximum availability for loans and letters of
credit under the Credit Facility is governed by a monthly borrowing base,
determined by the application of specified advance rates against certain
eligible assets. Based on this calculation, the maximum amount available for
loans and letters of credit under the Credit Facility at January 30, 1999 was
approximately $131,054,000. Commercial and standby letters of credit outstanding
under the Credit Facility at January 30, 1999 were approximately $65,763,000.
==============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at the Company's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%,
respectively. In addition, the Company is required to pay the lenders a
quarterly commitment fee on the unused revolving loan commitment amount at a
rate ranging from 0.375% to 0.5% per annum. Fees for outstanding commercial and
standby letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens, investments and capital expenditures,
restrictions on dividends or other distributions to stockholders and maintenance
of certain financial ratios including specified levels of net worth. For Fiscal
1998, the capital expenditure limit was $52,000,000. For Fiscal 1999, capital
expenditures are limited to a maximum of $55,000,000.
The lenders have been granted a pledge of the common stock of the Company
and certain of its subsidiaries, and a security interest in substantially all
other tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of the Company and its subsidiaries, as
collateral for the Company's obligations under the Credit Facility.
The Credit Facility matures on June 30, 2000 and includes an automatic
one-year extension, contingent upon the satisfaction of certain conditions. In
addition, the commitments under the Credit Facility terminate on February 16,
2000 unless the outstanding 8 3/4% Subordinated Notes due 2000 (the "8 3/4%
Notes") are refinanced on or prior to such date with the proceeds of
subordinated debt or capital stock, the terms and conditions of which are
reasonably satisfactory to the Requisite Lenders under the Credit Facility.
On August 13, 1998, the Company declared a dividend to its sole
stockholder, ATSC, of a promissory note in the original principal amount of
$100,625,000 (the "Note Payable to ATSC"). The Note Payable to ATSC was issued
by the Company on August 28, 1998 and has interest and payment terms
substantially similar to the terms of the 8 1/2% Convertible Subordinated
Debentures Due 2016 (the "Convertible Debentures") that were issued in 1996 by
ATSC to AnnTaylor Finance Trust. The Note Payable to ATSC was declared in order
to (1) relieve the Company of the administrative burden associated with
declaring cash dividends to ATSC quarterly, which has been necessary in order to
provide ATSC with funds sufficient to meet its quarterly interest payment
obligations on the Convertible Debentures, and (2) enhance financial reporting,
by more closely associating the debt obligation with the entity that was the
ultimate beneficiary of the cash received upon the creation of debt. ATSC has
pledged the Note Payable to ATSC to the lenders as collateral for ATSC's
guarantee of the Company's performance of its obligations under the Credit
Facility.
On June 28, 1993, Ann Taylor issued $110,000,000 principal amount of its 8
3/4% Notes. The outstanding principal amount of these notes as of January 30,
1999 was $100,000,000.
In July 1993, Ann Taylor entered into a $110,000,000 (notional amount)
interest rate swap agreement, which had the effect of converting the Company's
interest obligations on the 8 3/4% Notes to a variable rate. Under the
agreement, the Company received a fixed rate of 4.75% and paid a floating rate
based on LIBOR, as determined in six month intervals. The swap agreement matured
in July 1996. Net receipts or payments under the agreement were recognized as
adjustments to interest expense.
===============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
The Company and its wholly owned subsidiary AnnTaylor Distribution
Services, Inc. are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage loan
balance at January 30, 1999 was $5,157,000.
The aggregate principal payments of all long-term obligations are as
follows:
Fiscal Year (in thousands)
-----------
1999.................................... $ 1,206
2000.................................... 101,300
2001.................................... 1,401
2002.................................... 1,250
2003.................................... ---
2004 and thereafter..................... 100,625
-------
Total................................ $205,782
========
3. PREFERRED SECURITIES
In April and May of Fiscal 1996, ATSC completed the sale of an aggregate
of $100,625,000 of 8 1/2% Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities (the "preferred securities") issued by its financing
vehicle, AnnTaylor Finance Trust, a Delaware business trust (the "Trust"). The
preferred securities have a liquidation preference of $50 per security
($100,625,000 in the aggregate) and are convertible at the option of the holders
thereof into ATSC's common stock at a conversion rate of 2.545 shares of common
stock for each preferred security (equivalent to $19.65 per share of common
stock, which represented a 20% premium to the $16.375 closing price of the
common stock on the New York Stock Exchange at the date of the execution of the
purchase agreement relating to the sale of the preferred securities). The sole
assets of the Trust are $103,700,000 of 8 1/2% Convertible Subordinated
Debentures of ATSC maturing on April 15, 2016. A total of 2,012,500 preferred
securities were issued, and are convertible into an aggregate of 5,121,812
shares of ATSC's common stock. ATSC received net proceeds of $95,984,000 in
connection with the sale of the preferred securities. The carrying value and
estimated fair value of the preferred securities at January 30, 1999 were
$96,624,000 and $196,219,000, respectively.
==============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the allowance for doubtful accounts for the
fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 is as
follows:
Fiscal Years Ended
-------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Balance at beginning of year.......... $ 812 $ 811 $ 736
Provision for loss on accounts
receivable.......................... 1,476 1,795 1,803
Accounts written off.................. (1,468) (1,794) (1,728)
------- ------- -----
Balance at end of year................ $ 820 $ 812 $ 811
====== ====== ======
5. COMMITMENTS AND CONTINGENCIES
RENTAL COMMITMENTS
Ann Taylor occupies its retail stores and administrative facilities under
operating leases, most of which are non-cancelable. Some leases contain renewal
options for periods ranging from one to ten years under substantially the same
terms and conditions as the original leases. Most of the store leases require
Ann Taylor to pay a specified minimum rent, plus a contingent rent based on a
percentage of the store's net sales in excess of a specified threshold. In
addition, most of the leases require Ann Taylor to pay real estate taxes,
insurance and certain common area and maintenance costs in addition to the
future minimum lease payments shown below.
Future minimum lease payments under non-cancelable operating leases at
January 30, 1999 are as follows:
Fiscal Year (in thousands)
-----------
1999..................................$ 78,042
2000.................................. 77,068
2001.................................. 73,767
2002.................................. 71,265
2003.................................. 64,978
2004 and thereafter................... 252,340
---- -------
Total.................................$617,460
========
Rent expense for the fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997 was as follows:
Fiscal Years Ended
-------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Minimum rent................ $66,358 $59,495 $55,571
Percentage rent............. 2,414 1,671 2,433
----- ----- -----
Total.................. $68,772 $61,166 $58,004
====== ====== ======
Litigation
The Company has been named as a defendant in several legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to these actions cannot be accurately predicted, in the
opinion of the Company, any such liability will not have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
==============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, ATSC, Ann Taylor, certain directors and former officers and
directors of ATSC and Ann Taylor, Merrill Lynch & Co. ("ML&Co.") and certain
affiliates of ML&Co. have been named as defendants in a purported class action
lawsuit filed in April 1996 by certain alleged stockholders alleging that ATSC
and the other defendants engaged in a fraudulent scheme and course of business
that operated a fraud or deceit on purchasers of ATSC's common stock during the
period from February 3, 1994 through May 4, 1995. On March 10, 1998, the Court
issued an Opinion dismissing the complaint. The Court's Opinion granted the
plaintiffs leave to amend and re-file the complaint within thirty days of the
date of the Opinion, and an amended complaint was filed by the plaintiffs on
April 9, 1998. On November 9, 1998, the Court issued an Opinion dismissing, with
prejudice, the amended complaint. On or about December 15, 1998, the plaintiffs
filed a notice of appeal to the U.S District Court of Appeals, Second Circuit,
seeking review of the Appellate Court's decision. The appeal is presently
pending, and any liability that may arise from this action cannot be predicted
at this time. The Company believes that the amended complaint is without merit
and intends to defend the action vigorously.
6. ENTERPRISE-WIDE OPERATING INFORMATION
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, major customers and the material countries in which the entity holds
assets and reports revenues.
The Company is a specialty retailer of women's apparel, shoes and
accessories. Given the economic characteristics of the store formats, the
similar nature of the products sold, the type of customer and method of
distribution, the operations of the Company are aggregated into one reportable
segment. The Company believes that the customer base for its stores consists
primarily of relatively affluent, fashion-conscious women from the ages of 25 to
55, and that the majority of its customers are working women with limited time
to shop.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Fiscal Years Ended
-------------------------------------
January 30, 1999 January 31, 1998
---------------- ----------------
(in thousands)
Land and building................... $ 8,683 $ 8,625
Leasehold improvements.............. 93,168 85,332
Furniture and fixtures.............. 153,395 136,314
Construction in progress............ 11,059 6,422
------- -------
266,305 236,693
Less accumulated depreciation
and amortization.................. 114,520 97,083
------- -------
Net property and equipment..... $ 151,785 $139,610
======= =======
8. EXTRAORDINARY ITEM
On July 2, 1997, the Company used available cash to prepay $24,500,000,
the outstanding balance of its term loan due September 1998, which resulted in
an extraordinary charge to earnings in Fiscal 1997 of $173,000, net of income
tax benefit.
===============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. NONRECURRING CHARGES
STUDIO SHOE STORES CLOSING
In connection with the planned closing of all of the Company's Ann Taylor
Studio shoe stores, announced in January 1997, the Company recorded a pre-tax
charge of $3,600,000 in Fiscal 1996. Of the total impairment loss, $2,500,000
represented impairment of long-lived assets such as properties and store
fixtures and $1,100,000 pertained to lease and other related costs for these
locations until the properties are sublet.
RESIGNATION OF A FORMER EXECUTIVE
Effective August 23, 1996, a former executive and Director of the Company
and Ann Taylor resigned. In connection with this resignation, a one-time pre-tax
charge of $3,500,000 was recorded in Fiscal 1996 relating to the estimated costs
of the Company's obligations under the former executive's employment contract
with the Company.
RETIREMENT OF ASSETS
In the fourth quarter of Fiscal 1998, the Company recorded a $3,633,000
non-cash pre-tax charge for the retirement of certain assets. This charge
related to the write-off of the net book value of the assets relinquished during
the renovation of the Company's corporate offices.
10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MERRILL LYNCH AND ITS AFFILIATES
At January 30, 1999, certain affiliates of ML&Co. held approximately 6.7%
of ATSC's outstanding common stock. Two of the members of the Board of Directors
of the Company and ATSC serve as representatives of ML&Co. and its affiliates.
As a result, ML&Co. and such affiliates are in a position to influence the
management of the Company and ATSC.
In Fiscal 1996, ATSC paid approximately $1,207,500 to ML&Co. and Merrill
Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill Lynch") in connection with
their services as placement agents for the sale of the preferred securities (see
Note 3). ATSC agreed to indemnify ML&Co. and Merrill Lynch, as placement agents,
against certain liabilities, including certain liabilities under the federal
securities law, in connection with the sale of the preferred securities.
==============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
SOURCING ACQUISITION
In Fiscal 1995, the Company purchased approximately 16% of its merchandise
directly from Cygne Designs, Inc. ("Cygne") and an additional 38% of its
merchandise through the Company's direct sourcing joint venture with Cygne known
as CAT. On September 20, 1996 (the "Effective Date"), pursuant to the Stock and
Asset Purchase Agreement dated as of June 7, 1996, by and among ATSC, Ann
Taylor, Cygne and Cygne Group F.E. Limited (as amended, the "Purchase
Agreement"), Ann Taylor acquired the entire interest of Cygne in CAT and certain
of the assets (the "Assets") of the Ann Taylor Woven Division of Cygne (the
"Division") that were used for sourcing merchandise for Ann Taylor (the
"Sourcing Acquisition"). As a result of the Sourcing Acquisition, CAT became an
indirect wholly owned subsidiary of the Company. CAT was subsequently merged
into Ann Taylor and now performs all of Ann Taylor's direct sourcing functions,
including those previously provided by the Division, as a division of Ann
Taylor. For financial reporting purposes, the transaction has been accounted for
as of the Effective Date under the purchase method of accounting in accordance
with Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations".
In consideration for Cygne's interest in CAT and the Assets, ATSC and the
Company paid (i) 2,348,145 shares of common stock of ATSC having an aggregate
value, as of the Effective Date, of $36,000,000, (ii) $3,200,000 in cash as
payment for inventory and fixed assets and (iii) approximately $6,500,000 in
cash in settlement of open accounts payable by Ann Taylor to Cygne for
merchandise delivered by Cygne prior to the closing. The Company also assumed
certain liabilities related to the operations of the Division. The purchase
price was subject to post-closing adjustments based upon final determination of
the value of certain of the assets purchased and liabilities assumed. As of
February 1, 1997, certain post-closing adjustments reduced the net cash paid to
approximately $227,000. The total purchase price to the Company of the Sourcing
Acquisition has been allocated to the tangible and intangible assets and
liabilities of CAT and the Division that were acquired, based on estimates of
their respective fair values. The excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and is being amortized
on a straight-line basis over 25 years.
The following unaudited proforma consolidated data for the Company for the
fiscal year ended February 1, 1997 has been presented to reflect the Sourcing
Acquisition as if it had occurred at the beginning of such period:
Fiscal Year Ended
February 1, 1997
----------------
Actual Proforma
------ --------
(in thousands)
Net sales...............................$798,117 $798,117
Net income..............................$ 8,667 $ 11,595
The proforma data set forth above does not purport to be indicative of the
results that actually would have occurred if the Sourcing Acquisition had
occurred at the beginning of the period presented or of results which may occur
in the future.
===============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
A summary of the noncash activity that occurred in the fiscal year ended
February 1, 1997 in conjunction with the Sourcing Acquisition is as follows:
(in thousands)
Fair value of assets acquired .................... $ 4,727
Excess of purchase price over the fair
value of net assets acquired.................. 38,340
Ann Taylor's previous investment in CAT........... (6,840)
Issuance of ATSC's common stock................... (36,000)
-------
Cash paid ........................................ $ 227
========
11. STOCK OPTION PLANS
ATSC accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation costs have been recognized for
stock option awards. Had compensation costs of option awards been determined
under a fair value alternative method as stated in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ATSC
would have been required to prepare a fair value model for such options and
record such amount in the financial statements as compensation expense. Proforma
net income before extraordinary loss for Fiscal 1998, Fiscal 1997 and Fiscal
1996 after taking into account such expense would have been $38.4 million, $11.0
million and $8.2 million, respectively. For purposes of this calculation, ATSC
arrived at the fair value of each stock grant at the date of grant by using the
Black Scholes option pricing model with the following weighted average
assumptions used for grants for the fiscal years ended January 30, 1999, January
31, 1998 and February 1, 1997: risk-free interest rate of 5.4%, 6.2% and 5.8%,
respectively; expected life of 4.0 years, 5.0 years and 4.3 years, respectively;
and expected volatility of 59.4%, 67.9% and 55.2%, respectively.
===============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. INCOME TAXES
The provision for income taxes for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997 consists
of the following:
Fiscal Years Ended
---------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Federal:
Current.......................$21,589 $14,427 $ 9,898
Deferred...................... 2,748 (1,917) (802)
------ ------- -----
Total federal............... 24,337 12,510 9,096
------ ------ -----
State and local:
Current....................... 7,869 5,538 3,844
Deferred...................... 1,217 (769) (152)
------ ------- -----
Total state and local....... 9,086 4,769 3,692
------ ------ -----
Foreign:
Current....................... 156 187 187
Deferred...................... --- --- ---
------ ------ -----
Total foreign............... 156 187 187
------ ------ -----
Total.........................$33,579 $17,466 $12,975
====== ====== ======
The reconciliation between the provision for income taxes and the
provision for income taxes at the federal statutory rate for the fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997 is as follows:
Fiscal Years Ended
-------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Income before income taxes and
extraordinary loss.............. $72,903 $29,463 $21,642
====== ====== ======
Federal statutory rate............. 35% 35% 35%
====== ====== ======
Provision for income taxes at
federal statutory rate......... $ 25,516 10,312 $ 7,575
State and local income taxes,
net of federal
income tax benefit.............. 4,660 3,800 2,273
Non-deductible amortization of
goodwill....................... 3,500 3,500 3,429
Unremitted earnings of foreign
subsidiaries.................. (188) (314) (382)
Other.............................. 91 168 80
------ ------ ------
Provision for income taxes......... $33,579 $17,466 $12,975
======= ======= =======
============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. INCOME TAXES (CONTINUED)
The tax effects of significant items comprising the Company's net deferred
tax assets as of January 30, 1999 and January 31, 1998 are as follows:
January 30, January 31,
1999 1998
---- ----
(in thousands)
Current:
Inventory............................ $ 128 $ 2,854
Accrued expenses..................... 3,812 4,269
Real estate.......................... (1,686) (1,634)
Other................................ --- ---
------ ------
Total current......................... $ 2,254 $ 5,489
====== ======
Noncurrent:
Depreciation and amortization........ $(5,510) $(4,982)
Rent expense......................... 4,786 4,364
Other................................ 276 901
------ ------
Total noncurrent...................... $ (448) $ 283
======= ======
Income taxes provided reflect the current and deferred tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. U.S. federal income taxes are provided on unremitted foreign earnings
except those that are considered permanently reinvested, which at January 30,
1999 amounted to approximately $6,864,000. However, if these earnings were not
considered permanently reinvested, under current law, the incremental tax on
such undistributed earnings would be approximately $2,149,000.
13. RETIREMENT PLANS
Savings Plan. The Company maintains a defined contribution 401(k) savings
plan for substantially all full-time employees of the Company and its
subsidiaries. Participants may contribute to the plan an aggregate of up to
10% of their annual earnings. The Company makes a matching contribution of
50% with respect to the first 3% of each participant's annual earnings
contributed to the plan. The Company's contributions to the plan for Fiscal
1998, Fiscal 1997 and Fiscal 1996 were $592,000, $519,000 and $390,000,
respectively.
Pension Plan. Substantially all full-time employees of the Company and
its subsidiaries are covered under a noncontributory defined benefit
pension plan. Through December 31, 1997, the pension plan was a "cash balance
pension plan". Each participant accrued a benefit based on compensation
and years of service with the Company. As of January 1, 1998, the Plan was
amended and the formula to calculate benefits was changed to a career
average formula. The new career average formula was used to determine the
funding status of the plan beginning in Fiscal 1997. The Company's funding
policy for the plan is to contribute annually the amount necessary to provide
for benefits based on accrued service and projected pay increases.
Plan assets consist primarily of cash, equity and fixed income securities.
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which standardizes the disclosure requirements for
pension and other postretirement benefits, eliminates certain disclosures, and
requires additional information on the changes in the benefit obligations and
fair value of plan assets.
==============================================================================
ANNTAYLOR , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Retirement Plans (continued)
The following table provides information for the Pension Plan at January
30, 1999, January 31, 1998 and February 1, 1997:
Fiscal Years Ended
-----------------------------
Jan. 30, Jan. 31, Feb. 1,
1999 1998 1997
---- ---- ----
(in thousands)
Change in benefit obligation:
Benefit obligation,
beginning of year................. $3,820 $3,413 $2,893
Service cost........................ 669 571 981
Interest............................ 292 250 212
Plan amendments..................... --- 81 ---
Actuarial loss (gain)............... 348 (103) (316)
Benefits paid....................... (487) (392) (357)
----- ----- ------
Benefit obligation, end of year..... $4,642 $3,820 $3,413
------ ------ ------
Change in plan assets:
Fair value of plan assets, beginning
of year........................... 5,128 4,745 2,537
Actual return on plan assets........ 1,205 907 2,333
Employer contribution (refund)...... 1,640 (132) 232
Benefits paid....................... (487) (392) (357)
----- ------- ------
Fair value of plan assets, end of year 7,486 5,128 4,745
----- ----- -----
Funded status (fair value of plan
assets less benefit obligation)... 2,844 1,308 1,332
Unrecognized net actuarial gain...... (1,675) (1,361) (802)
Unrecognized prior service cost...... 69 75 ---
----- ----- -----
Prepaid benefit cost................. $ 1,238 $ 22 $ 530
======= ======= ======
Net pension cost includes the following components:
Fiscal Years Ended
---------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
Service cost........................$ 669 $ 571 $ 981
Interest cost....................... 292 250 213
Expected return on assets........... (481) (409) (218)
Amortization of prior gains......... (61) (42) (9)
Amortization of prior service cost.. 6 6 ---
----- ------ ------
Net periodic pension cost...........$ 425 $ 376 $ 967
===== ====== ======
For the fiscal years ended January 30, 1999, January 31, 1998 and February 1,
1997, the following actuarial assumptions were used:
Fiscal Years Ended
---------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
Discount rate....................... 6.75% 7.50% 8.00%
Long-term rate of return on assets.. 9.00% 9.00% 9.00%
Rate of increase in future compensation 4.00% 4.00% 4.00%
==============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. STOCKHOLDER'S EQUITY
The following summarizes the changes in stockholder's equity during Fiscal
1998, Fiscal 1997 and Fiscal 1996:
Additional Total
Common Paid-in Retained Stockholder's
Stock Capital Earnings Equity
----- ------- -------- ------
(in thousands)
Balance at February 3, 1996....... $ 1 $311,567 $ 14,120 $325,688
Net income..................... --- --- 8,667 8,667
Parent company contributions... --- 132,385 --- 132,385
--- ------- ------ -------
Balance at February 1, 1997....... 1 443,952 22,787 466,740
Net income..................... --- --- 11,824 11,824
Parent company contributions... --- 1,934 --- 1,934
--- ----- ------ -------
Balance at January 31, 1998....... 1 445,886 34,611 480,498
Net income..................... --- --- 39,324 39,324
Parent company contributions... --- 9,501 --- 9,501
Note payable to ATSC........... --- (100,625) --- (100,625)
--- -------- ------ -------
Balance at January 30, 1999....... $ 1 $354,762 $ 73,935 $428,698
=== ======= ====== =======