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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 31, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 1-10738
ANNTAYLOR STORES CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3499319
- ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
- ---------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(212) 541-3300
---------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock, The New York Stock Exchange
$.0068 Par Value
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ___.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes _____. No X.
The aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant as of April 2, 1998 was
$315,774,583.
The number of shares of the registrant's Common Stock
outstanding as of April 2, 1998 was 25,642,685.
Documents Incorporated by Reference:
Portions of the Registrant's Proxy Statement for the
Registrant's 1998 Annual Meeting of Stockholders to be held on
June 17, 1998 are incorporated by reference into Part III.
=============================================================================
PART I
ITEM 1. Business
- ------------------
General
- -------
AnnTaylor Stores Corporation (the "Company"), through its
wholly owned subsidiary AnnTaylor, Inc. ("Ann Taylor"), is a
leading national specialty retailer of better quality women's
apparel, shoes and accessories sold primarily under the Ann
Taylor brand name. The Company believes that "Ann Taylor" is a
highly recognized national brand that defines a distinct fashion
point of view. Ann Taylor merchandise represents classic styles,
updated to reflect current fashion trends. The Company's stores
offer a full range of career and casual separates, weekend wear,
dresses, tops, accessories and shoes, coordinated as part of a
total wardrobing strategy. This total wardrobing strategy is
reinforced by an emphasis on customer service. Ann Taylor sales
associates are trained to assist customers in merchandise
selection and wardrobe coordination, helping them achieve the
"Ann Taylor look" while reflecting the customers' personal
styles.
As of January 31, 1998, the Company operated 324 stores in
41 states and the District of Columbia, under the names Ann
Taylor, Ann Taylor Factory Store and Ann Taylor Loft. Of the 283
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.
In 1995, the Company began testing Ann Taylor Loft, a
separate moderate-price store concept 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. As of January 31, 1998, the Company operated
27 Ann Taylor Loft stores, all located in factory outlet centers.
The Company believes that the Ann Taylor Loft concept represents
an opportunity for the Company to compete in the moderately-
priced women's apparel market. In 1998, the Company plans to
open Ann Taylor Loft stores outside the factory outlet center
environment for the first time, primarily in regional malls and
strip shopping centers. See "Stores and Expansion" below.
The Company also operates 14 stores in factory outlet
centers that serve primarily as a clearance vehicle for
merchandise from both Ann Taylor and Ann Taylor Loft stores. The
Company is introducing a limited selection of original priced Ann
Taylor Loft merchandise to many of these stores as well, so that
the Company's emphasis on wardrobing can be represented in these
stores at all times.
The Company was incorporated under the laws of the state of
Delaware in 1988 under the name AnnTaylor Holdings, Inc. The
Company changed its name to AnnTaylor Stores Corporation in April
1991. The Company was formed at the direction of Merrill Lynch
Capital Partners, Inc. ("ML Capital Partners"), a wholly owned
subsidiary of Merrill Lynch & Co., Inc. ("ML&Co"), for the
purpose of acquiring Ann Taylor in a leveraged buyout transaction
(the "Acquisition") in 1989. As of April 2, 1998, certain
limited partnerships controlled directly or indirectly by ML
Capital Partners, together with certain other affiliates of
ML&Co. (collectively, the "ML Entities"), beneficially owned an
aggregate of 6,159,018 shares, or approximately 24.0%, of the
outstanding common stock of the Company. The ML Entities have
two designees on the Company's Board of Directors and, therefore,
are in a position to influence management of the Company. Unless
the context indicates otherwise, all references herein to the
Company include the Company, its wholly owned subsidiary Ann
Taylor and their respective subsidiaries.
============================================================================
Merchandise Design and Production
- ---------------------------------
Substantially all Ann Taylor merchandise is developed by the
Company's in-house product design and development team, which
designs merchandise exclusively for the Company's stores. The
Company's merchandising group determines inventory needs for the
upcoming season, edits the assortment developed by the design
team, plans monthly merchandise flows, and arranges for the
production of merchandise either through the Company's sourcing
division, or with manufacturers or vendors who are private label
specialists.
The Company's production management and quality assurance
department establishes the technical specifications for all Ann
Taylor merchandise, inspects factories in which Ann Taylor
merchandise is produced, including periodic in-line inspections
while goods are in production to identify potential problems
prior to shipment and, upon receipt, inspects merchandise on a
test basis for uniformity of size and color, as well as for
conformity with specifications and overall quality of
manufacturing.
The Company believes that procuring merchandise directly
from manufacturers improves the Company's competitive position by
providing it with greater control over pre-production processes,
resulting in greater consistency in merchandise quality and
sizing, and by reducing merchandise costs. To this end, in May
1992, the Company commenced a joint venture, known as "CAT", with
one of its private label vendors, Cygne Designs, Inc. ("Cygne").
CAT was formed for the purpose of acting as a sourcing agent
exclusively for Ann Taylor, placing merchandise orders directly
with manufacturers. Until September 1996, the Company owned a
minority interest in CAT. In September 1996, the Company
acquired Cygne's entire interest in CAT, which became a wholly
owned subsidiary of Ann Taylor, as well as certain assets of the
Ann Taylor Woven Division of Cygne that Cygne used in sourcing
merchandise for Ann Taylor. The Company's sourcing division is
now known as Ann Taylor Global Sourcing ("ATGS").
The Company sources merchandise from approximately 175
manufacturers and vendors, none of which accounted for more
than 7% of the Company's purchases in Fiscal 1997. The
Company's merchandise is manufactured in over 28 countries,
with approximately 14% of the Company's merchandise
manufactured in Hong Kong and 24% in China. Any event causing a
sudden disruption of manufacturing or imports from Hong Kong or
China, including the imposition of additional import
restrictions, could have a material adverse effect on the
Company's operations. Substantially all of the Company's foreign
purchases are negotiated and paid for in U.S. dollars.
The Company cannot predict whether any of the foreign
countries in which its products are currently manufactured or any
of the countries in which the Company may manufacture its
products in the future will be subject to future or increased
import restrictions by the U.S. government, including the
likelihood, type or effect of any trade restriction. Trade
restrictions, including increased tariffs or quotas, against
apparel, footwear or other items sold by the Company could affect
the importation of such merchandise generally and, in such event,
could increase the cost or reduce the supply of merchandise
available to the Company and adversely affect the Company's
business, financial condition, results of operations and
liquidity. The Company's merchandise flow may also be adversely
affected by financial or political instability in any of the
countries in which its goods are manufactured, if it affects the
production or export of merchandise from such countries;
significant fluctuation in the value of the U.S. dollar against
foreign currencies; and restrictions on the transfer of funds.
The Company does not maintain any long-term or exclusive
commitments or arrangements to purchase merchandise from any
single supplier. The Company believes it has a good relationship
with its suppliers and that, as the number of the Company's
stores increases, subject to the discussion above, there will
continue to be adequate sources to produce a sufficient supply of
quality goods in a timely manner and on satisfactory economic
terms.
=============================================================================
Inventory Control and Merchandise Allocation
- --------------------------------------------
The Company's merchandise planning and allocation department
analyzes each store's size, location, demographics, and sales and
inventory history to determine the quantity of merchandise to be
purchased for and the allocation of merchandise to the Company's
stores. Upon receipt, merchandise is allocated in order to
achieve an emphasis that is suited to each store's customer base.
Merchandise typically is sold at its original marked price
for several weeks, with the length of time varying by item. The
Company reviews its inventory levels on an on-going basis in
order to identify slow-moving merchandise and broken assortments
(items no longer in stock in a sufficient range of sizes) and
uses markdowns to clear merchandise. Markdowns may be used if
inventory exceeds customer demand for reasons of style, seasonal
adaptation or changes in customer preference or if it is
determined that the inventory will not sell at its currently
marked price. Marked-down items remaining unsold are moved
periodically to the Company's factory outlet stores, where
additional markdowns may be taken.
Throughout 1997, the Company focused on improving its
inventory management strategies, including evaluating target
average inventory investment per store, in order to achieve
increased gross margins. In Fiscal 1997, inventory turned 5.1
times compared to 4.7 times in Fiscal 1996. Inventory turnover
is determined by dividing cost of sales by the average of the
cost of inventory at the beginning and the end of the period,
excluding inventory associated with the Company's sourcing
division. ATGS inventory is principally finished goods in
transit from factories.
In early 1998, the Company selected a new comprehensive
merchandising information system to provide improved systems
support for its merchandising functions. This system will be
phased in over the next two years. When complete, the system
will serve as the central source of information regarding
merchandise items, inventory management, purchasing, allocation,
replenishment, and distribution and receiving.
The Company uses a centralized distribution system, under
which nearly all Ann Taylor merchandise is distributed to the
Company's stores through its distribution center located in
Louisville, Kentucky. See "Properties". Merchandise is shipped
by the distribution center to the Company's stores several times
each week.
Stores and Expansion
- --------------------
An important aspect of the Company's business strategy is a
real estate expansion program designed to reach new customers
through the opening of new stores. The Company adds additional
stores, or expands the size of existing stores, in markets where
Ann Taylor already has a presence as market conditions warrant
and sites become available. The Company also opens new stores in
additional markets that it believes have a sufficient
concentration of its target customers. Store locations are
determined on the basis of various factors, including geographic
location, demographic studies, anchor tenants in a mall location,
other specialty stores in a mall or specialty center location or
in the vicinity of a village location, and the proximity to
professional offices in a downtown or village location.
Ann Taylor Factory Stores and all Ann Taylor Loft stores opened
through 1997 are located in factory outlet malls in which co-
tenants generally include a significant number of outlet or
discount stores operated by nationally recognized upscale brand
name retailers.
As of January 31, 1998, the Company operated 324 stores
throughout the United States. Ann Taylor stores opened in 1997
averaged 4,500 square feet, compared to the average size of Ann
Taylor stores opened prior to 1993 of 3,500 square feet. New Ann
Taylor stores opened since 1993 have been between 3,800 and
13,800 square feet in size (excluding the two flagship stores
referred to below). The Company believes that the larger store
format enhances the Company's ability to merchandise its customer
offerings and reinforces its total wardrobing concept, provides
area necessary for the proper presentation of Ann Taylor shoes,
petites and other product line extensions, and improves customer
service and ease of shopping. Ann Taylor stores to be opened in
Fiscal 1998 are expected to average approximately 4,400 square
feet.
=============================================================================
In Fall 1995, the Company opened two flagship Ann Taylor
stores, each in excess of 20,000 square feet, one on Madison
Avenue in New York City, and the other on Post Street in San
Francisco. These two larger stores represent the fullest
assortment of Ann Taylor merchandise, and include amenities
unique to these stores.
Ann Taylor Factory Stores average 7,000 square feet and the
Company's existing Ann Taylor Loft stores in factory outlet
centers average 9,200 square feet. The 16 Ann Taylor Loft stores to
be opened in regional malls and strip shopping centers in 1998
will average approximately 6,100 square feet. The Company also plans
to open 2 Ann Taylor Loft stores in factory outlet centers in 1998,
averaging 7,500 square feet.
The Company's stores typically have approximately 19% of
their total square footage allocated to stockroom and other non-
selling space.
The following table sets forth certain information regarding
store openings, expansions and closings for Ann Taylor stores
("ATS"), Ann Taylor Factory Stores ("ATFS"), Ann Taylor Loft
stores ("ATL") and the Company's former Ann Taylor Studio stores
("ATA") over the past five years:
Total
Stores No. No.
Open at Stores Stores
Beginn- No. Stores Opened Expanded Closed No. Stores Open
ing of During Fiscal Year During During at End of Fiscal Year
Fiscal Fiscal --------------------- Fiscal Fiscal --------------------------
Year Year ATS ATFS ATL ATA(a) Year(b) Year(b) ATS ATFS ATL ATA(a) Total
- ---- ------- --- ---- --- ------ ------- ------- --- ---- --- ----- -----
1993 219 8 2 3 --- 12 1 222 9 --- --- 231
1994 231 18 7 5 5 25 4 236 21 --- 5 262
1995 262 26 4 14 4 30 4 258 22 17 9 306
1996 306 9 1 1 --- 7 8 259 14(c) 27(c) 9 309
1997 309 27 --- --- --- 9 12 283 14 27 --- 324
____________
(a) Ann Taylor Studio was a free-standing shoe and accessory
store concept tested by the Company in 1994 and 1995. All
Ann Taylor Studio stores were closed during fiscal 1997.
(b) All stores expanded and all stores closed were Ann Taylor
stores, except that one store expanded in 1994 and one store
expanded in 1995 were ATL stores and nine stores closed in
1997 were ATA stores.
(c) In 1995, certain ATFS and ATL stores that sold both
original price Ann Taylor Loft merchandise and clearance
merchandise from Ann Taylor stores and Ann Taylor Loft
stores were classified as ATFS stores. In 1996, these
stores were reclassified as ATL stores. During 1997, these
stores' merchandise assortment was changed to be
predominantly Ann Taylor Loft merchandise, and these stores
are now operated as ATL stores.
The Company believes that its existing store base is a
significant strategic asset of its business. Ann Taylor stores
are located in some of the most productive retail centers in the
United States. The Company believes that it is one of the most
sought after tenants by real estate developers because of its
strong Ann Taylor brand franchise and its high average sales per
square foot productivity ($445 per square foot in Fiscal 1997)
relative to other specialty apparel retailers.
The Company has invested approximately $145 million in its
store base since the beginning of fiscal 1993; approximately 65%
of its stores are either new or have been completely remodeled,
as a result of an expansion or relocation, in the last five
years.
In 1997, the Company opened 27 Ann Taylor stores, and
expanded or relocated 9 existing Ann Taylor stores. The Company
also closed 3 Ann Taylor stores, at the expiration of their
leases or in accordance with those stores' respective lease
terms, and closed all 9 Ann Taylor Studio stores. The Company's
total store square footage increased in 1997 from approximately
1,705,000 square feet to approximately 1,808,000 square feet, an
increase (net of store closings) of approximately 103,000 square
feet, or 6.0%. In Fiscal 1998, the Company intends to increase
store square footage by approximately 232,000 square feet, or
12.8%, representing approximately 28 new Ann Taylor stores, the
expansion of 9 existing Ann Taylor stores, and 18 new Ann Taylor
Loft stores.
==============================================================================
Capital expenditures for the Company's Fiscal 1997 store
expansion program, net of landlord construction allowances,
totaled approximately $18.5 million, including expenditures for
store refurbishing and store refixturing. The Company expects
that capital expenditures for its Fiscal 1998 store expansion
program, net of landlord construction allowances, will be
approximately $35.5 million, including expenditures for store
refurbishing and store refixturing.
The Company's bank credit agreement, which expires in July
1998, provides for, among other things, an annual limitation on
capital expenditures of $32.5 million in Fiscal 1997 and beyond,
subject to increase if certain conditions are satisfied. The
Company is negotiating to replace this bank credit agreement
before its expiration, and anticipates that the Company will be
able to make the capital expenditures contemplated by its 1998
real estate expansion program under the replacement facility.
See Note 2 to the Company's Consolidated Financial Statements and
"Management's Discussion and Analysis--Liquidity and Capital
Resources".
The Company's ability to continue to increase store square
footage will be dependent upon, among other things, general
economic and business conditions affecting consumer confidence
and spending, the availability of desirable locations and the
negotiation of acceptable lease terms. See "Management's
Discussion and Analysis--Liquidity and Capital Resources".
Information Systems
- -------------------
In 1997, the Company completed a thorough review of its
information systems, and developed a three-year strategic plan to
upgrade these systems, including the planned implementation of
the core merchandising system referred to above under "Inventory
Control and Merchandise Allocation". The Company believes that
enhanced information systems are critical to providing its
management with enhanced decision support tools and maintaining
the Company's competitive position. The Company expects to
invest at least $30 million in its information systems over the
next three years.
The Company has been conducting a comprehensive review of
its computer systems to identify those that could be adversely
affected by the "Year 2000 issue" and is developing an
implementation plan to resolve the issue. The "Year 2000 issue"
refers to the inability of many computer systems to process
accurately dates later than December 31, 1999. Date codes in
many programs are abbreviated to allow only two digits for the
year, e.g. "97" for the year 1997. Unless these programs are
modified to handle the century date change, they will likely
interpret the year "00", that is, the year 2000, as the year
1900. The Year 2000 issue creates risk for the Company from
unforeseen problems in its own computer systems as well as in
computer systems of third parties with whom the Company does
business worldwide, including banks and credit card processing
entities, suppliers, factories and others.
The Company presently believes that, with modifications to
existing software and conversions to new software that the
Company plans to implement over the next two years, the Year 2000
issue will not pose significant operating problems for the
Company's own computer systems as so modified and converted.
However, if such modifications and conversions are not completed
on a timely basis, the Year 2000 issue could have a material
adverse impact on the operations of the Company. In addition,
the Company cannot give assurance that the third parties with
whom it does business will address any Year 2000 issues in their
own systems on a timely basis; their failure to do so could also
have a material adverse impact on the Company. The Company is
currently compiling a list of these third parties, such as
significant vendors and service providers, and determining
procedures necessary to assess whether they are taking action to
remedy their Year 2000 issues in a timely manner.
==============================================================================
The total cost to the Company of addressing the Year 2000
issue has not been, and is not anticipated to be, material to the
Company's financial position or results of operations in any
given year. These costs and the date on which the Company plans
to complete the Year 2000 issue 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, third
party modification plans and other factors. However, there can
be no assurance that these estimates will be achieved, and actual
costs and ultimate timing could differ materially from those
presently contemplated.
Customer Credit
- ---------------
Customers may pay for merchandise with the Ann Taylor credit
card, American Express, Visa, MasterCard, JCB, cash or check.
Credit card sales were 78.7% of net sales in Fiscal 1997, 77.8%
in Fiscal 1996 and 77.0% in Fiscal 1995. In Fiscal 1997, 18.7%
of net sales were made with the Ann Taylor credit card, and 60.0%
were made with third-party credit cards. As of January 31, 1998,
the Company's Ann Taylor credit card accounts receivable totaled
$49,721,000, net of allowance for doubtful accounts. Accounts
written off in Fiscal 1997 were approximately $1,794,000, or 0.2%
of net sales.
Ann Taylor has offered customers its proprietary Ann Taylor
credit card since 1976. The Company believes that the Ann Taylor
credit card enhances customer loyalty while providing the
customer with additional credit. However, the percentage of the
Company's total sales made with its proprietary credit card has
been declining over the past several years. The Company believes
the declining penetration of its Ann Taylor credit card as a
percentage of sales is attributable to the gain of market share
by bank cards throughout the retail industry generally, as well
as to the increase in the number of the Company's Ann Taylor
Factory Stores and Loft stores in factory outlet mall locations,
which have historically experienced a significantly lower
penetration of sales with the Ann Taylor card. At January 31,
1998, over 419,000 Ann Taylor credit card accounts had been used
during the past 18 months.
Advertising and Promotion
- -------------------------
For many years, the Company relied on its Ann Taylor fashion
catalog, mailed principally to Ann Taylor credit card holders, as
its principal advertising vehicle. The Company also occasionally
ran print advertisements in newspapers and national women's
fashion magazines such as Elle, Vogue and Harpers Bazaar. In
early 1996, the Company suspended publication of its catalog and
ran very few print advertisements. Beginning in 1997, the
Company has placed a renewed emphasis on marketing. The Company
believes it is strategically important to communicate directly
with its customer base on a regular basis, both through increased
national and regional advertising, as well as through direct mail
marketing and in-store presentation. In 1997, marketing
expenditures as a percentage of sales returned to pre-1996
levels, and the Company intends to maintain or increase marketing
expenditures as a percentage of sales in 1998.
Trademarks and Service Marks
- ----------------------------
The Ann Taylor trademark, and other trademarks and service
marks used by the Company, either are registered or have
trademark applications pending with the United States Patent and
Trademark Office ("USPTO") and with the registries of many
foreign countries. The Company's rights in the "AnnTaylor" mark
are a significant part of the Company's business, as the Company
believes its mark is well known in the women's retail apparel
industry. Accordingly, the Company intends to maintain its
"AnnTaylor" mark and related registrations and vigorously protect
its trademarks against infringement.
==============================================================================
In 1994, the Company initiated trademark registration
applications with the USPTO for its AnnTaylor Loft trademark in
the categories of retail store services and apparel.
Registration of the mark was issued in the retail store services
category in 1996. However, the Company's application for a
trademark registration in the apparel classification is being
challenged in the USPTO by a French company, Freche et Fils,
which cites its own "Loft Design By . . ." trademark in
opposition to the Ann Taylor Loft mark. The Company believes
that the challenge is without merit and intends to defend the
action vigorously. In the event that Freche et Fils' challenge
to the Company's trademark application for the Ann Taylor Loft
trademark is successful, the Company would be denied federal
registration of the Ann Taylor Loft trademark in the apparel
classification.
Competition
- ------------
The women's retail apparel industry is highly competitive.
The Company's Ann Taylor stores compete with certain departments
in national or local department stores, and with other specialty
store chains and independent retail stores carrying similar lines
of merchandise. The Company believes that its focused
merchandise selection, exclusive Ann Taylor brand fashions,
personalized service and convenience distinguish it from other
specialty retailers. Many of the Company's competitors are
considerably larger and have substantially greater financial,
marketing and other resources than the Company and there is no
assurance that the Company will be able to compete successfully
with them in the future. The Company believes that the Ann
Taylor Loft concept offers the Company the opportunity to compete
in the moderately-priced women's apparel market. The Company
does not have significant prior experience in this market, and
the competitive factors described above are applicable to this
market as well. Further, existing competitors in that market may
have significantly greater brand recognition among this customer
segment than the Company.
Employees
- ---------
Store management receives compensation in the form of
salaries and performance-based bonuses. Sales associates are
paid on an hourly basis plus performance incentives. A number of
programs exist that offer incentives to both management and sales
associates to increase sales and support the Company's total
wardrobing strategy.
As of January 31, 1998, the Company had approximately 6,300
employees, of whom 1,600 were full-time salaried employees, 1,600
were full-time hourly employees and 3,100 were part-time hourly
employees working less than 30 hours per week. None of the
Company's employees are represented by a labor union. The
Company believes that its relationship with its employees is
good.
Statement Regarding Forward Looking Disclosures
- -----------------------------------------------
Sections of this Annual Report contain various forward
looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, with respect to the financial
condition, results of operations and business of the Company.
These forward looking statements involve certain risks and
uncertainties, and no assurance can be given that any of such
matters will be realized. Actual results may differ materially
from those contemplated by such forward looking statements. See
"Management's Discussion and Analysis--Statement Regarding
Forward Looking Disclosures".
==============================================================================
ITEM 2. Properties
- ------------------
As of January 31, 1998, the Company operated 324 stores, all
of which were leased. The store leases typically provide for
initial terms of ten years, although some leases have shorter or
longer initial periods, and grant the Company the right to extend
the term for one or two additional five-year periods. Most of
the store leases require Ann Taylor to pay a specified minimum
rent, plus a contingent rent based on a percentage of the store's
net sales in excess of a specified threshold. Most of the leases
also require Ann Taylor to pay real estate taxes, insurance and
certain common area and maintenance costs. The current terms of
the Company's leases, including renewal options, expire as
follows:
Fiscal Years Lease Number of
Terms Expire Stores
------------------- -----------
1998 - 2000............... 31
2001 - 2003............... 29
2004 - 2006............... 148
2007 and later............ 116
Ann Taylor leases corporate offices at 142 West 57th Street
in New York City, containing approximately 125,000 square feet,
and approximately 59,000 square feet of office space at 1372
Broadway in New York City. The leases for these premises expire
in 2006 and 2010, respectively. The Company also leases office
space in New Haven, Connecticut, containing approximately 37,000
square feet. This lease expires in 2000.
Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution
Services, Inc., owns its 256,000 square foot distribution center
located in Louisville, Kentucky. Nearly all Ann Taylor
merchandise is distributed to the Company's stores through this
facility. The parcel on which the Louisville distribution center
is located comprises approximately 20 acres and could accommodate
possible future expansion of the facility.
ITEM 3. Legal Proceedings
- -------------------------
On April 26, 1996, certain alleged stockholders of the
Company filed a purported class action lawsuit in the United
States District Court Southern District of New York, against the
Company, Ann Taylor, certain officers and directors of the
Company and Ann Taylor, ML&Co. and certain affiliates of ML&Co.
(Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The
complaint alleged causes of action under Section 10(b) and
Section 20(a) of the Securities Exchange Act of 1934, as amended,
by alleging that the Company and the other defendants engaged in
a fraudulent scheme and course of business that operated a fraud
or deceit on purchasers of the Company's common stock during the
period commencing February 3, 1994 through May 4, 1995 due to
alleged false and misleading statements about the Company and Ann
Taylor. The complaint sought, among other things, certification
as a class action on behalf of all purchasers of common stock
during the period commencing February 3, 1994 through May 4,
1995, the awarding of compensatory damages to the plaintiffs and
purported members of the class, the awarding of costs, including
pre-judgment and post-judgment interest, reasonable attorneys'
fees and expert witness fees to the plaintiffs and purported
members of the class and equitable and/or injunctive relief. On
March 10, 1998, the Court granted the defendants' motions to
dismiss the complaint. The Court found that the complaint failed
to state a claim upon which relief may be granted, and failed to
plead fraud with particularity and an inability to do so. The
Court's Opinion grants 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. The Company believes that the amended complaint is without
merit and intends to continue to defend the action vigorously.
As the case is in preliminary stages, any liability that may
arise from this action cannot be predicted at this time.
=============================================================================
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 and liquidity of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
None.
============================================================================
PART II
--------
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
The Company's common stock is listed and traded on the New
York Stock Exchange under the symbol ANN. The number of holders
of record of common stock at April 2, 1998 was 727. The
following table sets forth the high and low closing sale prices
for the common stock on the New York Stock Exchange during Fiscal
1997 and Fiscal 1996.
Market Price
---------------
High Low
---- ----
Fiscal Year 1997
----------------
Fourth quarter.................. $14-15/16 $11-5/16
Third quarter................... 19-5/8 14
Second quarter.................. 25 16-7/8
First quarter................... 24-1/4 17
Fiscal Year 1996
----------------
Fourth quarter.................. $21-3/8 $15-3/8
Third quarter................... 19-7/8 12
Second quarter.................. 23-1/4 12
First quarter................... 19-1/8 11-1/8
In Fiscal 1996, in connection with the acquisition of the
Company's sourcing division ATGS, the Company issued an aggregate
of 2,348,145 shares of common stock to Cygne (including shares
issued to a wholly owned subsidiary of Cygne), in partial
consideration for the sourcing operations purchased from Cygne.
Also in Fiscal 1996, the Company awarded to J. Patrick Spainhour,
Chairman and Chief Executive Officer of the Company, 75,000
shares of restricted common stock pursuant to the terms of his
employment agreement with the Company, and awarded to Patricia
DeRosa, President and Chief Operating Officer of the Company,
30,000 shares of restricted common stock, pursuant to the terms
of her employment agreement with the Company. The Company
believes that each of the foregoing share issuances was exempt
from registration pursuant to Section 4(2) of the Securities Act
of 1933, as amended, in each case as a transaction by an issuer
not involving a public offering.
The Company has never paid dividends on the common stock and
does not intend to pay dividends in the foreseeable future. As a
holding company, the ability of the Company to pay dividends is
dependent upon the receipt of dividends or other payments from
Ann Taylor. The payment of dividends by Ann Taylor to the
Company is subject to certain restrictions under Ann Taylor's
Bank Credit Agreement, the indenture relating to the 8-3/4% Notes
and the Receivables Facility described below under "Management's
Discussion and Analysis--Liquidity and Capital Resources". The
payment of cash dividends on the common stock by the Company is
also subject to certain restrictions contained in the Company's
guarantee of Ann Taylor's obligations under the Bank Credit
Agreement. In addition, in connection with the preferred
securities issued by the Company's financing vehicle, AnnTaylor
Finance Trust, the payment by the Company of cash dividends on
the common stock is restricted in the event of a default by the
Company of its obligations in relation to the preferred
securities or in the event payment of dividends on the preferred
securities is deferred. Any determination to pay cash dividends
in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and
other factors deemed relevant at that time by the Company's Board
of Directors.
=============================================================================
ITEM 6. Selected Financial Data
- --------------------------------
The following selected historical financial information for
the periods indicated has been derived from the audited
consolidated financial statements of the Company. The Company's
consolidated statements of operations, stockholders' equity and
cash flows for each of the three fiscal years ended January 31,
1998, February 1, 1997 and February 3, 1996, and consolidated
balance sheets as of January 31, 1998 and February 1, 1997, as
audited by Deloitte & Touche LLP, independent auditors, appear
elsewhere in this document. The information set forth below
should be read in conjunction with "Management's Discussion and
Analysis" and the consolidated financial statements and notes
thereto of the Company included elsewhere in this document. All
references to years are to the fiscal year of the Company, which
ends on the Saturday nearest January 31 in the following calendar
year. All fiscal years for which financial information is set
forth below had 52 weeks, with the exception of Fiscal 1995,
which had 53 weeks.
==============================================================================
Fiscal Years Ended
-------------------------------------------------
Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 29,
1998 1997 1996 1995 1994
-------- ------ --------- -------- --------
(dollars in thousands, except per square
foot data and per share data)
Operating Statement
Information:
Net sales $781,028 $ 798,117 $ 731,142 $ 658,804 $501,649
Cost of sales 411,756 443,443 425,225 357,783 271,749
------- ------- ------- ------- -------
Gross profit 369,272 354,674 305,917 301,021 229,900
Selling, general and
administrative expenses 308,232 291,027 271,136 214,224 169,371
Studio shoe stores closing
expense (a) --- 3,600 --- --- ---
Employment contract
separation expense (b) --- 3,500 --- --- ---
Distribution center
restructuring charge (c) --- --- --- --- 2,000
Amortization of goodwill (d) 11,040 10,086 9,506 9,506 9,508
------- ------- ------- ------- -------
Operating income 50,000 46,461 25,275 77,291 49,021
Interest expense (e) 19,989 24,416 20,956 14,229 17,696
Other (income) expense, net 548 403 38 168 (194)
------- ------- ------- ------- -------
Income before income taxes
and extraordinary loss 29,463 21,642 4,281 62,894 31,519
Income tax provision 17,466 12,975 5,157 30,274 17,189
------- ------- ------- ------- -------
Income (loss) before
extraordinary loss 11,997 8,667 (876) 32,620 14,330
Extraordinary loss (f) 173 --- --- 868 11,121
------- ------- ------- ------- -------
Net income (loss) $ 11,824 $ 8,667 $ (876) $ 31,752 $ 3,209
======= ======= ======= ======= =======
Basic earnings (loss) per
share before
extraordinary loss $ 0.47 $ 0.36 $ (0.04) $ 1.44 $ 0.67
Extraordinary loss
per share (f) 0.01 --- --- 0.04 0.52
------- ------- ------- ------- -------
Basic earnings (loss)
per share $ 0.46 $ 0.36 $ (0.04) $ 1.40 $ 0.15
======= ======= ======= ======= =======
Diluted earnings (loss)
per share before
extraordinary loss $ 0.47 $ 0.36 $ (0.04) $ 1.42 $ 0.66
Extraordinary loss
per share (f) 0.01 --- --- 0.04 0.51
------- ------- ------- ------- -------
Diluted earnings (loss)
per share $ 0.46 $ 0.36 $ (0.04) $ 1.38 $ 0.15
======= ======= ======= ======= =======
Weighted average shares
outstanding
(in thousands) 25,628 23,981 23,067 22,687 21,233
Weighted average shares
outstanding, assuming
dilution (in thousands) 25,693 24,060 23,167 23,067 21,834
Operating Information:
Percentage increase
(decrease) in
comparable store sales (g) (5.5)% 1.8% (8.9)% 13.7% 2.3%
Net sales per gross
square foot (h) $ 445 $ 476 $ 518 $ 627 $ 576
Number of stores:
Open at beginning of
the period 309 306 262 231 219
Opened during the period 27 11 48 35 13
Expanded during the period 9 7 30 25 12
Closed during the period 12 8 4 4 1
Open at the end of the
period 324 309 306 262 231
Total store square
footage at end
of period 1,808,000 1,705,000 1,651,000 1,173,000 929,000
Capital expenditures $ 22,945 $ 16,107 $ 78,378 $ 61,341 $ 25,062
Depreciation and
amortization,
including
goodwill (d) $ 38,843 $ 36,294 $ 28,294 $ 21,293 $ 18,013
Working capital
turnover (i) 6.5x 7.8x 7.8x 8.5x 12.1x
Inventory turnover (j) 5.1x 4.7x 4.3x 4.6x 4.9x
Balance Sheet Information
(at end of period):
Working capital (k) $ 122,181 $ 118,850 $ 86,477 $ 102,181 $ 53,283
Goodwill, net (d) 330,739 341,779 313,525 323,031 332,537
Total assets 683,661 688,139 678,709 598,254 513,399
Total debt 106,276 131,192 272,458 200,000 189,000
Preferred securities 96,391 96,158 --- --- ---
Stockholders' equity 384,107 370,582 325,688 326,112 259,271
(Footnotes on following page)
==============================================================================
(Footnotes for preceding page. In Fiscal 1997, the Company
adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" and all prior year per share information has
been recalculated. Unless otherwise noted, all per share
information is for both basic and diluted earnings per share.)
(a) Relates to the closing of the nine Ann Taylor Studio shoe
stores. The charge of $3,600,000 ($2,052,000, or $0.08 per
share, net of income tax benefit) represented the write-off
of the net book value of the nine stores and leases and other
related costs for these locations.
(b) In connection with the resignation in August 1996 of the
former Chairperson, a one-time pre-tax charge of $3,500,000
($1,958,000, or $0.08 per share, net of related tax benefit)
was recorded relating to the estimated costs of the Company's
obligations under her employment contract with the Company.
(c) In connection with the relocation of the Company's
distribution center, completed in late Spring 1995, a charge
of $2,000,000 ($1,140,000, or $0.05 per share, net of related
tax benefit) was recorded relating to severance and job
training costs, as well as the write-off of the net book
value of certain assets.
(d) As a result of the Acquisition of Ann Taylor by the Company,
which was effective as of January 29, 1989, $380,250,000,
representing the excess of the allocated purchase price over
the fair value of the Company's net assets, was recorded as
goodwill and is being amortized on a straight-line basis over
40 years. In addition, as a result of the acquisition of the
Company's sourcing division, effective September 20, 1996,
the Company recorded goodwill of $38,430,000 that is being
amortized on a straight-line basis over 25 years.
(e) Includes non-cash interest expense of $1,419,000, $1,574,000,
$1,004,000, $978,000 and $4,199,000 in Fiscal 1997, 1996,
1995, 1994 and 1993, respectively, from amortization of
deferred financing costs, and in 1993, from accretion of
original issue discount.
(f) In Fiscal 1997, Ann Taylor incurred an extraordinary loss of
$303,000 ($173,000, or $0.01 per share, net of income tax
benefit), in connection with the prepayment of the
outstanding balance of a term loan. In Fiscal 1994, Ann
Taylor incurred an extraordinary loss of $1,522,000
($868,000, or $0.04 per share, net of income tax benefit), in
connection with the prepayment of long-term debt with the
proceeds of a public sale of common stock of the Company. In
Fiscal 1993, Ann Taylor incurred an extraordinary loss of
$17,244,000 ($11,121,000, or $0.51 per share, net of income
tax benefit) due to debt refinancing activities.
(g) Comparable store sales are calculated by excluding the net
sales of a store for any month of one period if the store was
not also open during the same month of the prior period. In
a year with 53 weeks, such as Fiscal 1995, sales in the last
week of that year are not included in determining comparable
store sales. A store that is expanded by more than 15% is
treated as a new store for the first year following the
opening of the expanded store.
(h) Net sales per square foot ("sales per square foot") is
determined by dividing net sales for the period by the
average of the gross square feet at the beginning and end of
each period. Unless otherwise indicated, references herein
to square feet are to gross square feet, rather than net
selling space.
(i) Working capital turnover is determined by dividing net sales
by the average of the amount of working capital at the
beginning and end of the period.
(j) Inventory turnover is determined by dividing cost of sales by
the average of the cost of inventory at the beginning and end
of the period (excluding inventory associated with the
Company's sourcing division).
(k) Includes current portion of long-term debt of $1,119,000,
$287,000, $40,266,000, $0, and $8,757,000 in Fiscal 1997,
1996, 1995, 1994 and 1993, respectively.
==============================================================================
ITEM 7. Management's Discussion and Analysis of Financial Condition
- ---------------------------------------------------------------------
and Results of Operations
-------------------------
Sales
- -----
The following table sets forth certain sales and store data
for the periods indicated:
Fiscal Year Ended
----------------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
(52 weeks) (52 weeks) (53 weeks)
---------- ---------- ----------
Net sales ($000)................ $ 781,028 $ 798,117 $ 731,142
Total net sales increase
(decrease) percentage
(52 week basis)............... (2.1)% 10.6% 9.5%
Comparable store sales
increase (decrease)
percentage (52 week basis).... (5.5)% 1.8% (8.9)%
Net sales per average
square foot................... $ 445 $ 476 $ 518
Total store square footage
at end of period............. 1,808,000 1,705,000 1,651,000
Number of
New stores.................... 27 11 48
Expanded stores............... 9 7 30
Closed stores................. 12 8 4
Total stores open at end
of period..................... 324 309 306
New Ann Taylor stores opened in 1997 averaged 4,500 square
feet, compared to the average size of Ann Taylor stores opened
prior to 1993 of 3,500 square feet. New Ann Taylor stores opened
since 1993 have ranged between 3,800 and 13,800 square feet in
size (excluding the Company's two flagship stores). Ann Taylor
Factory Stores average 7,000 square feet, and Ann Taylor Loft
stores average 9,200 square feet. This increase in average store
size has had, and is expected to continue to have, a negative
effect on sales per square foot. However, the Company believes
that the larger store format enhances the Company's ability to
merchandise its customer offerings and reinforces its total
wardrobing concept, provides area necessary for the proper
presentation of Ann Taylor shoes, petites and other product line
extensions, and improves customer service and ease of shopping.
Ann Taylor stores to be opened in Fiscal 1998 are expected to
average approximately 4,400 square feet, and Ann Taylor Loft
stores are expected to average approximately 6,300 square feet.
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
---------------------------
1997 1996 1995
---- ---- ----
Net sales......................... 100.0% 100.0% 100.0%
Cost of sales..................... 52.7 55.6 58.2
----- ----- -----
Gross profit.................. 47.3 44.4 41.8
Selling, general and
administrative expenses......... 39.5 36.5 37.0
Studio shoe stores
closing expense................. --- 0.4 ---
Employment contract
separation expense.............. --- 0.4 ---
Amortization of goodwill.......... 1.4 1.3 1.3
----- ----- -----
Operating income.............. 6.4 5.8 3.5
Interest expense.................. 2.6 3.1 2.9
Other expense, net................ --- --- ---
----- ----- -----
Income before income taxes
and extraordinary loss.......... 3.8 2.7 0.6
Income tax provision.............. 2.3 1.6 0.7
----- ----- -----
Income (loss) before
extraordinary loss............. 1.5 1.1 (0.1)
Extraordinary loss................ --- --- ---
----- ----- -----
Net income (loss)............. 1.5% 1.1% (0.1)%
===== ===== =====
=======================================================================
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. See discussion of Sourcing Acquisition below.
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 the former Chairperson'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.
Fiscal 1996 Compared to Fiscal 1995
- ------------------------------------
The Company's net sales increased to $798,117,000 in Fiscal
1996 (52 weeks) from $731,142,000 in Fiscal 1995 (53 weeks), an
increase of $66,975,000, or 9.2%. Total sales for the fifty-two
week period ended February 1, 1997 were up 10.6% compared to the
fifty-two week period ended January 27, 1996. This increase in
net sales was attributable to the inclusion of a full year of
operating results for the 48 stores opened and 30 stores expanded
during 1995, the opening of 11 new stores and
===========================================================================
the expansion of 7 stores in 1996, and to a comparable sales
increase of 1.8% for the fifty-two week period ended February 1,
1997. This sales increase was partially offset by the closing of
8 stores in 1996. The Company believes that the 1.8% increase in
its comparable store sales in 1996 was attributable primarily to
positive customer reaction to the Company's Fall 1996 merchandise
offerings.
Gross profit as a percentage of net sales increased to 44.4%
in 1996 from 41.8% in 1995. This increase was primarily
attributable to lower markdowns associated with decreased
promotional activities.
Selling, general and administrative expenses as a percentage
of net sales decreased to 36.5% in 1996 from 37.0% in 1995. The
decrease in selling, general and administrative expenses as a
percentage of net sales was primarily the result of increased
leverage on fixed expenses due to improved comparable store
sales.
Operating income increased to $46,461,000, or 5.8% of net
sales, in 1996 from $25,275,000, or 3.5% of net sales, in 1995.
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 the former Chairperson'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
$10,086,000, or 1.3% of net sales, in 1996 compared to
$9,506,000, or 1.3% of net sales, in 1995. Operating income
without giving effect to such amortization was $56,547,000, or
7.1% of net sales, in 1996 and $34,781,000, or 4.8% of net sales,
in 1995.
Interest expense was $24,416,000 in 1996 compared to
$20,956,000 in 1995. The increase in interest expense was
attributable to higher interest rates associated with the
issuance of 8-1/2% Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities (the "preferred securities") by
the Company's financing vehicle, AnnTaylor Finance Trust,
partially offset by a decrease in the Company's long-term debt.
The weighted average interest rate on the Company's outstanding
indebtedness at February 1, 1997 was 8.63% compared to 8.26% at
February 3, 1996.
The income tax provision was $12,975,000, or 60.0% of income
before income taxes, in the 1996 period compared to $5,157,000,
or 120.5% of income before income taxes, in 1995. The effective
tax rates for both periods were higher than the statutory rates,
primarily as a result of non-deductible goodwill expense.
As a result of the foregoing factors, the Company had net
income of $8,667,000, or 1.1% of net sales, for 1996 compared to
a net loss of $876,000, or 0.1% of net sales, for 1995.
Changes in Financial Position
- -----------------------------
Accounts receivable decreased to $60,211,000 at the end of
1997 from $63,605,000 at the end of 1996, a decrease of
$3,394,000, or 5.3%. This decrease was primarily attributable to
a decrease in Ann Taylor credit card receivables, which declined
$4,784,000, or 8.8%, to $49,721,000 in 1997. The Company
believes the declining penetration of its Ann Taylor credit card
as a percentage of sales is primarily attributable to the gain of
market share by bank cards throughout the retail industry
generally.
Merchandise inventories decreased to $97,234,000 at January
31, 1998 from $100,237,000 at February 1, 1997, a decrease of
$3,003,000, or 3.0%. Merchandise inventories at January 31, 1998
and February 1, 1997, included approximately $21,124,000 and
$13,728,000, respectively, of inventory associated with the
Company's sourcing division. The sourcing division's inventory
is principally finished goods in transit from factories. Total
square footage increased to approximately 1,808,000 square feet
at January 31, 1998 from approximately 1,705,000 square feet at
February 1, 1997. Merchandise inventory on a per square foot
basis, excluding inventory associated with the Company's sourcing
division, was approximately $42 at the end of 1997, compared to
approximately $51 at the end of 1996, a decrease of
=======================================================================
approximately 17%. This decrease is a reflection of
more conservative inventory management as part of
the Company's strategy to increase inventory turns. Inventory
turned 5.1 times in 1997 compared to 4.7 times in 1996, 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 under Ann Taylor's revolving
credit facility under the Bank Credit Agreement and the
Receivables Facility described below. The following table sets
forth material measures of the Company's liquidity:
Fiscal Year
-------------------------------
1997 1996 1995
---- ---- ----
(dollars in thousands)
Cash provided by
operating activities.............. $ 71,589 $ 67,532 $ 7,376
Working capital.................... $122,181 $118,850 $86,477
Current ratio....................... 2.39:1 2.53:1 1.77:1
Debt to equity ratio................ .28:1 .35:1 .84:1
Cash provided by operating activities, as presented on the
consolidated statements of cash flows, increased in 1997
principally as a result of increases in earnings, noncash
charges, accounts payable and accrued liabilities, and decreases
in receivables, merchandise inventories and prepaid expenses.
Ann Taylor's Bank Credit Agreement originally provided,
among other things, for a $25,000,000 term loan and a
$125,000,000 revolving credit facility. As described below, in
January 1996 the Company prepaid a portion of the term loan and
reduced the revolving credit facility to $122,000,000. On July
2, 1997, the Company used available cash to prepay the
outstanding balance of the $24,500,000 term loan. The maturity
date of the revolving credit facility is July 29, 1998; however,
the Company is required to reduce the outstanding balance under
the revolving credit facility to $50,000,000 or less for thirty
consecutive days in 1996 and in each fiscal year thereafter. The
maximum amount that may be borrowed under the revolving credit
facility is reduced by the amount of commercial and standby
letters of credit outstanding under the Bank Credit Agreement.
At January 31, 1998, there were no borrowings outstanding under
the revolving credit facility and the amount available under the
facility, after taking into account outstanding letters of
credit, was approximately $89,000,000. The Bank Credit Agreement
contains financial and other covenants, including limitations on
indebtedness, liens and investments, restrictions on dividends or
other distributions to stockholders, and requirements to maintain
certain financial ratios and specified levels of net worth. The
Company's ability to satisfy such financial covenants will be
dependent upon, among other things, the Company's sales and
earnings and the amount of capital expenditures made by the
Company. The Bank Credit Agreement also provides for, among
other things, an annual limitation on capital expenditures of
$32,500,000 in 1997 and beyond, subject to increase if certain
conditions are satisfied. The Company is negotiating to replace
this bank credit agreement before its expiration in July 1998,
and anticipates that the Company will be able to make the capital
expenditures contemplated by its 1998 real estate expansion
program, under the replacement facility.
Ann Taylor sells its proprietary credit card accounts
receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary
of Ann Taylor. AnnTaylor Funding, Inc. uses the receivables to
secure borrowings of up to $40,000,000, depending upon the
eligible accounts receivable balance, under a receivables
financing facility (the "Receivables Facility"). AnnTaylor
Funding, Inc. had total assets of approximately $50,440,000 at
January 31, 1998, all of which are subject to the security
interest of the lender under the Receivables Facility. At
January 31, 1998, there were no borrowings outstanding under the
Receivables Facility. The Receivables Facility matures in May
1998.
======================================================================
On July 29, 1997, ATGS and the Hongkong and Shanghai Banking
Corporation ("HKSBC") amended their credit agreement (the "HKSBC
Agreement"), increasing the commitment available for letters of
credit to $50,000,000; cash borrowings under the facility are
limited to a maximum of $5,000,000. Such credit facility matures
on July 29, 1998 and contains financial and other covenants. As
of January 31, 1998, commercial and standby letters of credit
outstanding under this facility totaled $25,102,000 and there
were no borrowings outstanding under this facility.
As noted above, the Company's Bank Credit Agreement,
Receivables Facility and HKSBC Agreement mature in May and July
1998. The Company is currently negotiating to obtain new
financing and anticipates new arrangements will be in place in
the second quarter of Fiscal 1998.
In April and May of 1996, the Company completed the sale of
an aggregate of $100,625,000 of preferred securities issued by
its financing vehicle, AnnTaylor Finance Trust. The preferred
securities have a liquidation preference of $50 per security and
are convertible at the option of the holders thereof into shares
of common stock of the Company at a conversion rate of 2.545
shares of common stock for each preferred security. A total of
2,012,500 preferred securities were issued, and are convertible
into an aggregate of 5,121,812 shares of common stock,
representing approximately 17% of the Company's outstanding
common stock as of January 31, 1998. The Company received net
proceeds of $95,984,000 in connection with the sale of the
preferred securities and applied $94,000,000 to reduce
outstanding borrowings under the revolving credit facility.
Ann Taylor and its wholly owned subsidiary, AnnTaylor
Distribution Services, Inc., are parties to a $7,000,000 seven-
year mortgage loan 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. Pursuant to the requirements of the Bank
Credit Agreement, in January 1996 the Company applied one-half of
the proceeds of the mortgage to reduce the amount available under
the revolving credit facility, thereby reducing the revolving
credit facility by $3,000,000, and prepaid a portion of the term
loan.
The Company's capital expenditures totaled $22,945,000,
$16,107,000, and $78,378,000 in 1997, 1996, and 1995,
respectively. The decrease in capital expenditures in 1997 and
1996 is due primarily to the construction of fewer new and
expanded stores compared to 1995. In that year, the Company
increased its retail store square footage by nearly 500,000
square feet, or 40%. The Company slowed its real estate
expansion program in 1996 and 1997, to enable it to more
effectively consolidate the growth, including organizational
changes, that had occurred during recent years. The Company
expects its total capital expenditure requirements will be
approximately $50,000,000 in 1998, including capital for new
store construction for a planned square footage increase of
approximately 240,000 square feet, or 13.3%, as well as capital
to support 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 as well as limitations
imposed by new credit facilities. See "Business--Stores and
Expansion".
Dividends and distributions from Ann Taylor to the Company
are restricted by the Bank Credit Agreement, the Receivables
Facility and the Indenture for Ann Taylor's 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 Bank Credit Agreement
and the HKSBC Agreement, as well as the Receivables Facility, and
replacements thereof that are expected to be obtained. The
Company typically purchases merchandise from certain of its
vendors on terms requiring payment within 30 days or less after
the Company's receipt of the merchandise. If some or all of the
Company's such vendors were to demand shorter payment terms, the
Company's working capital needs would increase. The Company
believes that cash flow from operations and funds available under
the Bank Credit Agreement, the Receivables Facility and the HKSBC
Agreement, and replacements thereof that are expected to be
obtained, are sufficient to enable it to meet its on-going cash
needs for its business, as presently conducted, for the
foreseeable future.
========================================================================
The Company has been conducting a comprehensive review of
its computer systems to identify those systems that could be
adversely affected by the "Year 2000 issue" and is developing an
implementation plan to resolve the issue. The "Year 2000 issue"
refers to the inability of many computer systems to process
accurately dates later than December 31, 1999. Date codes in
many programs are abbreviated to allow only two digits for the
year, e.g. "97" for the year 1997. Unless these programs are
modified to handle the century date change, they will likely
interpret the year "00", that is, the year 2000, as the year
1900. The Year 2000 issue creates risk for the Company from
unforeseen problems in its own computer systems as well as in
computer systems of third parties with whom the Company does
business worldwide, including banks and credit card processing
entities, suppliers, factories and others.
The Company presently believes that, with modifications to
existing software and conversions to new software that the
Company plans to implement over the next two years, the Year 2000
issue will not pose significant operating problems for the
Company's own computer systems as so modified and converted.
However, if such modifications and conversions are not completed
on a timely basis, the Year 2000 issue could have a material
adverse impact on the operations of the Company. In addition,
the Company cannot give assurance that the third parties with
whom it does business will address any Year 2000 issues in their
own systems on a timely basis; their failure to do so could also
have a material adverse impact on the Company. The Company is
currently compiling a list of these third parties, such as
significant vendors and service providers, and determining
procedures necessary to assess whether they are taking action to
remedy their Year 2000 issues in a timely manner.
The total cost to the Company of addressing the Year 2000
issue has not been, and is not anticipated to be, material to the
Company's financial position or results of operations in any
given year. These costs and the date on which the Company plans
to complete the Year 2000 issue 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, third
party modification plans and other factors. However, there can
be no assurance that these estimates will be achieved, and actual
costs and ultimate timing could differ materially from those
presently contemplated.
Effective February 1, 1998, the Company elected to change
its method of inventory valuation from the retail method to a
cost method. The Company believes the cost method is a
preferable method for matching the cost of merchandise with the
revenues generated. The cumulative effect of this accounting
change and the effect on future financial statements resulting
from this change is not expected to be material.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which requires that changes in
comprehensive income be shown in a financial statement that is
displayed with the same prominence as other financial statements;
and 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. In February 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosure about Pensions and Other Postretirement
Benefits", which revises disclosures, but does not change the
measurement or recognition of these plans. Management is
currently evaluating the impact of these standards and believes
their adoption will not impact the Company's consolidated
financial position, results of operations or cash flows, and any
impact will be limited to the form and content of its
disclosures. All of these statements are effective for fiscal
years beginning after December 15, 1997.
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"), 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 and now performs all of Ann Taylor's
direct sourcing functions, including those previously provided by
the Division, under the name AnnTaylor Global Sourcing. The
results of operations of ATGS are included in the consolidated
financial statements of the Company since the Effective Date.
The Company believes that the Sourcing Acquisition provides
Ann Taylor with greater control over pre-production processes and
production management, which it expects will result in a variety
of operational benefits, such as greater consistency in
merchandise quality and sizing. The Company is also recognizing
a net reduction in the cost of merchandise purchased through the
sourcing division (after taking into account the cost of
operating ATGS).
In consideration for Cygne's interest in CAT and the Assets,
the Company paid (i) 2,348,145 shares of common stock of the
Company having an aggregate value, as of the Effective Date, of
$36,000,000, (ii) $3,200,000 in cash in 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 for inventory and fixed assets to approximately
$227,000. The total purchase price 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.
Pursuant to the terms of a Stockholders Agreement entered
into at the time of the Sourcing Acquisition, the Company
registered the sale of the shares of Common Stock issued to Cygne
as part of the consideration for the acquisition. Cygne
subsequently sold, pursuant to this registration statement, all
of the shares of Common Stock issued to it by the Company.
Statement Regarding Forward Looking Disclosures
- -----------------------------------------------
Sections of this Annual Report, 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", "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 accurately predict customer fashion preferences; a
decline in the demand for merchandise offered by the Company;
competitive influences; levels of store traffic; effectiveness of
the Company's brand awareness and marketing programs; general
economic conditions that are less favorable than expected; 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; an adverse outcome of certain litigation
described in "Legal Proceedings" that materially and adversely
affects the Company's financial condition; or lack of sufficient
customer acceptance of the Ann Taylor Loft concept in the
moderate-priced women's apparel market. The Company assumes no
obligation to update or revise any such forward-looking
statements, 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 8. Financial Statements and Supplementary Data
- ------------------------------------------------------
The following consolidated financial statements of the
Company for the years ended January 31, 1998, February 1, 1997
and February 3, 1996 are included as a part of this Report (See
Item 14):
Consolidated Statements of Operations for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3,
1996.
Consolidated Balance Sheets as of January 31, 1998 and
February 1, 1997.
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996.
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3,
1996.
Notes to Consolidated Financial Statements.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
- --------------------------------------------------------------------
and Financial Disclosures
-------------------------
None.
==========================================================================
PART III
--------
ITEM 10. Directors and Executive Officers of the Registrant
- --------------------------------------------------------------
The information required by this item is incorporated herein
by reference to the Section entitled "Nominees for Election as
Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders.
ITEM 11. Executive Compensation
- -------------------------------
The information required by this item is incorporated herein
by reference to the Sections entitled "Compensation of Directors
and Related Matters", "Executive Compensation" and "Employment
Agreements" in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The information required by this item is incorporated herein
by reference to the Section entitled "Beneficial Ownership of
Common Stock" in the Company's Proxy Statement for its 1998
Annual Meeting of Stockholders.
ITEM 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this item is incorporated herein
by reference to the Sections entitled "Compensation of Directors
and Related Matters" and "Compensation Committee Report on
Executive Compensation--Compensation Committee Interlocks and
Insider Participation" in the Company's Proxy Statement for its
1998 Annual Meeting of Stockholders.
In connection with the Sourcing Acquisition, the Company
issued to Cygne an aggregate of 2,348,145 shares of Common Stock.
See "Management's Discussion and Analysis -- Sourcing
Acquisition".
========================================================================
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 30 through 51 and are filed
as part of this Annual Report:
Consolidated Statements of Operations for the
fiscal years ended January 31, 1998, February 1, 1997
and February 3, 1996; Consolidated Balance Sheets as of
January 31, 1998 and February 1, 1997; Consolidated
Statements of Stockholders' Equity for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3,
1996; Consolidated Statements of Cash Flows for the
fiscal years ended January 31, 1998, February 1, 1997
and February 3, 1996; 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 March 12, 1998 with respect to the
dismissal of the purported class action lawsuit against
the Company, Ann Taylor, certain officers and directors
of the Company and Ann Taylor, ML&Co. and certain
affiliates of ML&Co. Additionally the Form 8-K reported
on an Amendment to the Company's amended and restated
1992 Stock Option and Restricted Stock and Unit Award
Plan.
(c) Exhibits
The exhibits listed below are filed as a part
of this Annual Report.
Exhibit Number
- --------------
3.1 Restated Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 filed with
the Securities and Exchange Commission (the
"Commission") on August 10, 1992 (Registration No. 33-
50688).
3.2 By-Laws of the Company. Incorporated by reference to
Exhibit 3.2 to the Form 10-Q of the Company for the
Quarter ended November 2, 1991 filed on December 17,
1991 (Registration No. 33-28522).
4.1 Indenture, dated as of June 15, 1993, between Ann
Taylor and Fleet Bank, N.A., as Trustee, including the
form of Subordinated Note due 2000. Incorporated by
reference to Exhibit 4.1 to the Current Report on Form
8-K of Ann Taylor filed on July 7, 1993.
4.1.1 Instrument of Resignation, Appointment and Acceptance,
dated as of December 1, 1995, among Ann Taylor, Fleet
Bank, N.A., as Resigning Trustee, and Norwest Bank
Minnesota, N.A., the Successor Trustee. Incorporated
by reference to Exhibit 4.1.1 to the Annual Report on
Form 10-K of the Company filed on April 8, 1996.
10.1 Form of Warrant Agreement entered into between
AnnTaylor and The Connecticut Bank and Trust Company,
National Association, including the form of Warrant.
Incorporated by reference to Exhibit 4.3 to Amendment
No. 1 to the Registration Statement of the Company and
Ann Taylor filed on June 21, 1989 (Registration No. 33-
28522).
10.2 Amended and Restated Credit Agreement, dated as of
September 29, 1995, among Ann Taylor, Bank of America
National Trust and Savings Association ("Bank of
America"), and Fleet Bank, National Association, as Co-
Agents, the financial institutions from time to time
party thereto, BA Securities, Inc., as Arranger, and
Bank of America, as Agent. Incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K of
Ann Taylor filed on October 17, 1995.
=========================================================================
Exhibit
Number
- -------
10.2.1 First Amendment to Amended and Restated Credit
Agreement, dated as of January 4, 1996, among Ann
Taylor, Bank of America, Fleet Bank, National
Association, as Co-Agents, the financial institutions
from time to time party thereto, BA Securities, Inc.,
as Arranger, and Bank of America, as Agent.
Incorporated by reference to Exhibit 10.2.1 to the
Annual Report on Form 10-K of the Company filed on
April 8, 1996.
10.2.2 Second Amendment to the Amended and Restated Credit
Agreement, dated as of April 9, 1996 among Ann Taylor,
Bank of America and Fleet Bank, National Association,
as Co-Agents, the financial institutions from time to
time party thereto, BA Securities Inc. as Arranger, and
Bank of America as Agent. Incorporated by reference to
Exhibit 10.1 on Form 10-Q of the Company for the
Quarter ended August 3, 1996 filed on September 16,
1996.
10.3 Amended and Restated Guaranty, dated as of September
29, 1995, made by the Company in favor of Bank of
America, as Agent. Incorporated by reference to
Exhibit 10.4 to the Current Report on Form 8-K of Ann
Taylor filed on October 17, 1995.
10.4 Amended and Restated Security and Pledge Agreement,
dated as of September 29, 1995, made by Ann Taylor in
favor of Bank of America, as Agent. Incorporated by
reference to Exhibit 10.2 to the Current Report on Form
8-K of Ann Taylor filed on October 17, 1995.
10.5 Amended and Restated Security and Pledge Agreement,
dated as of September 29, 1995, made by the Company in
favor of Bank of America, as Agent. Incorporated by
reference to Exhibit 10.5 to the Current Report on Form
8-K of Ann Taylor filed on October 17, 1995.
10.6 Trademark Security Agreement, dated as of September 29,
1995, made by Ann Taylor in favor of Bank of America,
as Agent. Incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K of Ann Taylor filed on
October 17, 1995.
10.7 1989 Stock Option Plan. Incorporated by reference to
Exhibit 10.18 to the Registration Statement of the
Company and Ann Taylor filed on May 3, 1989
(Registration No. 33-28522).
10.7.1 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.
10.8 Lease, dated as of March 17, 1989, between Carven
Associates and Ann Taylor concerning the West 57th
Street headquarters. Incorporated by reference to
Exhibit 10.21 to the Registration Statement of the
Company and Ann Taylor filed on May 3, 1989
(Registration No. 33-28522).
10.8.1 First Amendment to Lease, dated as of November 14,
1990, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.17.1 to the
Registration Statement of the Company filed on April
11, 1991 (Registration No. 33-39905).
10.8.2 Second Amendment to Lease, dated as of February 28,
1993, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.17.2 to the
Annual Report on Form 10-K of the Company filed on
April 29, 1993.
10.8.3 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.
10.8.4 Modification of Amendment and Extension to Lease, dated
as of April 14, 1994 between Carven Associates and Ann
Taylor. Incorporated by reference to Exhibit 10.15.4
to the Annual Report on Form 10-K of the Company filed
on April 28, 1995.
=====================================================================
Exhibit
Number
- --------
10.8.5 Fifth Amendment to Lease, dated as of March 14, 1995,
between Carven Associates and Ann Taylor. Incorporated
by reference to Exhibit 10.15.5 to the Annual Report on
Form 10-K of the Company filed on April 28, 1995.
10.8.6 Sixth Amendment to Lease, dated as of January 5, 1996,
between Pacific Metropolitan Corporation and Ann
Taylor.
10.8.7 Seventh Amendment to Lease, dated as of June 5, 1996,
between Pacific Metropolitan Corporation and Ann
Taylor.
10.8.8 Eighth Amendment to Lease, undated, between Pacific
Metropolitan Corporation and Ann Taylor.
10.8.9 Ninth Amendment to Lease, dated as of May 13, 1997,
between Pacific Metropolitan Corporation and Ann
Taylor.
10.8.10 Tenth Amendment to Lease, dated as of May 21, 1997,
between Pacific Metropolitan Corporation and Ann
Taylor.
10.9 Tax Sharing Agreement, dated as of July 13, 1989,
between the Company and Ann Taylor. Incorporated by
reference to Exhibit 10.24 to Amendment No. 2 to the
Registration Statement of the Company and Ann Taylor
filed on July 13, 1989 (Registration No. 33-28522).
10.10 Employment Agreement dated as of February 1, 1994
between the Company and Sally Frame Kasaks.
Incorporated by reference to Exhibit 10.8 to the Form
10-Q of the Company for the Quarter ended October 29,
1994 filed on December 9, 1994.
10.11 Employment Agreement dated February 16, 1996 between
the Company and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.4 to the Annual Report on Form
10-K of the Company filed on April 8, 1996.
10.11.1 Amendment to the Employment Agreement, dated August 23,
1996, between the Company and J. Patrick Spainhour.
Incorporated by reference to Exhibit 10.11.1 to the
Annual Report on Form 10-K of the Company filed on May
1, 1997.
10.12 Employment Agreement dated November 25, 1996 between
the Company and Patricia DeRosa. Incorporated by
reference to Exhibit 10.3 to Form 10-Q of Ann Taylor for
the Quarter ended November 2, 1996 filed on December
17, 1996.
10.13 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.
10.14 Separation Agreement dated January 24, 1997 between Ann
Taylor and Paul E. Francis. Incorporated by reference
to Exhibit 10.14 to the Annual Report on Form 10-K of
the Company filed on May 1, 1997.
10.15 Separation Agreement dated July 15, 1997 between Ann
Taylor and Barry Shapiro.
10.16 The AnnTaylor Stores Corporation 1992 Stock Option and
Restricted Stock and Unit Award Plan, Amended and
Restated as of February 23, 1994 (the "1992 Option
Plan"). Incorporated by reference to Exhibit 10.15 to
the Annual Report on Form 10-K of the Company filed on
May 1, 1997.
10.16.1 Amendment to the AnnTaylor Stores Corporation Amended
and Restated 1992 Stock Option and Restricted Stock and
Unit Award Plan, as approved by stockholders on June
18, 1997. Incorporated by reference to Exhibit 10.15.1
to the Form 10-Q of the Company for the Quarter Ended
August 2, 1997 filed on September 12, 1997.
=======================================================================
Exhibit
Number
- ---------
10.16.2 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 on the Current
Report on Form 8-K of the Company filed on March 12,
1998.
10.17 AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan, as approved
by stockholders on June 18, 1997. Incorporated by
reference to Exhibit 10.16 to the Form 10-Q of the
Company for the Quarter Ended August 2, 1997 filed on
September 12, 1997.
10.17.1 Amendment to the AnnTaylor Stores Corporation Amended
and Restated Management Performance Compensation Plan
dated as of March 12, 1998.
10.18 Associate Stock Purchase Plan. Incorporated by
reference to Exhibit 10.31 to the Form 10-Q of the
Company for the Quarter Ended October 31, 1992 filed on
December 15, 1992.
10.19 Amended and Restated Receivables Financing Agreement
dated October 31, 1995, among AnnTaylor Funding, Inc.,
Ann Taylor, Market Street Capital Corp. and PNC Bank,
National Association. Incorporated by reference to
Exhibit 10.31.4 to the Form 10-Q of the Company for the
Quarter ended October 28, 1995 filed on December 8,
1995.
10.19.1 First Amendment to the Amended and Restated Receivables
Financing Agreement, dated as of November 1, 1996,
among AnnTaylor Funding, Inc., Ann Taylor, Market
Street Capital Corp. and PNC Bank, National
Association. Incorporated by reference to Exhibit
10.5 to the Form 10-Q of Ann Taylor for the Quarter
ended November 2, 1996 filed on December 17, 1996.
10.20 Purchase and Sale Agreement dated as of January 27,
1994 between Ann Taylor and AnnTaylor Funding, Inc.
Incorporated by reference to Exhibit 10.29 to the
Annual Report on Form 10-K of the Company filed on
March 31, 1994.
10.21 AnnTaylor Stores Corporation Deferred Compensation
Plan. Incorporated by reference to Exhibit 10.33 to
the Annual Report on Form 10-K of the Company filed on
April 28, 1995.
10.21.1 Amendment to the AnnTaylor Stores Corporation Deferred
Compensation Plan as approved by the Board of Directors
on August 11, 1995. Incorporated by reference to
Exhibit 10.33.1 to the Form 10-Q of the Company for the
Quarter Ended July 29, 1995 filed on September 11,
1995.
10.22 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.
10.23 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.
10.24 Amended and Restated Credit Agreement, dated as of
September 20, 1996, between AnnTaylor Global Sourcing,
Inc. and the Hongkong and Shanghai Banking Corporation
Limited. Incorporated by reference to Exhibit 10.6 to
the Form 10-Q of Ann Taylor for the Quarter ended
November 2, 1996 filed on December 17, 1996.
============================================================================
Exhibit
Number
- --------
10.24.1 Promissory Note dated September 20, 1996 from AnnTaylor
Global Sourcing, Inc. to the Hongkong and Shanghai
Banking Corporation Limited, New York Branch.
Incorporated by reference to Exhibit 10.7 to Form 10-Q
of Ann Taylor for the Quarter ended November 2, 1996
filed on December 17, 1996.
10.24.2 Amended and Restated Security Agreement, dated as of
September 20, 1996, between AnnTaylor Global Sourcing,
Inc. and the Hongkong and Shanghai Banking Corporation
Limited. Incorporated by reference to Exhibit 10.8 to
the Form 10-Q of Ann Taylor for the Quarter ended
November 2, 1996 filed on December 17, 1996.
10.24.3 Letter of Negative Pledge, dated as of September 20,
1996 from AnnTaylor Global Sourcing, Inc. to the
Hongkong and Shanghai Banking Corporation Limited.
Incorporated by reference to Exhibit 10.9 to the Form
10-Q of Ann Taylor for the Quarter ended November 2,
1996 filed on December 17, 1996.
10.24.4 First Amendment to the Amended and Restated Credit
Agreement, dated as of April 11, 1997, between
AnnTaylor Global Sourcing, Inc. and the Hongkong and
Shanghai Banking Corporation Limited. Incorporated by
reference to Exhibit 10.25.4 to the Form 10-Q of the
Company for the Quarter Ended August 2, 1997 filed on
September 12, 1997.
10.24.5 Second Amendment to the Amended and Restated Credit
Agreement, dated as of July 29, 1997, between AnnTaylor
Global Sourcing, Inc. and the Hongkong and Shanghai
Banking Corporation Limited. Incorporated by reference
to Exhibit 10.25.5 to the Form 10-Q of the Company for
the Quarter Ended August 2, 1997 filed on September 12,
1997.
10.24.6 Notification of extension of termination date of the
Amended and Restated Credit Agreement, dated as of
September 20, 1996 between AnnTaylor Global Sourcing,
Inc. and the HongKong and Shanghai Banking Corporation
Limited. Incorporated by reference to Exhibit 10.25.6
to the Form 10-Q of the Company for the Quarter Ended
November 1, 1997 filed on December 16, 1997.
10.25 Stock and Asset Purchase Agreement, dated as of June 7,
1996, by and among the Company, Ann Taylor, Cygne and
Cygne Group (F.E.) Limited. Incorporated by reference
to Exhibit 2 to the Registrants' Current Report on Form
8-K filed on June 10, 1996.
10.25.1 Amendment to Stock and Asset Purchase Agreement, dated
as of August 27, 1996, by and among the Company, Ann
Taylor, Cygne and Cygne Group (F.E.) Limited.
Incorporated by reference to Exhibit 3 to the
Registrants' Current Report on Form 8-K filed on August
30, 1996.
10.25.2 Stockholders Agreement, dated as of September 20, 1996,
among the Company, Cygne and Cygne Group (F.E.)
Limited, a Hong Kong corporation and wholly owned
subsidiary of Cygne. Incorporated by reference to
Exhibit 10.26.2 to the Annual Report on Form 10-K of
the Company filed on May 1, 1997.
10.25.3 Consulting Agreement, dated as of September 20, 1996,
by and between the Company, Cygne and Mr. Bernard M.
Manuel. Incorporated by reference to Exhibit 10.26.3
to the Annual Report on Form 10-K of the Company filed
on May 1, 1997.
10.25.4 Consulting Agreement, dated as of September 20, 1996,
by and between the Company, Cygne and Mr. Irving
Benson. Incorporated by reference to Exhibit 10.26.4
to the Annual Report on Form 10-K of the Company filed
on May 1, 1997.
=========================================================================
Exhibit
Number
- --------
10.26 Certificate of Trust of AnnTaylor Finance Trust.
Incorporated by reference to Exhibit 4.1 to the
Registration Statement of the Company and AnnTaylor
Finance Trust filed on June 21, 1996 (Registration 333-
06605).
10.26.1 Amended and Restated Declaration of Trust of AnnTaylor
Finance Trust, dated as of April 25, 1996 among the
Company, as Sponsor, The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware
Trustee and J. Patrick Spainhour, Paul E. Francis and
Walter J. Parks, as Trustees. Incorporated by
reference to Exhibit 4.2 to the Registration Statement
of the Company and AnnTaylor Finance Trust filed on
June 21, 1996 (Registration 333-06605).
10.26.2 Indenture, dated as of April 15, 1996, among AnnTaylor
Stores Corporation and The Bank of New York, as
Trustee, including form of Preferred Securities and
form of Convertible Subordinated Debentures due 2016.
Incorporated by reference to Exhibit 4.3 to the
Registration Statement of the Company and AnnTaylor
Finance Trust filed on June 21, 1996 (Registration No.
333-06605).
10.26.3 Amendment No. 1 to the Amended and Restated Declaration
of Trust of AnnTaylor Finance Trust, dated as of August
27, 1996, between the Company and Bank of New York, as
Trustee. Incorporated by reference to Exhibit 10.2 to
Form 10-Q of Ann Taylor for the Quarter ended August 3,
1996 filed on September 16, 1996.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
===========================================================================
SIGNATURES
-----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ANNTAYLOR STORES CORPORATION
By: /s/ J. Patrick Spainhour
---------------------------
J. Patrick Spainhour
Chairman and Chief
Executive Officer
Date: April 29, 1998
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 April 29, 1998
- ------------------------ Officer and Director
J. Patrick Spainhour
/s/ Patricia DeRosa President and Chief Operating April 29, 1998
- ------------------------ Officer and Director
Patricia DeRosa
/s/ Walter J. Parks Senior Vice President - April 29, 1998
- ------------------------ Chief Financial Officer
Walter J. Parks and Treasurer
/s/ James M. Smith Vice President and Controller April 29, 1998
- ------------------------ Principal Accounting Officer
James M. Smith
/s/ Gerald S. Armstrong Director April 29, 1998
- -------------------------
Gerald S. Armstrong
/s/ James J. Burke, Jr. Director April 29, 1998
- --------------------------
James J. Burke, Jr.
/s/ Robert C. Grayson Director April 29, 1998
- --------------------------
Robert C. Grayson
/s/ Rochelle B. Lazarus Director April 29, 1998
- --------------------------
Rochelle B. Lazarus
/s/ Hanne M. Merriman Director April 29, 1998
- ---------------------------
Hanne M. Merriman
=============================================================================
ANNTAYLOR STORES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Independent Auditors' Report.......................................... 31
Consolidated Financial Statements:
Consolidated Statements of Operations for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3, 1996.... 32
Consolidated Balance Sheets as of January 31, 1998 and
February 1, 1997................................................ 33
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 31, 1998, February 1, 1997
and February 3, 1996............................................ 34
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3, 1996... 35
Notes to Consolidated Financial Statements........................ 36
=============================================================================
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
ANNTAYLOR STORES CORPORATION:
We have audited the accompanying consolidated financial
statements of AnnTaylor Stores Corporation and its subsidiaries,
listed in the accompanying index. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of the Company and its subsidiaries at January 31, 1998 and
February 1, 1997, and the results of their operations and their
cash flows for each of the three fiscal years in the period ended
January 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
March 19, 1998
==========================================================================
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended January 31, 1998, February 1, 1997 and
February 3, 1996
Fiscal Years Ended
-----------------------------------
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
--------- --------- ---------
(in thousands, except per share amounts)
Net sales............................. $781,028 $798,117 $731,142
Cost of sales......................... 411,756 443,443 425,225
------- ------- -------
Gross profit.......................... 369,272 354,674 305,917
Selling, general and
administrative expenses........... 308,232 291,027 271,136
Studio shoe stores closing expense.... --- 3,600 ---
Employment contract separation expense --- 3,500 ---
Amortization of goodwill.............. 11,040 10,086 9,506
------- ------- -------
Operating income...................... 50,000 46,461 25,275
Interest expense...................... 19,989 24,416 20,956
Other expense, net.................... 548 403 38
------- ------- -------
Income before income taxes
and extraordinary loss............ 29,463 21,642 4,281
Income tax provision.................. 17,466 12,975 5,157
------- ------- -------
Income (loss) before extraordinary loss 11,997 8,667 (876)
Extraordinary loss (net of income
tax benefit of $130,000)............. 173 --- ---
------ ------- -------
Net income (loss)................... $11,824 $ 8,667 $ (876)
====== ======= ======
Basic and diluted earnings (loss)
per share of common stock:
Basic and diluted earnings (loss)
per share before extraordinary loss.. $ 0.47 $ 0.36 $ (0.04)
Extraordinary loss per share........... 0.01 --- ---
------ ------ ------
Basic and diluted earnings
(loss) per share.................. $ 0.46 $ 0.36 $ (0.04)
====== ======= ======
See accompanying notes to consolidated financial statements.
=============================================================================
ANNTAYLOR STORES CORPORATION
CONSOLIDATED BALANCE SHEETS
January 31, 1998 and February 1, 1997
January 31, February 1,
1998 1997
------------ -----------
(in thousands)
ASSETS
Current assets
Cash and cash equivalents....................... $ 31,369 $ 7,025
Accounts receivable, net........................ 60,211 63,605
Merchandise inventories......................... 97,234 100,237
Prepaid expenses and other current assets....... 21,291 25,653
------- -------
Total current assets........................ 210,105 196,520
Property and equipment, net...................... 139,610 143,433
Goodwill, net.................................... 330,739 341,779
Deferred financing costs, net.................... 1,258 2,743
Other assets..................................... 1,949 3,664
------- -------
Total assets................................ $683,661 $688,139
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................ $ 38,185 $ 34,341
Accrued tenancy................................. 6,727 6,827
Gift certificates redeemable.................... 5,935 4,903
Accrued expenses................................ 35,958 31,312
Current portion of long-term debt............... 1,119 287
------- -------
Total current liabilities................... 87,924 77,670
Long-term debt................................... 105,157 130,905
Deferred income taxes............................ --- 4,872
Other liabilities................................ 10,082 7,952
Commitments and contingencies
Company-Obligated Mandatorily
Redeemable Convertible
Preferred Securities of Subsidiary,
AnnTaylor Finance Trust,
Holding Solely Convertible Debentures......... 96,391 96,158
Stockholders' equity
Common stock, $.0068 par value;
40,000,000 shares authorized;
25,657,590 and 25,598,489
shares issued, respectively.................. 174 174
Additional paid-in capital...................... 350,647 349,545
Warrants to acquire 2,814 shares
of common stock............................... 46 46
Retained earnings............................... 34,204 22,613
Deferred compensation on restricted stock....... (737) (1,590)
------- -------
384,334 370,788
Treasury stock, 12,659 and 11,601
shares, respectively,
at cost................................... (227) (206)
------- -------
Total stockholders' equity.................. 384,107 370,582
------- -------
Total liabilities and stockholders' equity.. $683,661 $688,139
======= =======
See accompanying notes to consolidated financial statements.
==============================================================================
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended January 31, 1998, February 1, 1997 and
February 3, 1996
(in thousands)
Common Stock Additional Warrants Restricted Treasury Stock
-------------- Paid-In --------------- Retained Stock ---------------------
Shares Amount Capital Shares Amount Earnings Awards Shares Amount
------ ------ --------- ------ ------ -------- ------ ------ ------
Balance at January 28, 1995 23,107 $157 $310,714 58 $ 951 $14,996 $ (149) 66 $(557)
Net loss --- --- --- --- --- (876) --- --- ---
Exercise of stock options and
related tax benefit 23 --- 405 --- --- --- --- --- (12)
Exercise of warrants --- --- 203 (21) (355) --- --- (22) 152
Activity related to common
stock issued as employee
incentives (2) --- (38) --- --- --- 116 1 (19)
------ --- ------- --- ---- ------ ------ -- ----
Balance at February 3, 1996 23,128 157 311,284 37 596 14,120 (33) 45 (436)
Net income --- --- --- --- --- 8,667 --- --- ---
Exercise of stock options and
related tax benefit 18 --- 216 --- --- --- --- --- ---
Exercise of warrants --- --- 314 (34) (550) --- --- (34) 236
Issuance of stock for Sourcing
Acquisition 2,348 16 35,984 --- --- --- --- --- ---
Amortization of discount on
preferred securities --- --- --- --- --- (174) --- --- ---
Activity related to common
stock issued as employee
incentives 104 1 1,747 --- --- --- (1,557) 1 (6)
------ --- ------- --- ---- ------ ------ -- ----
Balance at February 1, 1997 25,598 174 349,545 3 46 22,613 (1,590) 12 (206)
Net income --- --- --- --- --- 11,824 --- --- ---
Exercise of stock options and
related tax benefit 48 --- 890 --- --- --- --- 1 (10)
Amortization of discount on
preferred securities --- --- --- --- --- (233) --- --- ---
Activity related to common
stock issued as employee
incentives 12 --- 212 --- --- --- 853 --- (11)
------ --- ------- --- ---- ------ ------ --- ----
Balance at January 31, 1998 25,658 $174 $350,647 3 $ 46 $34,204 $ (737) 13 $(227)
====== === ======= === ==== ====== ====== === ====
See accompanying notes to consolidated financial statements.
=============================================================================
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended January 31, 1998, February 1, 1997 and
February 3, 1996
Fiscal Years Ended
-------------------------------
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
--------- -------- ------
(in thousands)
Operating activities:
Net income (loss)......................... $ 11,824 $ 8,667 $ (876)
Adjustments to reconcile net income.......
(loss) to net cash
provided by operating activities:
Extraordinary loss.................... 303 --- ---
Equity earnings in CAT................ --- (1,402) (1,646)
Provision for loss on
accounts receivable................. 1,795 1,803 1,280
Depreciation and amortization......... 27,803 26,208 18,788
Amortization of goodwill.............. 11,040 10,086 9,506
Amortization of deferred compensation 1,065 191 68
Non-cash interest..................... 1,419 1,574 1,004
Deferred income taxes................. (2,687) (985) 3,150
Loss on disposal of property
and equipment....................... 248 3,209 1,143
Change in assets and liabilities
net of effects from
purchase of AnnTaylor Global Sourcing:
Decrease (increase)
in receivables............... 1,599 4,987 (10,464)
Decrease (increase) in
merchandise inventories....... 3,003 9,342 (8,980)
Decrease (increase) in
prepaid expenses and
other current assets........... 1,894 247 (12,951)
Decrease in other non-current
assets and liabilities, net.... 2,861 738 429
Increase in accounts payable
and accrued liabilities........ 9,422 2,867 6,925
------- ------- -------
Net cash provided by operating activities... 71,589 67,532 7,376
------- ------- -------
Investing activities:
Purchases of property and equipment..... (22,945) (16,107) (78,378)
Purchase of AnnTaylor Global Sourcing....... --- (227) ---
------- ------- -------
Net cash used by investing activities.. (22,945) (16,334) (78,378)
------- ------- -------
Financing activities:
Borrowings (repayments) under
revolving credit facility............... --- (101,000) 37,000
Net proceeds from issuance of
preferred securities...................... --- 95,984 ---
Proceeds from (repayment of) term loan...... (24,500) --- 24,500
Term loan prepayment penalty................ (184) --- ---
Proceeds from (payments of) mortgage........ (416) (266) 6,958
Borrowings (repayments) under
receivables facility..................... --- (40,000) 4,000
Proceeds from exercise of stock options..... 869 210 384
Payment of financing costs.................. (69) (384) (2,108)
------- ------- -------
Net cash provided by (used by)
financing activities...................... (24,300) (45,456) 70,734
------- ------- -------
Net increase (decrease) in cash............... 24,344 5,742 (268)
Cash, beginning of year....................... 7,025 1,283 1,551
------- ------- -------
Cash, end of year.............................$ 31,369 $ 7,025 $ 1,283
======= ======= =======
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for interest......$ 19,251 $ 22,689 $ 19,607
======= ======= =======
Cash paid during the year for
income taxes..............................$ 17,220 $ 8,990 $ 6,886
======= ======= =======
See accompanying notes to consolidated financial statements.
=============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
- ------------------------------------------------
Ann Taylor is a leading national specialty retailer of
better quality women's apparel, shoes and accessories sold
principally under the Ann Taylor brand name.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts
of AnnTaylor Stores Corporation (the "Company") and AnnTaylor,
Inc. ("Ann Taylor"). The Company has no material assets other
than the common stock of Ann Taylor and the common securities of
AnnTaylor Finance Trust and conducts no business other than the
management of Ann Taylor. All intercompany accounts have been
eliminated in consolidation.
Certain Fiscal 1996 and 1995 amounts have been reclassified
to conform to the Fiscal 1997 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. The fiscal
year ended February 3, 1996 included 53 weeks. The other 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 $8,568,000 for Fiscal 1997,
$9,024,000 for Fiscal 1996 and $8,328,000 for Fiscal 1995.
Merchandise Inventories
- -----------------------
Merchandise inventories are accounted for by the retail
inventory method and are stated at the lower of cost (first-in,
first-out method) or market. The majority of the Company's
inventory represents finished goods available for sale.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. The Company
capitalized interest costs of approximately $1,300,000 in Fiscal
1995. Depreciation and amortization are computed on a straight-
line basis over the estimated useful lives of the assets (3 to 40
years) or, in the case of leasehold improvements, over the lives
of the respective leases, if shorter.
=========================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------
Deferred Financing Costs
- ------------------------
Deferred financing costs are being amortized using the
interest method over the term of the related debt. Accumulated
amortization at January 31, 1998 and February 1, 1997 was
$4,427,000 and $3,534,000, respectively.
Goodwill
- --------
Goodwill relating to the 1989 acquisition of Ann Taylor by
the Company is being amortized on a straight-line basis over 40
years. Goodwill relating to the 1996 Sourcing Acquisition (see
Note 13) is being amortized on a straight-line basis over 25
years. Accumulated amortization at January 31, 1998 and February
1, 1997 was $87,851,000 and $76,811,000, 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 cash flows.
Income Taxes
- -------------
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", which requires an asset and liability method
of accounting for deferred income taxes. Under the asset and
liability method, deferred tax assets and liabilities are
recognized, and income or expense is recorded, for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which requires that components
of comprehensive income be shown in a financial statement that is
displayed with the same prominence as other financial statements;
and 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
===================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (Continued)
- ----------------------------------------------------------
the material countries in which the entity holds assets
and reports revenues. In February 1998, the Financial
Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits", which revises
disclosures, but does not change the measurement or recognition
of these plans. Management is currently evaluating the impact of
these standards and believes their adoption will not impact the
Company's consolidated financial position, results of operations
or cash flows, and any impact will be limited to the form and
content of its disclosures. All of these statements are
effective for fiscal years beginning after December 15, 1997.
2. Long-Term Debt
- --------------------
The following table summarizes long-term debt outstanding at
January 31, 1998 and February 1, 1997:
January 31, 1998 February 1, 1997
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands)
Senior Debt:
Term loan.................... $ --- $ --- $ 24,500 $ 24,500
Mortgage..................... 6,276 6,276 6,692 6,692
8-3/4% Notes.................. 100,000 100,500 100,000 97,750
------- ------- ------- -------
Total debt................. 106,276 106,776 131,192 128,942
Less current portion.......... 1,119 1,119 287 287
------- ------- ------- -------
Total long-term debt....... $105,157 $105,657 $130,905 $128,655
======= ======= ======= =======
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 judgment is involved, the
estimates are not necessarily indicative of the amounts the
Company could realize in a current market exchange.
Ann Taylor's Bank Credit Agreement originally provided,
among other things, for a $25,000,000 term loan and a
$125,000,000 revolving credit facility. As described below, in
January 1996, the Company prepaid a portion of the term loan and
reduced the revolving credit facility to $122,000,000. On July
2, 1997, the Company used available cash to prepay $24,500,000,
the outstanding balance of the term loan. The maturity date of
the revolving credit facility is July 29, 1998; however, the
Company is required to reduce the outstanding loan balance under
the revolving credit facility to $50,000,000 or less for thirty
consecutive days during Fiscal 1996 and in each fiscal year
thereafter. The maximum amount that may be borrowed under the
revolving credit facility is reduced by the amount of commercial
and standby letters of credit outstanding under the Bank Credit
Agreement. At January 31, 1998 and February 1, 1997, Ann Taylor
had outstanding commercial and standby letters of credit under
the Bank Credit Agreement of $33,000,000 and $12,000,000,
respectively. At January 31, 1998 the amount available under the
revolving credit facility was $89,000,000.
=======================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Long-Term Debt (continued)
- ------------------------------
The amounts outstanding under the revolving credit facility
bear interest at a rate equal to, at the Company's option, the
Bank of America (1) Base Rate, or (2) Eurodollar Rate plus 0.75%.
In addition, Ann Taylor is required to pay the lenders a
quarterly commitment fee of 0.25% per annum of the unused
revolving loan commitment.
Under the terms of the Bank Credit Agreement, Bank of
America obtained a pledge of Ann Taylor's outstanding common
stock held by the Company and a security interest in certain
assets of Ann Taylor, excluding inventory and accounts
receivable. In addition, the Bank Credit Agreement contains
financial and other covenants, including limitations on
indebtedness, liens and investments, restrictions on dividends or
other distributions to stockholders, and requirements to maintain
certain financial ratios and specified levels of net worth. The
Bank Credit Agreement also provides for, among other things, an
annual limitation on capital expenditures of $32,500,000 in
Fiscal 1997 and beyond, subject to increase if certain conditions
are satisfied.
Ann Taylor sells its proprietary credit card accounts
receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary
of Ann Taylor, that uses the receivables to secure borrowings of
up to $40,000,000, based on its eligible accounts receivable,
under a receivables financing facility (the "Receivables
Facility"). As of January 31, 1998, there were no borrowings
outstanding under the Receivables Facility. AnnTaylor Funding,
Inc. had total assets of approximately $50,440,000 at
January 31, 1998, all of which are subject to the security
interest of the lender under the Receivables Facility. The
Receivables Facility matures in May 1998.
In connection with the Sourcing Acquisition discussed in
Note 13, the Hongkong and Shanghai Banking Corporation entered
into an Amended and Restated Credit Agreement with AnnTaylor
Global Sourcing, Inc. ("ATGS", formerly known as CAT US Inc.
("CAT") and now a wholly owned subsidiary of Ann Taylor),
continuing the $40,000,000 credit facility of ATGS's predecessor.
On July 29, 1997, ATGS amended its credit facility with the
HKSBC, increasing the commitment available to $50,000,000. The
facility is available principally for the issuance of letters of
credit; cash borrowings under the facility are limited to a
maximum of $5,000,000. Such credit facility matures on July 29,
1998 and contains financial and other covenants. As of January
31, 1998 and February 1, 1997, commercial and standby letters of
credit outstanding under this facility totaled $25,102,000 and
$28,189,000, respectively, and there were no borrowings
outstanding under this facility.
As noted above, the Company's Bank Credit Agreement,
Receivables Facility and HKSBC Agreement mature in May and July
1998. The Company is currently negotiating to obtain new
financing and anticipates new arrangements will be in place in
the second quarter of Fiscal 1998.
On June 28, 1993, Ann Taylor issued $110,000,000 principal
amount of its 8-3/4% Subordinated Notes due 2000 ("8-3/4% Notes").
The outstanding principal amount of these notes as of
January 31, 1998 was $100,000,000.
=========================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Long-Term Debt (Continued)
- -------------------------------
In July 1993, Ann Taylor entered into a $110,000,000
(notional amount) interest rate swap agreement, which had the
effect of converting the Company's interest obligations on the
8-3/4% Notes to a variable rate. Under the agreement, the Company
received a fixed rate of 4.75% and paid a floating rate based on
LIBOR, as determined in six month intervals. The swap agreement
matured in July 1996. Net receipts or payments under the
agreement were recognized as adjustments to interest expense.
Ann Taylor and its wholly owned subsidiary AnnTaylor
Distribution Services, Inc. are parties to a $7,000,000 seven-
year mortgage loan 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. Pursuant to the requirements of the Bank
Credit Agreement, in January 1996, the Company applied one-half
of the proceeds of the mortgage to reduce the amount available
under the revolving credit facility, thereby reducing the
revolving credit facility by $3,000,000, and prepaid a portion of
the term loan.
The aggregate principal payments of all long-term
obligations are as follows:
Fiscal Year (in thousands)
-----------
1998.................................. $ 1,119
1999.................................. 1,206
2000.................................. 101,300
2001.................................. 1,401
2002.................................. 1,250
-------
Total.............................. $106,276
=======
3. Preferred Securities
- -------------------------
In April and May of Fiscal 1996, the Company completed the
sale of an aggregate of $100,625,000 of 8-1/2% Company-Obligated
Mandatorily Redeemable Convertible Preferred Securities (the
"preferred securities") issued by its financing vehicle,
AnnTaylor Finance Trust, a Delaware business trust (the "Trust").
The preferred securities have a liquidation preference of $50 per
security ($100,625,000 in the aggregate) and are convertible at
the option of the holders thereof into the Company's common stock
at a conversion rate of 2.545 shares of common stock for each
preferred security (equivalent to $19.65 per share of common
stock, which represented a 20% premium to the $16.375 closing
price of the common stock on the New York Stock Exchange at the
date of the execution of the purchase agreement relating to the
sale of the preferred securities). The sole assets of the Trust
are $103,700,000 of 8-1/2% Convertible Subordinated Debentures of
the Company maturing on April 15, 2016. A total of 2,012,500
preferred securities were issued, and are convertible into an
aggregate of 5,121,812 shares of the Company's common stock. The
Company received net proceeds of $95,984,000 in connection with
the sale of the preferred securities, of which $94,000,000 was
applied to reduce outstanding borrowings under Ann Taylor's
revolving credit facility. The carrying value and estimated fair
value of the preferred securities at January 31, 1998 were
$96,391,000 and $86,537,500, respectively.
========================================================================
ANNTAYLOR STORES CORPORATION
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 31, 1998, February 1, 1997 and
February 3, 1996 is as follows:
Fiscal Years Ended
--------------------------
Jan.31, Feb. 1, Feb. 3,
1998 1997 1996
---- ------ ------
(in thousands)
Balance at beginning of year.... $ 811 $ 736 $ 931
Provision for loss on
accounts receivable.......... 1,795 1,803 1,280
Accounts written off............ (1,794) (1,728) (1,475)
------ ------ ------
Balance at end of year.......... $ 812 $ 811 $ 736
====== ====== ======
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 31, 1998 are as follows:
Fiscal Year (in thousands)
-----------
1998............................... $ 68,663
1999............................... 67,537
2000............................... 65,491
2001............................... 62,446
2002............................... 59,515
2003 and thereafter................ 251,998
-------
Total......................... $575,650
=======
========================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Commitments and Contingencies (continued)
- ----------------------------------------------
Rent expense for the fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996 was as follows:
Fiscal Years Ended
----------------------------
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
-------- ------- -------
(in thousands)
Minimum rent................ $59,495 $55,571 $47,132
Percentage rent............. 1,671 2,433 3,090
------ ------ ------
Total.................. $61,166 $58,004 $50,222
====== ====== ======
Litigation
- ----------
The Company has been named as a defendant in several legal
actions arising from its normal business activities. Although
the amount of any liability that could arise with respect to
these actions cannot be accurately predicted, in the opinion of
the Company, any such liability will not have a material adverse
effect on the financial position, results of operations or
liquidity of the Company.
In addition, the Company, Ann Taylor, certain officers and
directors of the Company and Ann Taylor, Merrill Lynch & Co.
("ML&Co.") and certain affiliates of ML&Co. have been named as
defendants in a purported class action lawsuit filed by certain
alleged stockholders alleging that the Company and the other
defendants engaged in a fraudulent scheme and course of business
that operated a fraud or deceit on purchasers of the Company's
common stock. 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. The Company believes
that the amended complaint is without merit and intends to defend
the action vigorously. As the case is in preliminary stages, any
liability that may arise from this action cannot be predicted at
this time.
Other
- -----
The Internal Revenue Service (the "IRS") examination of the
Company has recently been concluded. The IRS has made an
assessment, which the Company has paid, that is not material to
the Company's consolidated financial condition, operating results
or liquidity. All matters in the IRS examination are subject to
final review by the Congressional Joint Committee on Taxation.
6. Net Income per Share
- -----------------------
In Fiscal 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128") which specifies the computation, presentation and
disclosure requirements for basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income by
the weighted average number of common shares outstanding during
the period. Diluted earnings per share includes the addition of
potential common shares issued assuming the conversion of all
outstanding warrants and stock options, as follows:
======================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Net Income per Share (continued)
- ----------------------------------
Fiscal Years Ended
-----------------------------------------------------------------------------------------
January 31, 1998 February 1, 1997 February 3, 1996
---------------------------- ------------------------- ---------------------------
(In thousands, except per share amounts)
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Loss Shares Amount
------ ------ ------ ------ ------ ------ ---- ------ ------
Basic Earnings per Share
- ------------------------
Income (loss) available
to common stockholders
before extraordinary loss $11,997 25,628 $0.47 $8,667 23,981 $0.36 $(876) 23,067 $(0.04)
Effect of Dilutive
- ------------------
Securities
- ----------
Warrants --- 3 --- --- 22 --- --- 44 ---
Stock Options --- 62 --- --- 57 --- --- 56 ---
------- ------- ---- ------ ------ ---- ----
Diluted Earnings per Share
- --------------------------
Income (loss) available
to common stockholders
before extraordinary loss $11,997 25,693 $0.47 $8,667 24,060 $0.36 $(876) 23,167 $(0.04)
====== ====== ==== ===== ====== ==== ==== ====== =====
Conversion of the preferred securities into common stock is
not included in the computation of diluted earnings per share for
the fiscal years ended January 31, 1998 and February 1, 1997 due
to the antidilutive effect of the conversion.
7. Other Equity
- ----------------
Common Stock Warrants
- ---------------------
At January 31, 1998, the Company had outstanding warrants to
acquire, in the aggregate, 2,814 shares of the common stock of
the Company (the "Warrants"). The Warrants, when exercised,
entitle the holders thereof to acquire such shares, subject to
adjustment, at no additional cost. The Warrants expire on July
15, 1999 and became exercisable as a result of the initial public
offering of the Company's common stock in May 1991.
Preferred Stock
- ---------------
At January 31, 1998, February 1, 1997 and February 3, 1996,
there were 2,000,000 shares of preferred stock, par value $0.01,
authorized and unissued.
=======================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Property and Equipment
- -------------------------
Property and equipment consists of the following:
Fiscal Years Ended
------------------
Jan. 31, Feb. 1,
1998 1997
-------- -------
(in thousands)
Land and building............... $ 8,625 $ 8,603
Leasehold improvements.......... 85,332 76,576
Furniture and fixtures.......... 136,314 120,595
Construction in progress........ 6,422 3,307
------- -------
236,693 209,081
Less accumulated depreciation
and amortization.............. 97,083 65,648
------- -------
Net property and equipment $139,610 $143,433
======= =======
9. Stock Option Plans
- ----------------------
In 1989 and 1992, the Company established stock option
plans. 122,199 shares of common stock are reserved for issuance
under the 1989 plan and 2,924,934 shares of common stock are
reserved for issuance under the 1992 plan. Under the terms of
both plans, the exercise price of any option may not be less than
100% of the fair market value of the common stock on the date of
grant. Stock options granted prior to 1994 generally vest over a
five year period, with 20% becoming exercisable immediately upon
grant of the option and 20% per year for the next four years.
Stock options granted since 1994 generally vest either (i) over a
four year period, with 25% becoming exercisable on each of the
first four anniversaries of the grant, or (ii) in seven or nine
years with accelerated vesting upon the achievement of specified
earnings or stock price targets within a five year period. All
stock options granted under the 1989 plan and the 1992 plan
expire ten years from the date of grant. At January 31, 1998,
there were 21,066 shares under the 1989 plan and 1,404,975 shares
under the 1992 plan available for future grant.
The Company accounts for the stock options in accordance
with Accounting Principles Board Opinion No. 25, under which no
compensation costs have been recognized for stock option awards.
Had compensation costs of option awards been determined under a
fair value alternative method as stated in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company would have been required to prepare a
fair value model for such options and record such amount in the
financial statements as compensation expense. Proforma net
income before extraordinary loss and net income per share before
extraordinary loss after taking into account such expense would
have been $11.0 million and $0.43, respectively, for Fiscal 1997,
and $8.2 million and $0.34, respectively, for Fiscal 1996, and
proforma net loss and net loss per share for Fiscal 1995 would
have been $1.1 million and $0.05, respectively. For purposes of
this calculation, the Company arrived at the fair value of each
stock grant at the date of grant by using the Black Scholes
option pricing model with the following weighted average
assumptions used for grants for the fiscal years ended January
31, 1998, February 1, 1997, and February 3, 1996: risk-free
interest rate of 6.2%, 5.8%, and 7.0%, respectively; expected
life of 5.0 years, 4.3 years, and 5.0 years, respectively; and
expected volatility of 67.9%, 55.2%, and 44.8%, respectively.
=====================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock Options Plans (continued)
- ---------------------------------
The following summarizes stock option transactions for the
fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996:
Weighted Number
Option Prices Average Price of Shares
------------- ------------- ---------
Outstanding Options
January 28, 1995 $6.80-$42.75 $23.03 1,398,006
Granted $12.50-$44.125 $31.90 478,250
Exercised $6.80-$22.75 $13.68 (22,611)
Canceled $6.80-$42.75 $27.64 (299,468)
---------
Outstanding Options
February 3, 1996 $6.80-$44.125 $28.00 1,554,177
Granted $11.00-$21.625 $17.52 463,500
Exercised $6.80 $6.80 (18,234)
Canceled $11.50-$42.75 $27.31 (335,358)
---------
Outstanding Options
February 1, 1997 $6.80-$44.125 $22.69 1,664,085
Granted $14.25-$22.75 $20.60 590,000
Exercised $6.80- $20.00 $15.45 (47,436)
Canceled $11.50- $39.75 $25.11 (585,557)
---------
Outstanding Options
January 31, 1998 $6.80-$44.125 $21.20 1,621,092
=========
At January 31, 1998, February 1, 1997 and February 3, 1996
there were exercisable 450,776 options, 660,290 options and
586,135 options, respectively, which have weighted average
exercise prices of $19.02 per share, $21.03 per share and $19.78
per share, respectively.
In 1994, the Company's 1992 stock option plan was amended
and restated to include restricted stock and unit awards. A unit
represents the right to receive the cash value of a share of
common stock on the date the restrictions on the unit lapse. The
restrictions on these grants generally lapse with respect to one-
third of the shares and units awarded on each of the first
through third anniversaries of the date of the grant. In the
event a grantee terminates employment with the Company, any
restricted stock or restricted units remaining subject to
restrictions are forfeited. On February 23, 1994, 13,630 shares
of restricted stock and 6,820 restricted units were awarded. As
of January 31, 1998, the restrictions on these grants have fully
lapsed. The resulting unearned compensation expense was charged
to stockholders' equity and was amortized over the applicable
restricted period. During 1997, certain other employees were
awarded 11,665 shares of restricted common stock and
3,335 restricted units, all of which wefre outstanding at January
31, 1998. For the fiscal year ended January 31, 1998, the
resulting unearned compensation expense, based upon the market
value on the date of grant, was charged to stockholders' equity
and is being amortized over the restricted period.
10. Executive Compensation
- ---------------------------
Effective August 23, 1996, the then-Chairman and Chief
Executive Officer and Director of the Company and Ann Taylor
resigned from her position. See Note 12 for a discussion of the
Company's obligations under the former Chairman's employment
agreement.
=========================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Executive Compensation (continued)
- ---------------------------------------
Upon this resignation, the Company's then-President and
Chief Operating Officer J. Patrick Spainhour was promoted to the
position of Chairman and Chief Executive Officer. In connection
with this promotion, Mr. Spainhour was granted 75,000 shares of
restricted common stock. The resulting unearned compensation
expense of $1,171,875, based on the market value on the
date of the grant, was charged to stockholders' equity and
is being amortized over the restricted period applicable
to these shares. Additionally, as of December 9, 1996,
the President and Chief Operating Officer of the Company
received a grant of 30,000 restricted shares of common stock and
20,000 restricted units. The resulting unearned compensation
expense of $592,500, based on the market value on the date of the
grant, was charged to stockholders' equity and is being amortized
over the restricted period applicable to these shares. As of
January 31, 1998, 70,000 shares of restricted stock and 13,333
restricted units had not yet vested.
11. 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.
12. 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. 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 the Chairman and Chief Executive Officer
- -------------------------------------------------------
Effective August 23, 1996, the then Chairman and Chief
Executive Officer 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 relating to the estimated
costs of the Company's obligations under the former Chairman's
employment contract with the Company.
13. Certain Relationships and Related Transactions
- ----------------------------------------------------
Transactions with Merrill Lynch and its Affiliates
- --------------------------------------------------
At January 31, 1998, certain affiliates of ML&Co. held
approximately 24.0% of the Company's outstanding common stock.
Two of the members of the Board of Directors of the Company and
Ann Taylor serve as representatives of ML&Co. and its affiliates.
As a result, ML&Co. and such affiliates are in a position to
influence the management of the Company and Ann Taylor.
===========================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Certain Relationships and Related Transactions (continued)
- ---------------------------------------------------------------
In Fiscal 1996, the Company paid approximately $1,207,500 to
ML&Co. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated
("Merrill Lynch") in connection with their services as placement
agents for the sale of the preferred securities (see Note 3).
The Company agreed to indemnify ML&Co. and Merrill Lynch, as
placement agents, against certain liabilities, including certain
liabilities under the federal securities law, in connection with
the sale of the preferred securities.
Sourcing Acquisition
- --------------------
In Fiscal 1995, the Company purchased approximately 16% of
its merchandise directly from Cygne Designs, Inc. ("Cygne") and
an additional 38% of its merchandise through the Company's direct
sourcing joint venture with Cygne known as CAT. On September 20,
1996 (the "Effective Date"), pursuant to the Stock and Asset
Purchase Agreement dated as of June 7, 1996, by and among the
Company, Ann Taylor, Cygne and Cygne Group F.E. Limited (as
amended, the "Purchase Agreement"), Ann Taylor acquired the
entire interest of Cygne in CAT and certain of the assets (the
"Assets") of the Ann Taylor Woven Division of Cygne (the
"Division") that were used for sourcing merchandise for Ann
Taylor (the "Sourcing Acquisition"). As a result of the Sourcing
Acquisition, CAT became an indirect wholly owned subsidiary of
the Company and now performs all of Ann Taylor's direct sourcing
functions, including those previously provided by the Division,
under the name AnnTaylor Global Sourcing, Inc. For financial
reporting purposes, the transaction has been accounted for as of
the Effective Date under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16,
"Accounting for Business Combinations".
In consideration for Cygne's interest in CAT and the Assets,
the Company paid (i) 2,348,145 shares of common stock of the
Company having an aggregate value, as of the Effective Date, of
$36,000,000, (ii) $3,200,000 in cash as payment for inventory and
fixed assets and (iii) approximately $6,500,000 in cash in
settlement of open accounts payable by Ann Taylor to Cygne for
merchandise delivered by Cygne prior to the closing. The Company
also assumed certain liabilities related to the operations of the
Division. The purchase price was subject to post-closing
adjustments based upon final determination of the value of
certain of the assets purchased and liabilities assumed. As of
February 1, 1997, certain post-closing adjustments reduced the
net cash paid to approximately $227,000. The total purchase
price to the Company of the Sourcing Acquisition has been
allocated to the tangible and intangible assets and liabilities
of CAT and the Division that were acquired, based on estimates of
their respective fair values. The excess of the purchase price
over the fair value of the net assets acquired was recorded as
goodwill and is being amortized on a straight-line basis over 25
years.
The following unaudited proforma consolidated data for the
Company for the fiscal year ended February 1, 1997 has been
presented to reflect the Sourcing Acquisition as if it had
occurred at the beginning of such period:
Fiscal Year Ended
February 1, 1997
---------------------
Actual Proforma
------ ---------
(in thousands, except per share amounts)
Net sales................................ $798,117 $798,117
Net income............................... $ 8,667 $ 11,595
Basic and diluted earnings per share..... $ 0.36 $ 0.45
Weighted average shares.................. 23,981 25,458
Weighted average shares,
assuming dilution...................... 24,060 25,537
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Certain Relationships and Related Transactions (continued)
- ---------------------------------------------------------------
The proforma data set forth above does not purport to be
indicative of the results that actually would have occurred if
the Sourcing Acquisition had occurred at the beginning of the
period presented or of results which may occur in the future.
A summary of the noncash activity that occurred in the
fiscal year ended February 1, 1997 in conjunction with the
Sourcing Acquisition is as follows:
(in thousands)
Fair value of assets acquired................. $ 4,727
Excess of purchase price over the
fair value of net assets acquired.. 38,340
Ann Taylor's previous investment in CAT....... (6,840)
Issuance of the Company's common stock........ (36,000)
-------
Cash paid..................................... $ 227
=======
14. Income Taxes
- -----------------
The provision for income taxes for the fiscal years ended
January 31, 1998, February 1, 1997, and February 3, 1996 consists
of the following:
Fiscal Years Ended
------------------------------------
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- -----------
(in thousands)
Federal:
Current..................... $14,427 $ 9,898 $1,400
Deferred.................... (1,917) (802) 2,249
------ ----- -----
Total federal............. 12,510 9,096 3,649
------ ----- -----
State and local:
Current..................... 5,538 3,844 607
Deferred.................... (769) (152) 901
------ ----- -----
Total state and local..... 4,769 3,692 1,508
------ ----- -----
Foreign:
Current..................... 187 187 ---
Deferred.................... --- --- ---
------ ----- -----
Total foreign............. 187 187 ---
------ ----- -----
Total....................... $17,466 $12,975 $5,157
====== ====== =====
===================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Income Taxes (continued)
- ----------------------------
The reconciliation between the provision for income taxes
and the provision for income taxes at the federal statutory rate
for the fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996 is as follows:
Fiscal Years Ended
--------------------------------
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
-------- ------ ------
(in thousands)
Income before income taxes
and extraordinary loss..................... $29,463 $21,642 $4,281
====== ====== =====
Federal statutory rate....................... 35% 35% 35%
====== ====== =====
Provision for income taxes at
federal statutory rate..................... $10,312 $ 7,575 $1,498
State and local income taxes,
net of federal income tax benefit.......... 3,800 2,273 980
Non-deductible amortization of goodwill...... 3,500 3,429 3,327
Unremitted earnings of foreign subsidiaries.. (314) (382) (387)
Other........................................ 168 80 (261)
------ ------ -----
Provision for income taxes................... $17,466 $12,975 $5,157
====== ====== =====
The tax effects of significant items comprising the
Company's net deferred tax assets as of January 31, 1998 and
February 1, 1997 are as follows:
January 31, 1998 February 1, 1997
---------------- ---------------
(in thousands)
Current:
Inventory $ 2,854 $ 2,070
Accrued expenses 4,269 7,492
Real estate (1,634) (1,433)
Other --- (172)
------ ------
Total current $ 5,489 $ 7,957
====== ======
Noncurrent:
Depreciation and amortization $(4,982) $(6,528)
Rent expense 4,364 3,328
Other 901 (1,672)
------ ------
Total noncurrent $ 283 $(4,872)
====== ======
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 31, 1998
amounted to approximately $6,775,000. However, if these earnings
were not considered permanently reinvested, under current law,
the incremental tax on such undistributed earnings would be
approximately $2,022,000.
===========================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Retirement Plans
- ---------------------
Savings Plan. Ann Taylor maintains a defined contribution
401(k) savings plan for substantially all full-time employees.
Participants may contribute to the plan an aggregate of up to 10%
of their annual earnings. Ann Taylor makes a matching
contribution of 50% with respect to the first 3% of each
participant's annual earnings contributed to the plan. Ann
Taylor's contributions to the plan for Fiscal 1997, Fiscal 1996
and Fiscal 1995 were $519,000, $390,000, and $337,000,
respectively.
Pension Plan. Substantially all full-time employees of Ann
Taylor are covered under a noncontributory defined benefit
pension plan. Through December 31, 1997, the pension plan was a
"cash balance pension plan". Each participant accrued a benefit
based on compensation and years of service with Ann Taylor. As
of January 1, 1998, the Plan was amended and the formula to
calculate benefits was changed. The new career average plan
formula was used to determine the funding status of the plan for
fiscal 1997. Ann Taylor's funding policy for the plan is to
contribute annually the amount necessary to provide for benefits
based on accrued service and projected pay increases. Plan
assets consist primarily of cash, equity and fixed income
securities.
The following table sets forth the funded status of the
Pension Plan at January 31, 1998, February 1, 1997 and February
3, 1996, in accordance with Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions":
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
-------- -------- -------
(dollars in thousands)
Actuarial present value
of benefits obligation:
Accumulated benefit obligation,
including vested benefits of
$2,830,000, $2,435,000 and
$2,064,000, respectively............. $ 3,820 $ 3,413 $ 2,893
====== ====== ======
Projected benefit obligation for
service rendered to date............. $ 3,820 $ 3,413 $ 2,893
Plan assets at fair value............... 5,128 4,745 2,537
------ ------ ------
Plan assets in excess of
projected benefit obligation
(projected benefit obligation
in excess of plan assets)........ 1,308 1,332 (356)
Unrecognized net gain................... (1,286) (802) (231)
------ ------ ------
Prepaid (accrued) pension cost.......... $ 22 $ 530 $ (587)
====== ====== ======
Net periodic pension cost for
Fiscal 1997, Fiscal 1996 and
Fiscal 1995 included the
following components:
Service cost/benefits earned
during the year....................... $ 571 $ 981 $ 681
Interest cost on projected
benefit obligation................... 250 213 185
Actual return on plan assets............ (907) (527) (104)
Net amortization and deferral........... 462 300 (132)
----- ----- -----
Net periodic pension cost............... $ 376 $ 967 $ 630
====== ===== =====
Assumptions used to determine
the projected benefit
obligation and plan assets were:
Discount rate.......................... 7.50% 8.00% 6.75%
Rate of increase in
compensation level................... 4.00% 4.00% 4.00%
Expected long-term
rate of return on assets......... 9.00% 9.00% 9.00%
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Quarterly Financial Data (Unaudited)
- ----------------------------------------
Quarter
--------------------------------------------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share amounts)
Fiscal 1997
- -----------
Net sales....................... $197,064 $184,999 $187,200 $211,765
Gross profit.................... 98,636 85,354 92,732 92,550
Income before
extraordinary loss............ 6,475 985 2,185 2,352
Extraordinary loss.............. --- 173 --- ---
------- ------- ------- -------
Net income...................... $ 6,475 $ 812 $ 2,185 $ 2,352
======= ======= ======= =======
Basic and diluted
earnings per share
before extraordinary loss..... $ 0.25 $ 0.04 $ 0.09 $ 0.09
Extraordinary loss per share.... --- 0.01 --- ---
------- ------- ------- ------
Basic and diluted earnings
per share..................... $ 0.25 $ 0.03 $ 0.09 $ 0.09
======= ======= ======= =====
Fiscal 1996
- -----------
Net sales....................... $184,467 $187,862 $212,670 $213,118
Gross profit.................... 83,154 80,747 97,090 93,683
Net income...................... 1,812 627 3,262 2,966
Basic and diluted
earnings per share............ $ 0.08 $ 0.03 $ 0.13 $ 0.12
In the fourth quarter of Fiscal 1997, the Company adopted SFAS
No. 128. All previously reported per share information has been
recalculated. The sum of the quarterly per share data may not
equal the annual amounts due to changes in the weighted average
shares and share equivalents outstanding.
17. Subsequent Event
- ---------------------
Effective February 1, 1998, the Company elected to change its
method of inventory valuation from the retail method to a cost
method. The Company believes the cost method is a preferable
method for matching the cost of merchandise with the revenues
generated. The cumulative effect of this accounting change and the
effect on future financial statements resulting from this change is
not expected to be material. It is not possible to determine the
effect of the change on income in any previously reported fiscal
years.