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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------
(Mark One)
[X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended January 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 1-10738
ANNTAYLOR STORES CORPORATION
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3499319
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
(212) 541-3300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Each Class Name of each exchange on which registered
COMMON STOCK, THE NEW YORK STOCK EXCHANGE
$.0068 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |X]. No_____ .
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of February 26, 1999 was $912,348,697.
The number of shares of the registrant's Common Stock outstanding as of
February 26, 1999 was 26,007,152.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
- -------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
GENERAL
AnnTaylor Stores Corporation (the "Company"), through its wholly owned
subsidiary AnnTaylor, Inc. ("Ann Taylor"), is a leading national specialty
retailer of better quality women's apparel, shoes and accessories sold primarily
under the Ann Taylor brand name. The Company believes that "Ann Taylor" is a
highly recognized national brand that defines a distinct fashion point of view.
Ann Taylor merchandise represents classic styles, updated to reflect current
fashion trends. The Company's stores offer a full range of career and casual
separates, weekend wear, dresses, tops, accessories and shoes, coordinated as
part of a total wardrobing strategy. This total wardrobing strategy is
reinforced by an emphasis on customer service. Ann Taylor sales associates are
trained to assist customers in merchandise selection and wardrobe coordination,
helping them achieve the "Ann Taylor look" while reflecting the customers'
personal styles.
As of January 30, 1999, the Company operated 365 stores in 41 states and
the District of Columbia, under the names Ann Taylor, Ann Taylor Factory Store
and Ann Taylor Loft. Of the 306 stores operated under the Ann Taylor name,
approximately three-quarters are located in regional malls and upscale specialty
retail centers, with the balance located in downtown and village locations.
These stores represent the Company's core merchandise line. The Company believes
that the customer base for its Ann Taylor stores consists primarily of
relatively affluent, fashion-conscious women from the ages of 25 to 55, and that
the majority of its customers are working women with limited time to shop, who
are attracted to Ann Taylor by its focused merchandising and total wardrobing
strategies, personalized customer service, efficient store layouts and continual
flow of new merchandise.
As of January 30, 1999, the Company operated 46 Ann Taylor Loft stores.
Ann Taylor Loft is a separate moderate-price store for women who appreciate the
Ann Taylor style but are more cost conscious. Merchandise is designed uniquely
for these stores and is sold under the Ann Taylor Loft label. The first 30 of
the Company's Ann Taylor Loft stores were located in factory outlet centers,
including some Ann Taylor Factory Stores that, in 1996, were converted to Loft
stores after the introduction of the Loft concept. In 1998, the Company opened
its first 16 Ann Taylor Loft stores outside the factory outlet center
environment, primarily in regional malls and strip shopping centers focused on
the moderate-priced consumer. Management believes that Ann Taylor Loft
represents a significant opportunity for the Company to compete in the
moderately-priced women's apparel market. See "Stores and Expansion",
"Competition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Statement Regarding Forward Looking Disclosures"
below.
The Company also operates 13 Ann Taylor Factory stores in factory outlet
centers that serve primarily as a clearance vehicle for merchandise from Ann
Taylor stores. Many of these stores also offer a limited selection of original
priced Ann Taylor Loft merchandise.
The Company was incorporated under the laws of the state of Delaware in
1988 under the name AnnTaylor Holdings, Inc. The Company changed its name to
AnnTaylor Stores Corporation in April 1991. The Company was formed at the
direction of Merrill Lynch Capital Partners, Inc. ("ML Capital Partners"), a
wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co"), for the purpose
of acquiring Ann Taylor in a leveraged buyout transaction (the "Acquisition") in
1989. The Company completed an initial public offering of its common stock in
May 1991. Over the past several years, the aggregate amount of Company common
stock beneficially owned by ML Capital Partners and certain other affiliates of
ML&Co. (collectively, the "ML Entities"), has decreased, from 11,473,452 shares,
or approximately 57% of the Company's outstanding common stock, as of April
1992, to 1,733,628 shares, or approximately 6.7%, of the Company's outstanding
common stock, as of February 12, 1999. The ML Entities have two designees on the
Company's Board of Directors and, therefore, are in a position to influence
management of the Company. On March 25, 1999, ML Capital Partners orally advised
the Company that the ML Entities had sold all of these shares in March 1999.
Unless the context indicates otherwise, all references herein to the
Company include the Company, its wholly owned subsidiary Ann Taylor and their
respective subsidiaries.
===============================================================================
MERCHANDISE DESIGN AND PRODUCTION
Substantially all merchandise offered by the Company's stores is developed
by the Company's in-house product design and development teams, which design
merchandise exclusively for the Company. The Company's merchandising groups
determine inventory needs for the upcoming season, edit the assortments
developed by the design teams, plan monthly merchandise flows, and arrange for
the production of merchandise either through the Company's sourcing division, or
with manufacturers or vendors who are private label specialists.
The Company's production management and quality assurance department
establishes the technical specifications for all Company merchandise, inspects
factories in which the merchandise is produced, including periodic in-line
inspections while goods are in production to identify potential problems prior
to shipment and, upon receipt, inspects merchandise on a test basis for
uniformity of size and color, as well as for conformity with specifications and
overall quality of manufacturing.
The Company sources merchandise from approximately 235 manufacturers and
vendors, none of which accounted for more than 9% of the Company's merchandise
purchases in Fiscal 1998. The Company's merchandise is manufactured in over 20
countries, with approximately 10% of the Company's merchandise manufactured in
Hong Kong and 35% in China. Any event causing a sudden disruption of
manufacturing or imports from Hong Kong or China, including the imposition of
additional import restrictions, could have a material adverse effect on the
Company's operations. Substantially all of the Company's foreign purchases are
negotiated and paid for in U.S. dollars.
The Company cannot predict whether any of the foreign countries in which
its products are currently manufactured or any of the countries in which the
Company may manufacture its products in the future will be subject to future or
increased import restrictions by the U.S. government, including the likelihood,
type or effect of any trade restriction. Trade restrictions, including increased
tariffs or quotas, against apparel, footwear or other items sold by the Company
could affect the importation of such merchandise generally and, in such event,
could increase the cost or reduce the supply of merchandise available to the
Company and adversely affect the Company's business, financial condition,
results of operations and liquidity. The Company's merchandise flow may also be
adversely affected by financial or political instability in any of the countries
in which its goods are manufactured, if it affects the production or export of
merchandise from such countries. Merchandise flow may also be adversely affected
by significant fluctuation in the value of the U.S. dollar against foreign
currencies or restrictions on the transfer of funds.
The Company does not maintain any long-term or exclusive commitments or
arrangements to purchase merchandise from any single supplier. The Company
believes it has a good relationship with its suppliers and that, as the number
of the Company's stores increases, subject to the discussion above, there will
continue to be adequate sources to produce a sufficient supply of quality goods
in a timely manner and on satisfactory economic terms.
INVENTORY CONTROL AND MERCHANDISE ALLOCATION
The Company's merchandise planning and allocation department analyzes each
store's size, location, demographics, and sales and inventory history to
determine the quantity of merchandise to be purchased for and the allocation of
merchandise to the Company's stores. Upon receipt, merchandise is allocated in
order to achieve an emphasis that is suited to each store's customer base.
Merchandise typically is sold at its original marked price for several
weeks, with the length of time varying by item. The Company reviews its
inventory levels on an on-going basis in order to identify slow-moving
merchandise and broken assortments (items no longer in stock in a sufficient
range of sizes) and uses markdowns to clear merchandise. Markdowns may be used
if inventory exceeds customer demand for reasons of style, seasonal adaptation
or changes in customer preference or if it is determined that the inventory will
not sell at its currently marked price. Marked-down items remaining unsold are
moved periodically to the Company's factory outlet stores, where additional
markdowns may be taken.
===============================================================================
Throughout Fiscal 1997 and Fiscal 1998, the Company focused on improving
its inventory management strategies, including evaluating target average
inventory investment per store, in order to achieve greater inventory turns and
to enhance merchandise gross margins. In Fiscal 1998, inventory turned 5.0 times
compared to 5.1 times in Fiscal 1997 and 4.7 times in Fiscal 1996. Inventory
turnover is determined by dividing cost of sales by the average of the cost of
inventory at the beginning and the end of the period, excluding inventory
associated with the Company's sourcing division. Sourcing division inventory
consists principally of finished goods in transit from factories.
In Fiscal 1998, the Company selected a new comprehensive merchandising
information system to provide improved systems support for the Company's
merchandising functions. Since selection of the system, the Company has been
conducting a methodical, detailed review of both the new system's functionality
and the Company's internal merchandising processes, in order to design
adaptations to the new system and, in some cases, changes to the Company's
processes, so that the Company may make best use of the new system. The Company
expects to be ready to pilot the new system at the end of Fiscal 1999 and to
phase-in the system over the following year. When complete, this new system will
serve as the Company's central source of information regarding merchandise
items, inventory management, purchasing, allocation, replenishment, receiving
and distribution.
The Company uses a centralized distribution system, under which nearly all
merchandise is distributed to the Company's stores through its distribution
center, located in Louisville, Kentucky. See "Properties". Merchandise is
shipped by the distribution center to the Company's stores several times each
week.
STORES AND EXPANSION
An important aspect of the Company's business strategy is a real estate
expansion program designed to reach new customers through the opening of new
stores. The Company opens new stores in markets that it believes have a
sufficient concentration of its target customers. The Company also adds stores,
or expands the size of existing stores, in markets where the Company already has
a presence, as market conditions warrant and sites become available. Store
locations are determined on the basis of various factors, including geographic
location, demographic studies, anchor tenants in a mall location, other
specialty stores in a mall or specialty center location or in the vicinity of a
village location, and the proximity to professional offices in a downtown or
village location. Stores opened in factory outlet centers are located in factory
outlet malls in which co-tenants generally include a significant number of
outlet or discount stores operated by nationally recognized upscale brand name
retailers. Store size also is determined on the basis of various factors,
including geographic location, demographic studies, and space availability.
As of January 30, 1999, the Company operated 365 stores throughout the
United States, of which 306 were Ann Taylor stores, 46 were Ann Taylor Loft
stores, and 13 were Ann Taylor Factory Stores.
Most new Ann Taylor stores opened since 1993 have been between 4,000 and
9,000 square feet in size. In addition, in Fall 1995, the Company opened a
"flagship" Ann Taylor store in each of New York City and San Francisco. Each of
these flagship stores is in excess of 20,000 square feet. These stores represent
the fullest assortment of Ann Taylor merchandise, and include amenities unique
to these stores. In Fiscal 1998, the Company opened 26 Ann Taylor stores that
averaged approximately 4,400 square feet. In Fiscal 1999, the Company plans to
open approximately 20 Ann Taylor stores, which are expected to average
approximately 5,000 square feet.
Ann Taylor Loft stores that are located in factory outlet centers
(including three such stores opened in Fiscal 1998) average 9,000 square feet.
The 16 Ann Taylor Loft stores that were opened in regional malls and strip
shopping centers in 1998 averaged approximately 6,200 square feet. In Fiscal
1999, the Company expects to open approximately 30 Ann Taylor Loft stores in
regional malls and strip shopping centers. These stores are expected to average
approximately 6,000 square feet.
The Company's 13 Ann Taylor Factory Stores, located in factory outlet
centers, average 7,000 square feet.
===============================================================================
The Company's stores typically have approximately 20% of their total
square footage allocated to stockroom and other non-selling space.
The following table sets forth certain information regarding store
openings, expansions and closings for Ann Taylor stores ("ATS"), Ann Taylor
Factory Stores ("ATFS"), Ann Taylor Loft stores ("ATL") and the Company's former
Ann Taylor Studio stores ("ATA") over the past five years:
No.
Stores No. No.
Total Stores No. Stores Stores Stores No. Stores Open
Open at Opened During Expanded Closed at End of
Beginning Fiscal Year During During Fiscal Year
of Fiscal --------------------- Fiscal Fiscal -------------------------------------
Fiscal Year Year ATS ATFS ATL ATA(a) Year(b) Year(b) ATS ATFS ATL ATA(a) Total
- ----------- ---- --- ---- --- ------ ------- ------- --- ---- --- ------ -----
1994....... 231 18 7 5 5 25 4 236 21 --- 5 262
1995....... 262 26 4 14 4 30 4 258 22 17 9 306
1996....... 306 9 1 1 --- 7 8 259 14(c) 27(c) 9 309
1997....... 309 27 --- --- --- 9 12 283 14 27 --- 324
1998....... 324 26 --- 19 --- 8 4 306 13 46 --- 365
- ------------
(a) Ann Taylor Studio was a free-standing shoe and accessory store concept
tested by the Company in 1994 and 1995. All Ann Taylor Studio stores
were closed during Fiscal 1997.
(b) All stores expanded and all stores closed were Ann Taylor stores, except
that one store expanded in 1994 and one store expanded in 1995 were ATL
stores, one store closed in 1998 was an ATFS store and nine stores closed
in 1997 were ATA stores.
(c) In 1995, certain ATFS and ATL stores that sold both original price Ann
Taylor Loft merchandise and clearance merchandise from Ann Taylor stores
and Ann Taylor Loft stores were classified as ATFS stores. In 1996, these
stores were reclassified as ATL stores. During 1997, these stores'
merchandise assortment was changed to be predominantly Ann Taylor Loft
merchandise, and these stores are now operated as ATL stores.
The Company believes that its existing store base is a significant
strategic asset of its business. Ann Taylor stores are located in some of the
most productive retail centers in the United States. The Company believes that
it is among the tenants most highly desired by real estate developers because of
its strong Ann Taylor brand franchise and its high average sales per square foot
productivity ($474 per square foot in Fiscal 1998) relative to other specialty
apparel retailers.
The Company has invested approximately $172 million in its store base
since the beginning of Fiscal 1993; approximately 64% of its stores are either
new or have been completely remodeled, as a result of an expansion or
relocation, in the last five years.
The Company's 1998 real estate expansion plan resulted in an increase in
the Company's total store square footage of approximately 230,000 square feet
(net of store closings), or 12.7%, from approximately 1,808,000 square feet to
approximately 2,038,000 square feet. In Fiscal 1999, the Company intends to
increase store square footage by approximately 275,000 square feet, or 13.5%,
representing approximately 20 new Ann Taylor stores, the expansion, renovation
or relocation of 10 existing Ann Taylor stores, and approximately 30 new Ann
Taylor Loft stores.
Capital expenditures for the Company's Fiscal 1998 store expansion
program, net of landlord construction allowances, totaled approximately $26.4
million, including expenditures for store refurbishing and store refixturing.
The Company expects that capital expenditures for its Fiscal 1999 store
expansion program, net of landlord construction allowances, will be
approximately $35 million, including expenditures for store refurbishing and
store refixturing.
===============================================================================
The Company's ability to continue to increase store square footage will be
dependent upon, among other things, general economic and business conditions
affecting consumer confidence and spending, the availability of desirable
locations and the negotiation of acceptable lease terms. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Statement Regarding Forward
Looking Disclosures".
INFORMATION SYSTEMS
In 1997, the Company completed a thorough review of its information
systems, and developed a five-year strategic plan to upgrade these systems,
including the planned implementation of the core merchandising system referred
to above under "Inventory Control and Merchandise Allocation". The Company
believes that enhanced information systems are critical to providing its
management with enhanced decision support tools and maintaining the Company's
competitive position. The five-year plan contemplates aggregate investment in
information systems of approximately $35 million, of which approximately $11
million was expended in 1998, and $11 million is expected to be invested in
1999.
For information regarding the Company's Year 2000 compliance efforts, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Status".
CUSTOMER CREDIT
Customers may pay for merchandise with the Ann Taylor credit card,
American Express, Visa, MasterCard, JCB, cash or check. Credit card sales were
80.2% of net sales in Fiscal 1998, 78.7% in Fiscal 1997 and 77.8% in Fiscal
1996. In Fiscal 1998, 16.6% of net sales were made with the Ann Taylor credit
card, and 63.6% were made with third-party credit cards. As of January 30, 1999,
the Company's Ann Taylor credit card accounts receivable totaled $51,818,000,
net of allowance for doubtful accounts. Accounts written off in Fiscal 1998 were
approximately $1,468,000, or 0.2% of net sales.
The Company has offered customers its proprietary Ann Taylor credit card
since 1976. The Company believes that the Ann Taylor credit card enhances
customer loyalty while providing the customer with additional credit. However,
the percentage of the Company's total sales made with its proprietary credit
card has been declining over the past several years. The Company believes the
declining penetration of its Ann Taylor credit card as a percentage of sales is
attributable to the gain of market share by bank cards throughout the retail
industry generally, as well as to the increase in the number of the Company's
Ann Taylor Factory Stores and Loft stores, which have historically experienced a
significantly lower penetration of sales with the Ann Taylor card. At January
30, 1999, over 374,000 Ann Taylor credit card accounts had been used during the
past 18 months.
ADVERTISING AND PROMOTION
For many years, the Company relied on its Ann Taylor fashion catalog,
mailed principally to Ann Taylor credit card holders, as its principal
advertising vehicle. The Company also occasionally ran print advertisements in
newspapers and national women's fashion magazines such as Elle, Vogue and
Harpers Bazaar. In early 1996, the Company suspended publication of its catalog
and ran very few print advertisements. Beginning in 1997, the Company placed a
renewed emphasis on marketing. The Company believes it is strategically
important to communicate on a regular basis directly with its current customer
base and with potential customers, through increased national and regional
advertising,including outdoor media, as well as through direct mail marketing
and in-store presentation. Marketing expenditures as a percentage of sales were
2.0% in Fiscal 1998, 1.3% in Fiscal 1997, and 0.8% in Fiscal 1996.
===============================================================================
TRADEMARKS AND SERVICE MARKS
The Ann Taylor trademark, and other trademarks and service marks used by
the Company, either are registered or have trademark applications pending with
the United States Patent and Trademark Office ("USPTO") and with the registries
of many foreign countries. The Company's rights in the "AnnTaylor" mark are a
significant part of the Company's business, as the Company believes its
trademark is well known in the women's retail apparel industry. Accordingly, the
Company intends to maintain its "AnnTaylor" mark and related registrations and
vigorously protect its trademarks against infringement.
In 1994, the Company initiated trademark registration applications with
the USPTO for its AnnTaylor Loft trademark in the categories of retail store
services and apparel. Registration of the trademark was issued in the retail
store services category in 1996. However, the Company's application for a
trademark registration in the apparel classification is being challenged in the
USPTO by a French company, Freche et Fils, which cites its own "Loft Design
By..." trademark in opposition to the Ann Taylor Loft mark. The Company believes
that the challenge is without merit and intends to defend the action vigorously.
In the event that Freche et Fils' challenge to the Company's trademark
application for the Ann Taylor Loft trademark is successful, the Company would
be denied federal registration of the Ann Taylor Loft trademark in the apparel
classification.
COMPETITION
The women's retail apparel industry is highly competitive. The Company's
stores compete with certain departments in national or local department stores,
and with other specialty store chains and independent retail stores carrying
similar lines of merchandise. The Company believes that its focused merchandise
selection, exclusive fashions, personalized service and convenience distinguish
it from other apparel retailers. Many of the Company's competitors are
considerably larger and have substantially greater financial, marketing and
other resources than the Company and there is no assurance that the Company will
be able to compete successfully with them in the future. In addition, the
Company has only limited experience in the "moderate" category, and existing
competitors may have significantly greater brand recognition among this customer
segment than the Company.
EMPLOYEES
Store management receives compensation in the form of salaries and
performance-based bonuses. Sales associates are paid on an hourly basis plus
performance incentives. A number of programs exist that offer incentives to both
management and sales associates to increase sales and support the Company's
total wardrobing strategy.
As of January 30, 1999, the Company had approximately 7,300 employees, of
whom 1,800 were full-time salaried employees, 1,900 were full-time hourly
employees and 3,600 were part-time hourly employees working less than 30 hours
per week. None of the Company's employees are represented by a labor union. The
Company believes that its relationship with its employees is good.
==============================================================================
STATEMENT REGARDING FORWARD LOOKING DISCLOSURES
Sections of this Annual Report contain various forward looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995, with
respect to the financial condition, results of operations and business of the
Company. These forward looking statements involve certain risks and
uncertainties, and no assurance can be given that any of such matters will be
realized. Actual results may differ materially from those contemplated by such
forward looking statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Statement Regarding Forward
Looking Disclosures".
ITEM 2. PROPERTIES
As of January 30, 1999, the Company operated 365 stores, all of which were
leased. The store leases typically provide for initial terms of ten years,
although some leases have shorter or longer initial periods, and grant the
Company the right to extend the term for one or two additional five-year
periods. Most of the store leases require Ann Taylor to pay a specified minimum
rent, plus a contingent rent based on a percentage of the store's net sales in
excess of a specified threshold. Most of the leases also require Ann Taylor to
pay real estate taxes, insurance and certain common area and maintenance costs.
The current terms of the Company's leases, including renewal options, expire as
follows:
Fiscal Years Lease Number of
Terms Expire Stores
------------ ------
1999 - 2001........................ 21
2002 - 2004........................ 65
2005 - 2007........................160
2008 and later.....................119
Ann Taylor leases corporate offices at 142 West 57th Street in New York
City, containing approximately 125,000 square feet and approximately 59,000
square feet of office space at 1372 Broadway in New York City. The leases for
these premises expire in 2006 and 2010, respectively. The Company also leases
office space in New Haven, Connecticut, containing approximately 37,000 square
feet. This lease expires in 2000.
Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution Services,
Inc., owns its 256,000 square foot distribution center located in Louisville,
Kentucky. Nearly all Ann Taylor merchandise is distributed to the Company's
stores through this facility. The parcel on which the Louisville distribution
center is located comprises approximately 20 acres and could accommodate
possible future expansion of the facility.
===============================================================================
ITEM 3. LEGAL PROCEEDINGS
On April 26, 1996, certain alleged stockholders of the Company filed a
purported class action lawsuit in the United States District Court Southern
District of New York, against the Company, Ann Taylor, certain officers and
directors of the Company and Ann Taylor, ML&Co. and certain affiliates of ML&Co.
(Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The complaint
alleged causes of action under Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended, by alleging that the Company and the other
defendants engaged in a fraudulent scheme and course of business that operated a
fraud or deceit on purchasers of the Company's common stock during the period
commencing February 3, 1994 through May 4, 1995 due to alleged false and
misleading statements about the Company and Ann Taylor. The complaint sought,
among other things, certification as a class action on behalf of all purchasers
of common stock during the period commencing February 3, 1994 through May 4,
1995, the awarding of compensatory damages to the plaintiffs and purported
members of the class, the awarding of costs, including pre-judgment and
post-judgment interest, reasonable attorneys' fees and expert witness fees to
the plaintiffs and purported members of the class and equitable and/or
injunctive relief. On March 10, 1998, the Court granted the defendants' motions
to dismiss the complaint. The Court found that the complaint failed to state a
claim upon which relief may be granted, and failed to plead fraud with
particularity and an inability to do so. The Court's Opinion granted the
plaintiffs leave to amend and re-file the complaint within thirty days of the
date of the Opinion, and the plaintiffs filed an amended complaint on April 9,
1998. On November 9, 1998, the Court issued an Opinion dismissing, with
prejudice, the amended complaint. On or about December 15, 1998, the plaintiffs
filed a notice of appeal to the U.S District Court of Appeals, Second Circuit,
seeking review of the Appellate Court's decision. This appeal is presently
pending, and any liability that may arise from this action cannot be predicted
at this time. The Company believes that the amended complaint is without merit
and intends to defend the action vigorously.
The Company is also a party to routine litigation incident to its
business. Although the amount of any liability that could arise with respect to
these actions cannot be accurately predicted, in the opinion of the Company, any
such liability will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
==============================================================================
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange under the symbol ANN. The number of holders of record of common stock
at February 26, 1999 was 613. The following table sets forth the high and low
closing sale prices for the common stock on the New York Stock Exchange during
Fiscal 1998 and Fiscal 1997.
Market Price
------------
High Low
---- ---
Fiscal Year 1998
Fourth quarter..............................$ 41-9/16 $ 28-3/4
Third quarter............................... 29-5/8 19-3/8
Second quarter.............................. 23-1/2 16-1/8
First quarter............................... 16-1/2 11-13/16
Fiscal Year 1997
Fourth quarter..............................$ 14-15/16 $ 11-5/16
Third quarter............................... 19-5/8 14
Second quarter.............................. 25 16-7/8
First quarter............................... 24-1/4 17
The Company has never paid dividends on the common stock and does not
intend to pay dividends in the foreseeable future. As a holding company, the
ability of the Company to pay dividends is dependent upon the receipt of
dividends or other payments from Ann Taylor. The payment of dividends by Ann
Taylor to the Company is subject to certain restrictions under Ann Taylor's
Credit Facility described below under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources".
The payment of cash dividends on the common stock by the Company is also subject
to certain restrictions contained in the Company's guarantee of Ann Taylor's
obligations under the Credit Facility. In addition, in connection with the
preferred securities issued by the Company's financing vehicle, AnnTaylor
Finance Trust, the payment by the Company of cash dividends on the common stock
is restricted in the event of a default by the Company of its obligations in
relation to the preferred securities or in the event payment of dividends on the
preferred securities is deferred. Any determination to pay cash dividends in the
future will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant at that time by the
Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial information for the periods
indicated has been derived from the audited consolidated financial statements of
the Company. The Company's consolidated statements of operations, stockholders'
equity and cash flows for each of the three fiscal years ended January 30, 1999,
January 31, 1998 and February 1, 1997 and consolidated balance sheets as of
January 30, 1999 and January 31, 1998, as audited by Deloitte & Touche llp,
independent auditors, appear elsewhere in this document. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto of the Company included elsewhere in this
document. All references to years are to the fiscal year of the Company, which
ends on the Saturday nearest January 31 in the following calendar year. All
fiscal years for which financial information is set forth below had 52 weeks,
with the exception of Fiscal 1995, which had 53 weeks.
================================================================================
Fiscal Years Ended
----------------------------------------------------
Jan. 30, Jan. 31, Feb. 1, Feb. 3, Jan. 28,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands, except per square foot data and per share data)
Operating Statement Information:
Net sales ..........................$ 911,939 $781,028 $ 798,117 $731,142 $658,804
Cost of sales....................... 455,724 411,756 443,443 425,225 357,783
------- ------- ------- ------- -------
Gross profit..................... 456,215 369,272 354,674 305,917 301,021
Selling, general and
administrative expenses.......... 349,955 308,232 291,027 271,136 214,224
Studio shoe stores closing
expense (a)...................... --- --- 3,600 --- ---
Employment contract separation
expense (b)...................... --- --- 3,500 --- ---
Retirement of assets (c)............ 3,633 --- --- --- ---
Amortization of goodwill (d)........ 11,040 11,040 10,086 9,506 9,506
------- ------- ------- ------- -------
Operating income................. 91,587 50,000 46,461 25,275 77,291
Interest expense (e)................ 18,117 19,989 24,416 20,956 14,229
Other (income) expense, net......... 567 548 403 38 168
------- ------- ------- ------- -------
Income before income taxes and
extraordinary loss............... 72,903 29,463 21,642 4,281 62,894
Income tax provision................ 33,579 17,466 12,975 5,157 30,274
------- ------- ------- ------- -------
Income (loss) before
extraordinary loss.............. 39,324 11,997 8,667 (876) 32,620
Extraordinary loss (f).............. --- 173 --- --- 868
------- ------- ------- ------- -------
Net income (loss)................$ 39,324 $ 11,824 $ 8,667 $ (876) $ 31,752
======= ======= ======= ======== =======
Basic earnings (loss) per share before
extraordinary loss..............$ 1.53 $ 0.47 $ 0.36 $ (0.04) $ 1.44
Extraordinary loss per share (f).... --- 0.01 --- --- 0.04
------- ------- ------- ------- -------
Basic earnings (loss) per share.....$ 1.53 $ 0.46 $ 0.36 $ (0.04) $ 1.40
======= ======= ======= ======== =======
Diluted earnings (loss) per share before
extraordinary loss..............$ 1.44 $ 0.47 $ 0.36 $ (0.04) $ 1.42
Extraordinary loss per share (f).... --- 0.01 --- --- 0.04
------- ------- ------- ------- -------
Diluted earnings (loss) per share...$ 1.44 $ 0.46 $ 0.36 $ (0.04) $ 1.38
======= ======= ======= ======== =======
Weighted average shares outstanding
(in thousands)................... 25,715 25,628 23,981 23,067 22,687
Weighted average shares
outstanding, assuming
dilution (in thousands).......... 31,006 25,693 24,060 23,167 23,067
Operating Information:
Percentage increase (decrease) in
comparable store sales (g)...... 7.9% (5.5)% 1.8% (8.9)% 13.7%
Net sales per gross square foot (h).$ 474 $ 445 $ 476 $ 518 $ 627
Number of stores:
Open at beginning of the period.. 324 309 306 262 231
Opened during the period......... 45 27 11 48 35
Expanded during the period....... 8 9 7 30 25
Closed during the period......... 4 12 8 4 4
Open at the end of the period.... 365 324 309 306 262
Total store square footage at
end of period ...................2,038,000 1,808,000 1,705,000 1,651,000 1,173,000
Capital expenditures................$ 45,131 $ 22,945 $ 16,107 $ 78,378 $ 61,341
Depreciation and amortization,
including goodwill (d)...........$ 39,823 $ 38,843 $ 36,294 $ 28,294 $ 21,293
Working capital turnover (I)........ 6.3x 6.5x 7.8x 7.8x 8.5x
Inventory turnover (j).............. 5.0x 5.1x 4.7x 4.3x 4.6x
Balance Sheet Information (at end of period):
Working capital (k).................$ 168,708 $ 122,181 $ 118,850 $ 86,477 $ 102,181
Goodwill, net (d)................... 319,699 330,739 341,779 313,525 323,031
Total assets........................ 775,417 683,661 688,139 678,709 598,254
Total debt.......................... 105,157 106,276 131,192 272,458 200,000
Preferred securities................ 96,624 96,391 96,158 --- ---
Stockholders' equity................ 432,699 384,107 370,582 325,688 326,112
(Footnotes on following page)
===============================================================================
(Footnotes for preceding page. In Fiscal 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" and all prior year
per share information has been recalculated. Unless otherwise noted, all per
share information is for diluted earnings per share.)
(a) Relates to the closing of the nine Ann Taylor Studio shoe stores. The
charge of $3,600,000 ($2,052,000, or $0.08 per share, net of income tax
benefit) in Fiscal 1996 represented the write-off of the net book value of
the nine stores and leases and other related costs for these locations.
(b) In connection with the resignation in August 1996 of a former executive, a
one-time pre-tax charge of $3,500,000 ($1,958,000, or $0.08 per share, net
of related tax benefit) was recorded in Fiscal 1996 relating to the
estimated costs of the Company's obligations under her employment contract
with the Company.
(c) A charge of $3,633,000 ($2,180,000, or $0.07 per share, net of tax benefit)
was recorded in Fiscal 1998 for the retirement of certain assets resulting
from the renovation of the Company's corporate offices.
(d) As a result of the Acquisition of Ann Taylor by the Company, which was
effective as of January 29, 1989, $380,250,000, representing the excess
of the allocated purchase price over the fair value of the Company's net
assets, was recorded as goodwill and is being amortized on a
straight-line basis over 40 years. In addition, as a result of the
acquisition of the Company's sourcing division, effective September 20,
1996, the Company recorded goodwill of $38,430,000 that is being
amortized on a straight-line basis over 25 years.
(e) Includes non-cash interest expense of $1,290,000, $1,419,000, $1,574,000,
$1,004,000, and $978,000 in Fiscal 1998, 1997, 1996, 1995, and 1994,
respectively, from amortization of deferred financing costs.
(f) In Fiscal 1997, Ann Taylor incurred an extraordinary loss of $303,000
($173,000, or $0.01 per share, net of income tax benefit), in connection
with the prepayment of the outstanding balance of a term loan. In Fiscal
1994, Ann Taylor incurred an extraordinary loss of $1,522,000 ($868,000, or
$0.04 per share, net of income tax benefit), in connection with the
prepayment of long-term debt with the proceeds of a public sale of common
stock of the Company.
(g) Comparable store sales are calculated by excluding the net sales of a store
for any month of one period if the store was not also open during the same
month of the prior period. In a year with 53 weeks, such as Fiscal 1995,
sales in the last week of that year are not included in determining
comparable store sales. A store that is expanded by more than 15% is
treated as a new store for the first year following the opening of the
expanded store.
(h) Net sales per square foot ("sales per square foot") is determined by
dividing net sales for the period by the average of the gross square feet
at the beginning and end of each period. Unless otherwise indicated,
references herein to square feet are to gross square feet, rather than net
selling space.
(i) Working capital turnover is determined by dividing net sales by the average
of the amount of working capital at the beginning and end of the period.
(j) Inventory turnover is determined by dividing cost of sales by the average
of the cost of inventory at the beginning and end of the period (excluding
inventory associated with the Company's sourcing division).
(k) Includes current portion of long-term debt of $1,206,000, $1,119,000,
$287,000, $40,266,000, and $0 in Fiscal 1998, 1997, 1996, 1995, and 1994,
respectively.
================================================================================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SALES
The following table sets forth certain sales and store data for the
periods indicated:
Fiscal Year Ended
--------------------------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1996
(52 weeks) (52 weeks) (52 weeks)
---------- ---------- ------------
Net sales ($000).............................. $911,939 $ 781,028 $ 798,117
Total net sales increase (decrease)
percentage (52 week basis) ................. 16.8% (2.1)% 10.6%
Comparable store sales increase
(decrease) percentage (52 week basis)....... 7.9% (5.5)% 1.8%
Net sales per average square foot............. $ 474 $ 445 $ 476
Total store square footage at end of period... 2,038,000 1,808,000 1,705,000
Number of
New stores ................................. 45 27 11
Expanded stores ............................ 8 9 7
Closed stores .............................. 4 12 8
Total stores open at end of period ........... 365 324 309
The Company's net sales do not show significant seasonal variation,
although net sales in the fourth quarter have historically been moderately
higher than in the other quarters. As a result, the Company has not had
significant overhead and other costs generally associated with large seasonal
variations.
RESULTS OF OPERATIONS
The following table sets forth operating statement data expressed as a
percentage of net sales for the periods indicated:
Fiscal Year
------------------------
1998 1997 1996
---- ---- ----
Net sales ....................................... 100.0% 100.0% 100.0%
Cost of sales ................................... 50.0 52.7 55.6
----- ----- -----
Gross profit ................................ 50.0 47.3 44.4
Selling, general and
admnistrative expenses ...................... 38.4 39.5 36.5
Studio shoe stores closing expense .............. -- -- 0.4
Employment contract separation expense .......... -- -- 0.4
Retirement of assets ............................ 0.4 -- --
Amortization of goodwill ........................ 1.2 1.4 1.3
----- ----- -----
Operating income ............................ 10.0 6.4 5.8
Interest expense ................................ 2.0 2.6 3.1
Other expense, net .............................. -- -- --
----- ----- -----
Income before income taxes and extraordinary loss 8.0 3.8
2.7
Income tax provision ............................ 3.7 2.3 1.6
----- ----- -----
Income before extraordinary loss ................ 4.3 1.5 1.1
Extraordinary loss .............................. -- -- --
----- ----- -----
Net income ...................................... 4.3% 1.5% 1.1%
===== ===== =====
============================================================================
FISCAL 1998 COMPARED TO FISCAL 1997
The Company's net sales increased to $911,939,000 in Fiscal 1998 over
$781,028,000 in Fiscal 1997, an increase of $130,911,000, or 16.8%. Comparable
store sales for Fiscal 1998 increased 7.9%, compared to a decrease of 5.5% in
Fiscal 1997. Management believes that the sales increase was primarily
attributable to the opening of new stores, the expansion of existing stores, and
a net increase in comparable store sales in 1998, as a result of improved
customer acceptance of the Company's product offerings and merchandise
assortment.
Gross profit as a percentage of net sales increased to 50.0% in 1998 from
47.3% in 1997. As discussed in Note 1 to the Consolidated Financial Statements,
the Company elected in Fiscal 1998 to change the method by which the Company
accounts for inventory, from the retail method to the average cost method. The
effect of this accounting change on Fiscal 1998 net income was an increase of
$1,272,000, or $0.04 per share on a diluted basis. Under the retail method,
gross margin as a percentage of net sales would have been approximately 49.8%.
The increase in gross margin reflects continued merchandise margin improvements
resulting from the maturation of the Company's sourcing organization, since the
acquisition of the Company's sourcing joint venture two years ago, as well as a
reduction in markdowns as a percentage of sales. See discussion of Sourcing
Acquisition in Note 14 to the Company's Consolidated Financial Statements.
Selling, general and administrative expenses were $349,955,000, or 38.4%
of net sales, in 1998, compared to $308,232,000, or 39.5% of net sales, in 1997.
The decrease in selling, general and administrative expenses as a percentage of
net sales was primarily attributable to increased leverage on fixed expenses
resulting from increased comparable store sales. The benefits of this leverage
were partially offset by an increase in the provision for management performance
bonus expense, and an increase in marketing expenditures in support of the
Company's strategic initiatives to enhance the Ann Taylor brand.
Operating income increased to $91,587,000, or 10.0% of net sales, in 1998
from $50,000,000, or 6.4% of net sales, in 1997. Operating income in 1998 was
reduced by $3,633,000, or 0.4% of net sales, for the retirement of certain
assets in connection with the renovation of the Company's corporate offices.
Amortization of goodwill was $11,040,000, or 1.2% of net sales, in 1998 compared
to $11,040,000, or 1.4% of net sales, in 1997. Operating income without giving
effect to such amortization was $102,627,000, or 11.2% of net sales, in 1998 and
$61,040,000, or 7.8% of net sales, in 1997.
Interest expense was $18,117,000 in 1998 compared to $19,989,000 in 1997.
The decrease in interest expense was primarily attributable to a decrease in the
Company's outstanding long-term debt, resulting in part from the prepayment in
July 1997 of a $24,500,000 term loan referred to below, and to greater interest
income earned on cash on hand. The weighted average interest rate on the
Company's outstanding indebtedness at January 30, 1999 was 8.60% compared to
8.59% at January 31, 1998.
The income tax provision was $33,579,000, or 46.1% of income before income
taxes, in the 1998 period, compared to $17,466,000, or 59.3% of income before
income taxes and extraordinary loss, in 1997. The effective tax rates for both
periods were higher than the statutory rates, primarily as a result of
non-deductible goodwill expense. Without giving effect to such non-deductible
goodwill amortization, the Company's effective income tax rate was 40% of income
before income taxes in the 1998 period, compared to 43% before income taxes and
extraordinary loss in the 1997 period. The decrease in the effective income tax
rate resulted primarily from the implementation of additional state tax planning
and from an increase in the amount of income earned outside the United States by
the Company's non-U.S. sourcing subsidiaries.
As a result of the foregoing factors, the Company had net income of
$39,324,000, or 4.3% of net sales, for 1998, compared to net income of
$11,824,000, or 1.5% of net sales, for 1997.
=============================================================================
FISCAL 1997 COMPARED TO FISCAL 1996
The Company's net sales decreased to $781,028,000 in Fiscal 1997 from
$798,117,000 in Fiscal 1996, a decrease of $17,089,000, or 2.1%. Comparable
store sales for Fiscal 1997 decreased 5.5% compared to Fiscal 1996. Management
believes that the decreases were primarily attributable to lower customer
acceptance of certain of the Company's merchandise offerings and, to a lesser
extent, planned decreases in promotional inventory for certain periods during
the year.
Gross profit as a percentage of net sales increased to 47.3% in 1997 from
44.4% in 1996. This increase was primarily attributable to benefits achieved by
the Company's sourcing division.
Selling, general and administrative expenses were $308,232,000, or 39.5%
of net sales, in 1997, compared to $291,027,000, or 36.5% of net sales, in 1996.
The increase in selling, general and administrative expenses as a percentage of
net sales was primarily attributable to increased tenancy expense related to
increased retail square footage, investments in certain strategic initiatives,
such as marketing and enhanced merchandising information systems, and decreased
leverage on fixed expenses due to lower sales in 1997.
Operating income increased to $50,000,000, or 6.4% of net sales, in 1997
from $46,461,000, or 5.8% of net sales, in 1996. Operating income in 1996 was
reduced by $3,500,000, or 0.4% of net sales, representing the estimated costs of
the Company's obligations under a former executive's employment contract
following her resignation in August 1996, and by a one-time charge of
$3,600,000, or 0.4% of net sales, relating to the planned closing of all nine
Ann Taylor Studio shoe stores announced in January 1997. Amortization of
goodwill was $11,040,000, or 1.4% of net sales, in 1997 compared to $10,086,000,
or 1.3% of net sales, in 1996. Operating income without giving effect to such
amortization was $61,040,000, or 7.8% of net sales, in 1997 and $56,547,000, or
7.1% of net sales, in 1996.
Interest expense was $19,989,000 in 1997 compared to $24,416,000 in 1996.
The decrease in interest expense was primarily attributable to a decrease in the
Company's outstanding long-term debt, resulting in part from the prepayment in
July 1997 of a $24,500,000 term loan referred to below, and to greater interest
income earned on cash on hand. The weighted average interest rate on the
Company's outstanding indebtedness at January 31, 1998 was 8.59% compared to
8.63% at February 1, 1997.
The income tax provision was $17,466,000, or 59.3% of income before income
taxes and extraordinary loss, in the 1997 period compared to $12,975,000, or
60.0% of income before income taxes, in 1996. The effective tax rates for both
periods were higher than the statutory rates, primarily as a result of
non-deductible goodwill expense.
On July 2, 1997, the Company used available cash to prepay the outstanding
balance of a $24,500,000 term loan due September 1998. This loan repayment
resulted in an extraordinary charge to earnings in Fiscal 1997 of $173,000, net
of income tax benefit.
As a result of the foregoing factors, the Company had net income of
$11,824,000, or 1.5% of net sales, for 1997, compared to net income of
$8,667,000, or 1.1% of net sales, for 1996.
CHANGES IN FINANCIAL POSITION
Accounts receivable increased to $71,049,000 at the end of 1998 from
$60,211,000 at the end of 1997, an increase of $10,838,000, or 18.0%. This
increase was primarily attributable to construction allowance receivables, which
increased $6,501,000 to $12,485,000 in 1998, and to third party credit card
receivables (American Express, MasterCard, and Visa) which increased $2,182,000
and Ann Taylor credit card receivables, which increased $2,097,000, due to
increased sales.
==============================================================================
Merchandise inventories increased to $136,748,000 at January 30, 1999 from
$97,234,000 at January 31, 1998, an increase of $39,514,000, or 40.6%. The
increase in merchandise inventories is primarily due to inventory purchased for
new store square footage, planned increases in inventory levels and the early
shipment or receipt of Spring merchandise. Merchandise inventories at January
30, 1999 and January 31, 1998 included approximately $32,329,000 and
$21,124,000, respectively, of inventory associated with the Company's sourcing
division. Inventory attributed to the sourcing division is principally finished
goods in transit from factories. Total square footage increased to approximately
2,038,000 square feet at January 30, 1999 from approximately 1,808,000 square
feet at January 31, 1998. Merchandise inventory on a per square foot basis,
excluding inventory associated with the Company's sourcing division, was
approximately $51 at the end of 1998, compared to approximately $42 at the end
of 1997, an increase of approximately 21.4%. Inventory turned 5.0 times in 1998
compared to 5.1 times in 1997, excluding inventory associated with the Company's
sourcing division. Inventory turnover is determined by dividing cost of sales by
the average of the cost of inventory at the beginning and end of the period
(excluding inventory associated with the sourcing division).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flow from
operations and borrowings available under Ann Taylor's revolving credit facility
described below. The following table sets forth material measures of the
Company's liquidity:
Fiscal Year
----------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Cash provided by operating activities.......$ 75,535 $ 71,589 $ 67,532
Working capital.............................$ 168,708 $122,181 $ 118,850
Current ratio ............................... 2.30:1 2.39:1 2.53:1
Debt to equity ratio ........................ .24:1 .28:1 .35:1
Cash provided by operating activities, as presented on the consolidated
statements of cash flows, increased in 1998 principally as a result of earnings,
noncash charges, and an increase in accounts payable and accrued liabilities,
offset by increases in merchandise inventories, receivables and prepaid expenses
and other current assets.
On June 30, 1998, Ann Taylor entered into a new $150,000,000 senior
secured revolving credit facility (the "Credit Facility") with a syndicate of
lenders. This facility replaced Ann Taylor's then-existing $122,000,000 bank
credit agreement that was scheduled to expire in July 1998 and also resulted in
the non-renewal by Ann Taylor's sourcing division of its $50,000,000 credit
facility and in the non-renewal by AnnTaylor Funding, Inc. of a $40,000,000
accounts receivable facility. The Credit Facility is used by Ann Taylor for the
issuance of commercial and standby letters of credit and to provide funds for
other general corporate purposes.
Loans outstanding under the Credit Facility at any time may not exceed
$50,000,000. The Company did not make any borrowings under the loan provisions
of the Credit Facility during Fiscal 1998, and there were no loans outstanding
at fiscal year end. The outstanding loan balance is required to be reduced to
zero for the thirty-day period commencing January 1 each year. This cleandown
period was achieved for January 1999. Maximum availability for loans and letters
of credit under the Credit Facility is governed by a monthly borrowing base,
determined by the application of specified advance rates against certain
eligible assets. Based on this calculation, the maximum amount available for
loans and letters of credit under the Credit Facility at January 30, 1999 was
approximately $131,054,000. Commercial and standby letters of credit outstanding
under the Credit Facility at January 30, 1999 were approximately $65,763,000.
===============================================================================
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at Ann Taylor's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%,
respectively. In addition, Ann Taylor is required to pay the lenders a quarterly
commitment fee on the unused revolving loan commitment amount at a rate ranging
from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby
letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens, investments and capital expenditures,
restrictions on dividends or other distributions to stockholders and maintenance
of certain financial ratios including specified levels of net worth. For Fiscal
1998, the capital expenditure limit was $52,000,000. For Fiscal 1999, capital
expenditures are limited to a maximum of $55,000,000.
The lenders have been granted a pledge of the common stock of Ann Taylor
and certain of its subsidiaries, and a security interest in substantially all
other tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of Ann Taylor and its subsidiaries, as
collateral for Ann Taylor's obligations under the Credit Facility.
The Credit Facility matures on June 30, 2000 and includes an automatic
one-year extension, contingent upon the satisfaction of certain conditions. In
addition, the commitments under the Credit Facility terminate on February 16,
2000 unless Ann Taylor's outstanding 8 3/4% Subordinated Notes due 2000 (the "8
3/4% Notes") are refinanced on or prior to such date with the proceeds of
subordinated debt or capital stock, the terms and conditions of which are
reasonably satisfactory to the Requisite Lenders under the Credit Facility.
In April and May of 1996, the Company completed the sale of an aggregate
of $100,625,000 of preferred securities issued by its financing vehicle,
AnnTaylor Finance Trust. The preferred securities have a liquidation preference
of $50 per security and are convertible at the option of the holders thereof
into shares of common stock of the Company at a conversion rate of 2.545 shares
of common stock for each preferred security. A total of 2,012,500 preferred
securities were issued, and are convertible into an aggregate of 5,121,812
shares of common stock, representing approximately 16% of the Company's
outstanding common stock as of January 30, 1999. The Company received net
proceeds of $95,984,000 in connection with the sale of the preferred securities
and applied $94,000,000 to reduce outstanding borrowings under Ann Taylor's
then-existing revolving credit facility.
Ann Taylor and its wholly owned subsidiary, AnnTaylor Distribution
Services, Inc., are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage
balance at January 30, 1999 was $5,157,000.
The Company's capital expenditures totaled $45,131,000, $22,945,000, and
$16,107,000 in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Capital
expenditures were primarily attributable to the Company's store expansion,
renovation, and refurbishment programs, as well as the investment the Company
made in certain information systems and, in Fiscal 1998, the Company's corporate
offices. The Company expects its total capital expenditure requirements in
Fiscal 1999 will be approximately $50,000,000, including capital for new store
construction for a planned square footage increase of approximately 275,000
square feet, or 13.5%, as well as capital to support continued investments in
information systems. The actual amount of the Company's capital expenditures
will depend in part on the number of stores opened, expanded and refurbished and
on the amount of construction allowances the Company receives from the landlords
of its new or expanded stores. See "Business--Stores and Expansion".
==============================================================================
Dividends and distributions from Ann Taylor to the Company are restricted
by the Credit Facility and the Indenture for the 8 3/4% Notes.
In order to finance its operations and capital requirements, the Company
expects to use internally generated funds, trade credit and funds available to
it under the Credit Facility. The Company believes that cash flow from
operations and funds available under the Credit Facility are sufficient to
enable it to meet its on-going cash needs for its business, as presently
conducted, for the foreseeable future.
Effective February 1, 1998, the Company elected to change its method of
inventory valuation from the retail method to the average cost method. The
Company believes the average cost method is a preferable method for matching the
cost of merchandise with the revenues generated. The cumulative effect of this
accounting change on February 1, 1998 was not material, and therefore no
disclosure is noted on the Consolidated Statement of Operations. The effect of
this accounting change on Fiscal 1998 net income was an increase of $1,272,000,
or $0.04 per share on a diluted basis. It is not possible to determine the
effect of the change on income in fiscal periods ending prior to February 1,
1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which is effective for the Company for
the quarter ended October 30, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivatives and for hedging activities. Management is
currently evaluating the impact of this standard and believes its adoption will
not affect the Company's consolidated financial position, results of operations
or cash flows.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for the
Company for fiscal years beginning after December 15, 1998. The application of
SOP 98-1 is not anticipated to have a material impact on the Company's
consolidated financial statements.
YEAR 2000 STATUS
Many computer systems use only two digits to identify a year (for example,
"99" is used for the year "1999"). As a result, these systems may be unable to
process accurately dates later than December 31, 1999, since they may recognize
"00" as the year "1900", instead of the year "2000". This anomaly is often
referred to as the "Year 2000 compliance" issue. Since 1997, the Company has
been executing a plan to remediate or replace affected systems on a timely
basis. Equipment and other non-information technology systems that use
microchips or other embedded technology, such as certain conveyor systems at the
Company's distribution center, are also covered by the Company's Year 2000
compliance project.
The Company's Year 2000 compliance project includes four phases: (1)
evaluation of the Company's owned or leased systems and equipment to identify
potential Year 2000 compliance issues; (2) remediation or replacement of Company
systems and equipment determined to be non-compliant (and testing of remediated
systems before returning them to production); (3) inquiry regarding Year 2000
readiness of material business partners and other third parties on whom the
Company's business is dependent; and (4) development of contingency plans, where
feasible, to address potential third party non-compliance or failure of material
Company systems.
The initial phase of the Company's Year 2000 compliance project was the
evaluation of all software, hardware and equipment owned, leased or licensed by
the Company, and identification of those systems and equipment requiring Year
2000 remediation. This analysis was completed during Fiscal 1998.
=============================================================================
All computer hardware in the Company's U.S. home offices and distribution
center that was not Year 2000 compliant has been remediated or replaced, and all
computer hardware in the Company's retail stores that was not Year 2000
compliant will be remediated or replaced by the end of the first quarter of
Fiscal 1999. Of those software systems that were found not to be Year 2000
compliant, approximately 90% of all material systems have been remediated or
replaced by Year 2000 compliant software. The Company anticipates that all
remaining material systems, including certain operating systems used in the
Company's distribution center, will be remediated or replaced by the end of the
second quarter of Fiscal 1999. Hardware and software unique to the Company's
sourcing offices located outside the United States are scheduled to be
remediated or replaced by the end of the second quarter of Fiscal 1999.
The Company engaged a consultant to assist in the evaluation of the
equipment used in the Company's distribution center (other than computer
software and hardware, which were included in the analysis and remediation
efforts described above). This equipment evaluation has been completed, and
remediation or replacement of distribution center equipment found not to be Year
2000 compliant is scheduled to be completed by the end of the second quarter of
Fiscal 1999.
Over the past few years, the Company's strategic plan has included
significant investment in and modernization of many of the Company's computer
systems. As a result, much of the costs and timing for replacement of certain of
the Company's systems that were not Year 2000 compliant were already anticipated
as part of the Company's planned information systems spending and did not need
to be accelerated as a result of the Company's Year 2000 project. The total cost
to the Company specifically associated with addressing the Year 2000 issue with
respect to its systems and equipment has not been, and is not anticipated to be,
material to the Company's financial position or results of operations in any
given year. The Company estimates that the total additional cost of managing its
Year 2000 project, remediating existing systems and replacing non-compliant
systems, is approximately $2.1 million, of which approximately $1.1 million will
be expensed as incurred (including $965,000 expensed in Fiscal 1998), and $1
million which will be capitalized (including $855,000 capitalized in Fiscal
1998).
Although the Company believes its Year 2000 compliance efforts with
respect to its systems will be successful, any failure or delay could result in
actual costs and timing differing materially from that presently contemplated,
and in a disruption of business. The Company is developing a contingency plan to
permit its primary operations to continue if the Company's modifications and
conversions of its systems are not successfully completed on a timely basis, but
the foregoing cost estimates do not take into account any expenditures arising
out of a response to any such contingencies that materialize. The Company's cost
estimates also do not include time or costs that may be incurred as a result of
third parties' failure to become Year 2000 compliant on a timely basis.
The Company is communicating with its business partners, including key
manufacturers, vendors, banks and other third parties with whom it does
business, to obtain information regarding their state of readiness with respect
to the Year 2000 issue. Failure of third parties to remediate Year 2000 issues
affecting their respective businesses on a timely basis, or to implement
contingency plans sufficient to permit uninterrupted continuation of their
businesses in the event of a failure of their systems, could have a material
adverse effect on the Company's business and results of operations. Assessment
of third party Year 2000 readiness is expected to be substantially completed by
the end of the first quarter of Fiscal 1999. The Company will not be able to
determine its most reasonably likely worst case scenarios until assessment of
third parties' Year 2000 compliance is completed.
==============================================================================
The Company's Year 2000 compliance project also includes development of a
contingency plan designed to support critical business operations in the event
of the occurrence of systems failures or the occurrence of reasonably likely
worst case scenarios. The Company anticipates that contingency plans will be
substantially developed by the end of the second quarter of Fiscal 1999.
The Company may not be able to compensate adequately for business
interruption caused by certain third parties. Potential risks include suspension
or significant curtailment of service or significant delays by banks, utilities
or common carriers, or at U.S. ports of entry. The Company's business also could
be materially adversely affected by the failure of governmental agencies to
address Year 2000 issues affecting the Company's operations. For example, a
significant amount of the Company's merchandise is manufactured outside the
United States, and the Company is dependent upon the issuance by foreign
governmental agencies of export visas for, and upon the U.S. Customs Service to
process and permit entry into the United States of, such merchandise. If
failures in government systems result in the suspension or delay of these
agencies' services, the Company could experience significant interruption or
delays in its inventory flow.
The costs and timing for management's completion of Year 2000 compliance
modification and testing processes are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, the success of third parties'
Year 2000 compliance efforts and other factors. There can be no assurance that
these assumptions will be realized or that actual results will not vary
materially.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURES
Sections of this Annual Report on Form 10-K, including the preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain various forward looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, with respect to the
financial condition, results of operations and business of the Company. Examples
of forward-looking statements are statements that use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar expressions.
These forward looking statements involve certain risks and uncertainties, and no
assurance can be given that any of such matters will be realized. Actual results
may differ materially from those contemplated by such forward looking statements
as a result of, among other things, failure by the Company to predict accurately
customer fashion preferences; a decline in the demand for merchandise offered by
the Company; competitive influences; changes in levels of store traffic or
consumer spending habits; effectiveness of the Company's brand awareness and
marketing programs; lack of sufficient customer acceptance of the Ann Taylor
Loft concept in the moderate-priced women's apparel market; general economic
conditions that are less favorable than expected or a downturn in the retail
industry; the inability of the Company to locate new store sites or negotiate
favorable lease terms for additional stores or for the expansion of existing
stores; a significant change in the regulatory environment applicable to the
Company's business; an increase in the rate of import duties or export quotas
with respect to the Company's merchandise; financial or political instability in
any of the countries in which the Company's goods are manufactured; any material
adverse effects of the Year 2000 issue on the business of the Company or third
parties with which the Company does business; or an adverse outcome of the
litigation referred to in "Legal Proceedings" that materially and adversely
affects the Company's financial condition. The Company assumes no obligation to
update or revise any such forward looking statements, which speak only as of
their date, even if experience or future events or changes make it clear that
any projected financial or operating results implied by such forward-looking
statements will not be realized.
===============================================================================
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company maintains the majority of its cash and cash equivalents in
financial instruments with original maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, a change of 100 basis points in interest rates would not have a
material effect on the Company's financial condition.
The Company's outstanding long-term debt as of January 31, 1999 bears
interest at fixed rates; therefore, the Company's results of operations would
only be affected by interest rate changes to the extent that fluctuating rate
loans are outstanding under the Credit Facility. As of January 31, 1999, the
Company has no such amounts outstanding. Future borrowings would be affected by
interest rate changes; however, the Company does not believe that a change of
100 basis points in interest rates would have a material effect on the Company's
financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company for the
years ended January 30, 1999, January 31, 1998 and February 1, 1997 are included
as a part of this Report (See Item 14):
Consolidated Statements of Operations for the fiscal years ended January
30, 1999, January 31, 1998 and February 1, 1997.
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998.
Consolidated Statements of Stockholders' Equity for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997.
Consolidated Statements of Cash Flows for the fiscal years ended January
30, 1999, January 31, 1998 and February 1, 1997.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
===============================================================================
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 26, 1999, the Company's directors and executive officers were
as follows:
NAME AGE POSITION WITH THE COMPANY AND OFFICE HELD
---- --- -----------------------------------------
J. Patrick Spainhour 49 Chairman, Chief Executive Officer and
Director of the Company and Ann Taylor
Patricia DeRosa 46 President, Chief Operating Officer and
Director of the Company and Ann Taylor
Walter J. Parks (a) 40 Senior Vice President - Chief Financial
Officer and Treasurer of the Company and
Ann Taylor
Jocelyn F.L. Barandiaran 38 Senior Vice President - General Counsel and
Secretary of the Company and Ann Taylor
James M. Smith 37 Vice President - Controller and Assistant
Treasurer of the Company and Ann Taylor
Gerald S. Armstrong 55 Director of the Company and Ann Taylor
James J. Burke, Jr. 47 Director of the Company and Ann Taylor
Wesley E. Cantrell 64 Director of the Company and Ann Taylor
Robert C. Grayson 54 Director of the Company and Ann Taylor
Ronald W. Hovsepian 37 Director of the Company and Ann Taylor
Rochelle B. Lazarus 51 Director of the Company and Ann Taylor
Hanne M. Merriman 57 Director of the Company and Ann Taylor
- --------------------
(a) Mr. Parks resigned from his positions with the Company and Ann Taylor
effective March 31, 1999.
The Board of Directors of the Company is divided into three groups,
serving staggered three-year terms. The Board of Directors has standing
Audit, Compensation and Nominating Committees. The current members of the
Audit Committee are Mr. Grayson (Chairman), Ms. Lazarus and Ms. Merriman. The
current members of the Compensation Committee are Ms. Lazarus (Chairman), Mr.
Armstrong, Mr. Burke and Ms. Merriman. The current members of the Nominating
Committee are Ms. Merriman (Chairman), Mr. Armstrong and Mr. Grayson.
Directors who are employees of the Company do not receive any compensation
for serving on the Board of Directors of the Company or Ann Taylor. In addition,
Mr. Armstrong and Mr. Burke, who serve on the Boards of the Company and Ann
Taylor as representatives of ML&Co. and certain of its affiliates, have declined
to receive any compensation from the Company for Board service. All other
Directors (referred to below as "non-employee Directors") receive an annual
retainer of $20,000, plus $1,000 for each meeting of the Board or committee of
the Board that they attend. Committee chairs also receive an annual stipend of
$3,000 for their service as such. In addition, commencing with fiscal 1998, each
non-employee Director also receives an annual grant of an option to purchase
2,000 shares of Common Stock. Any new non-employee Director joining the Board
will, at the time of election, also receive an initial grant of an option to
purchase 7,500 shares of Common Stock. On June 17, 1998, incumbent non-employee
Directors were each granted a one-time option to purchase 7,500 shares of Common
Stock.
===============================================================================
The following is a brief biography of each of the Company's directors and
executive officers:
J. PATRICK SPAINHOUR. Mr. Spainhour has been Chairman and Chief Executive
Officer of the Company and Ann Taylor since August 1996 and a Director of the
Company and Ann Taylor since February 1996. From February 1996 to August 1996,
he was President and Chief Operating Officer of the Company and Ann Taylor. From
August 1994 to February 1996, Mr. Spainhour was executive vice president and
chief financial officer of The Donna Karan Company, a designer apparel company.
From February 1993 to July 1994, he was executive vice president, finance and
operations of Stride Rite Corp., a footwear company.
PATRICIA DEROSA. Ms. DeRosa has been President, Chief Operating Officer
and a Director of the Company and Ann Taylor since December 1996. From August
1995 to November 1996, she was executive vice president, business development of
Charming Shoppes, Inc., a women's specialty apparel retailer. From 1975 to 1981
and from 1983 to August 1995, she served in various capacities at The Gap, Inc.,
a specialty apparel retailer, including from 1993 to 1995 as president of the
GapKids division.
WALTER J. PARKS. Mr. Parks has been Senior Vice President--Chief
Financial Officer and Treasurer of the Company and Ann Taylor since February
1997. He has been employed by Ann Taylor since 1988 and has held various
positions, including General Accounting Manager, Director of Financial
Reporting and, from 1992 to 1995, Vice President of Financial Reporting, and
from February 1995 to February 1997, Senior Vice President--Finance of the
Company and AnnTaylor. Mr. Parks resigned from his positions with the Company
and Ann Taylor effective March 31, 1999.
JOCELYN F.L. BARANDIARAN. Ms. Barandiaran has been Senior Vice
President--General Counsel and Secretary of the Company and Ann Taylor since
October 1996. She served as Vice President--General Counsel and Secretary of
the Company and Ann Taylor from May 1992 to September 1996.
JAMES M. SMITH. Mr. Smith has been Vice President--Controller and
Assistant Treasurer of the Company since March 1997, and has been Vice
President--Controller and Assistant Treasurer of Ann Taylor since February
1995. He has also held the position of Assistant Secretary of both the
Company and Ann Taylor since June 1998. From February 1993 to January 1995,
Mr. Smith was Director of Financial Reporting for Ann Taylor.
GERALD S. ARMSTRONG. Mr. Armstrong has been a Director of the Company
and Ann Taylor since February 1989. He has been the managing partner of
Arena Capital Partners, LLC, a private investment firm, since January 1998.
Mr. Armstrong was a partner of Stonington Partners, Inc. ("Stonington
Partners"), a private investment firm, from November 1993 to December 1997,
and a director of Stonington Partners from August 1993 to December 1997. He
was a partner of ML Capital Partners, a private investment firm associates
with ML&Co. from May 1993 through June 1994, and was an executive vice
president of ML Capital Partners from November 1988 through April 1993. Mr.
Armstrong was also a managing director of the Investment Banking Division of
ML&Co. from November 1988 through June 1994. Since June 1994, Mr. Armstrong
has served as a consultant to ML Capital Partners. Mr. Armstrong is also a
director of Blue Bird Corporation and World Color Press, Inc.
JAMES J. BURKE, JR. Mr. Burke has been a Director of the Company and Ann
Taylor since February 1989. He has been a partner of Stonington Partners, since
November 1993, and a director of Stonington Partners since August 1993. He was a
partner of ML Capital Partners from May 1993 through June 1994, and was
president and chief executive officer of ML Capital Partners from January 1987
through April 1993. Mr. Burke was a first vice president of Merrill Lynch,
Pierce, Fenner & Smith Incorporated from July 1988 through June 1994 and was a
managing director of the Investment Banking Division of ML&Co. from April 1985
through June 1994. Since June 1994, Mr. Burke has served as a consultant to ML
Capital Partners. Mr. Burke is also a director of Borg-Warner Security
Corporation, Education Management Corp., Pathmark Stores, Inc., Supermarkets
General Holdings Corporation and United Artists Theatre Circuit, Inc., and
several privately held companies.
WESLEY E. CANTRELL. Mr. Cantrell has been a Director of the Company
and Ann Taylor since November 1998. He has been president and chief
executive officer of Lanier WorldWide, Inc. since March 1987. Lanier
WorldWide is engaged in the office systems and equipment business, and is an
operating unit of Harris Corporation, a company engaged in the
communications, semiconductors, office systems and equipment, and advanced
electronic systems industries.
===============================================================================
ROBERT C. GRAYSON. Mr. Grayson has been a Director of the Company and
Ann Taylor since April 1992. He has been president of Robert C. Grayson &
Associates, Inc., a retail marketing consulting firm, since February 1992.
He has also served as chairman of Berglass-Grayson, a management consulting
firm, since June 1995. He was a vice chairman of the board of Tommy Hilfiger
Corp., an apparel manufacturer and retailer, and chairman of the board of
Tommy Hilfiger Retail, a subsidiary of such company, from June 1994 to March
1996. Mr. Grayson is also a director of Sunglass Hut International, Inc.,
Kenneth Cole Productions, Inc. and Frisby Technologies Inc.
RONALD W. HOVSEPIAN. Mr. Hovsepian has been a Director of the Company and
Ann Taylor since June 1998. He has been vice president of business development
of International Business Machines Corporation ("IBM"), a supplier of advanced
information processing products and services, since January 1999. He was general
manager of IBM's global retail and distribution industry solutions organization
in 1998; from 1996 to 1997 he was vice president, supply chain solutions, and
from 1994 to 1995 he was director, consumer driven solutions, at IBM.
ROCHELLE B. LAZARUS. Ms. Lazarus has been a Director of the Company and
Ann Taylor since April 1992. She has been chief executive officer of Ogilvy &
Mather Worldwide, an advertising agency, since September 1996, and also chairman
of Ogilvy & Mather Worldwide since March 1997. She was president and chief
operating officer of Ogilvy & Mather Worldwide from December 1995 to September
1996, and was president of Ogilvy & Mather North America from April 1994 to
December 1995.
HANNE M. MERRIMAN. Ms. Merriman has been a Director of the Company and
Ann Taylor since December 1993. She has been the Principal in Hanne Merriman
Associates, retail business consultants, since January 1992. Ms. Merriman is
also a director of USAirways Group, Inc., The Rouse Company, State Farm
Mutual Automobile Insurance Company, Ameren Corp., Central Illinois Public
Service Company, T. Rowe Price Mutual Funds, and Finlay Enterprises, Inc.
She also serves as a director of the Children's Hospital Foundation (part of
the Children's National Medical Center), and is a member of the National
Women's Forum.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the annual and
long-term compensation awarded or paid for each of the last three fiscal years
to the Chief Executive Officer and the four other most highly compensated
executive officers of the Company as of January 30, 1999 (collectively, the
"named executives").
Annual Compensation Long-Term Compensation
---------------------------------------- ---------------------------
Restricted Securities All Other
Fiscal Other Annual Stock Awards Underlying Compensaton
Name and Principal Position Year Salary ($) Bonus ($)(a) Compensation($) ($) Options (#) ($) (b)
- --------------------------- ---- ---------- ----------- --------------- ---------- ----------- -------
J. Patrick Spainhour 1998 $725,000 $942,500 -- -- 20,000 $ 2,400
Chairman and Chief 1997 656,250 81,250 -- -- -- 3,306
Executive Officer 1996 556,074 295,000 -- $1,378,125(c) 175,000 --
Patricia DeRosa 1998 600,000 660,000 -- -- 10,000 --
President and Chief 1997 600,000 150,000 $367,234(d) -- -- --
Operating Officer 1996 86,538 -- -- 987,500(e) 100,000 --
Walter J. Parks(f) 1998 245,000 137,340 -- -- -- 2,400
Senior Vice President 1997 245,000 15,313 -- -- 16,000 2,438
Chief Financial Officer 1996 215,000 32,250 -- -- 7,500 2,312
and Treasurer
Jocelyn F.L. Barandiaran 1998 233,004 121,450 -- -- 4,200 --
Senior Vice President 1997 225,000 14,063 -- -- 16,000 --
General Counsel and 1996 215,000 32,250 -- -- 5,000 --
Secretary
James M. Smith 1998 145,600 65,520 -- -- 2,000 2,184
Vice President 1997 140,000 7,000 -- -- 7,500 2,374
Controller, Assistant 1996 125,000 11,250 -- -- 5,000 1,875
Treasurer and
Assistant Secretary
(a)Bonus awards were earned pursuant to the Company's Management Performance
Compensation Plan, except that a portion of the bonus amounts indicated for
Mr. Spainhour for 1996 and for Ms. DeRosa for 1997 were guaranteed bonuses
paid to them in accordance with the terms of their respective employment
agreements with the Company.
===============================================================================
(b)Represents contributions made by the Company on behalf of the named
executives to its 401(k) Savings Plan.
(c)Represents the market value, on the date of the grant, of 75,000 restricted
shares of Common Stock granted to Mr. Spainhour on December 13, 1996 in
connection with his promotion to Chairman and Chief Executive Officer of the
Company. The value of these shares as of January 30, 1999 was $2,906,250. Mr.
Spainhour's rights to these shares vest with respect to one-third of the
grant per year on each of the first three anniversaries of August 23, 1996,
the effective date of his promotion, subject to his continued employment by
the Company. Mr. Spainhour would be entitled to receive dividends on these
restricted shares if any dividends are paid by the Company on its Common
Stock.
(d) Represents reimbursement of relocation expenses.
(e)Represents the market value, on the date of the grant, of 30,000 restricted
shares of Common Stock and 20,000 restricted units granted to Ms. DeRosa on
December 9, 1996 in connection with her commencement of employment, pursuant
to her employment agreement with the Company. The value of these shares and
units as of January 30, 1999, was $1,937,500. Ms. DeRosa's rights to these
shares and units vest with respect to one-third of the grant per year on each
of the first three anniversaries of December 9, 1996, the effective date of
her employment agreement, subject to her continued employment by the Company.
Ms. DeRosa would be entitled to receive dividends on the restricted shares if
any dividends are paid by the Company on its Common Stock.
(f) Mr. Parks resigned from his employment effective March 31, 1999.
The following table sets forth certain information with respect to stock
options awarded during fiscal year 1998 to the named executives listed in Table
I above. These option grants also are reflected in Table I. In accordance with
Securities and Exchange Commission ("Commission") rules, the hypothetical
realizable values for each option grant are shown based on compound annual rates
of stock price appreciation of 5% and 10% from the grant date to the expiration
date. The assumed rates of appreciation are prescribed by the Commission and are
for illustrative purposes only; they are not intended to predict future stock
prices, which will depend upon market conditions and the Company's future
performance and prospects.
TABLE II
Stock Options Granted in Fiscal Year 1998
Potential Realizable Value
% of Total # at Assumed Annual Rates
# of Securities of Options of Stock Price
Underlying Granted to Exercise Appreciation
Options Employees in Price Expiration for Option Term (b)
Name Granted (a) Fiscal 1998 ($/Share) Date 5%($) 10%($)
---- ----------- ----------- --------- ---- ----- ------
J. Patrick Spainhour 20,000 8.5% $15.50 4/21/08 $195,000 $494,000
Patricia DeRosa 10,000 4.2% 15.50 4/21/08 97,500 247,000
Walter J. Parks --- --- --- --- --- ---
Jocelyn F.L. Barandiaran 4,200 1.8% 15.50 4/21/08 40,950 103,740
James M. Smith 2,000 0.9% 15.50 4/21/08 19,500 49,400
(a) Options vest 25% per year on each of the first through fourth
anniversaries of the date of grant, subject to earlier vesting upon the
occurrence of one of the following "Acceleration Events": (i) any person
(excluding ML Capital Partners and its affiliates, and certain other
persons) becomes the owner of at least 20% of the outstanding Common
Stock, (ii) a majority of the Board of Directors changes, or (iii) a
merger or other specified event occurs.
(b) These columns show the hypothetical realizable value of the options at the
end of the ten-year term of the options, assuming that the market price of
the Common Stock subject to the options appreciates in value at the annual
rate indicated in the table, from the date of grant to the end of the
option term.
===============================================================================
The following table shows the number of shares of Common Stock acquired by
each executive officer upon the exercise of Company stock options during fiscal
year 1998, and the aggregate dollar value realized by such executives upon such
exercise, based upon the fair market value of the Common Stock on the date of
exercise, as well as the number of all vested (exercisable) and unvested (not
yet exercisable) stock options held by each executive officer at the end of
fiscal year 1998, and the value of all such options that were "in the money"
(i.e., the market price of the Common Stock was greater than the exercise price
of the options) at the end of fiscal year 1998.
TABLE III
Aggregate Option Exercises in Fiscal 1998
and Fiscal Year End Option Values
No. of Shares $ Value Number of Shares Underlying $ Value of Unexercised
Acquired on Realized Upon Unexercised Options In-the-Money Options
Exercise of Exercise of at End of Fiscal 1998 at End of Fiscal 1998
Name Stock Options Options(a) Exercisable/Unexercisable Exercisable/Unexercisable (b)
- ---- ------------- ---------- ------------------------- -----------------------------
J. Patrick Spainhour 25,000 $412,500 150,000/20,000 $3,328,125/$465,000
Patricia DeRosa --- --- 83,000/27,000 1,462,875/532,125
Walter J. Parks 21,218 240,705 7,499/17,753 122,494/154,073
Jocelyn F.L. Barandiaran --- --- 48,040/24,660 851,982/352,794
James M. Smith 10,623 104,678 4,584/11,793 79,301/163,955
- -----------
(a) Calculated based on the closing market price of the Common Stock on the date
of exercise, less the amount required to be paid upon exercise of the
option.
(b) Calculated based on the closing market price of the Common Stock of $38.75
on January 29, 1999, the last trading day in fiscal year 1998, less the
amount required to be paid upon exercise of the option.
PENSION PLAN. Since 1989, Ann Taylor has maintained a defined benefit
retirement plan (as amended, the "Pension Plan") for the benefit of its
employees and those of its wholly owned subsidiaries, which is intended to
qualify under Section 401(a) of the Internal Revenue Code (the "Code").
Originally, the Pension Plan provided for calculation of benefits based on a
"cash balance" formula. Effective January 1, 1998, the Pension Plan provides for
calculation of benefits based on a "career average" formula instead of a cash
balance formula.
Under the "career average" formula, each participant's service and annual
earnings are used to determine their annual pension accrual. During each
participant's first ten years with Ann Taylor, their pension will accrue, for
each year of participation in the Pension Plan, at the rate of 1.25% of their
current year's pay up to the Social Security Wage Base ("Wage Base") plus 1.6%
of any pay that exceeds the Wage Base, up to the maximum amount permitted by the
Code. Upon completion of more than 10 years of service, the participant's annual
pension accrual increases to 1.6% of the current year's pay, up to the Wage
Base, plus 1.95% of any pay over the Wage Base, up to the maximum amount
permitted by the Code.
Pension benefits are fully vested after five years of service.
Participants receive credit for service with Ann Taylor prior to July 1, 1989
for purposes of vesting, and for purposes of calculating benefits under the
Pension Plan. There is no interruption in participation for those employees who
were participants in the Pension Plan as of December 31, 1997; their cash
balance benefit was frozen as of that date. Pension benefits for such employees
who retire on or after January 1, 1998 are calculated using whichever of the two
- - the amount in their cash balance account as of December 31, 1997, or the
career average formula - provides greater benefits.
Under the Code, the annual compensation that may be taken into account for
purposes of calculating benefits under the Pension Plan is limited to $160,000
(indexed for inflation). With the exception of Mr. Smith, all current executives
named in Table I had annual compensation in 1998 which exceeds this figure, and
the calculation of benefits for these executives is based on the lower plan
limitation amount.
===============================================================================
As of December 31, 1998, the credited years of service under the Pension
Plan for Mr. Spainhour was 1.8 years; Ms. DeRosa one year; Mr. Parks 9.3 years;
Ms. Barandiaran 5.7 years; and Mr. Smith 4.9 years. The estimated monthly
retirement benefit, payable as a single life annuity, that would be payable to
each of the executives named in Table I who were participants in the Pension
Plan during fiscal 1998, assuming (i) no increases in income and (ii) retirement
and the commencement of benefit payments at age 65, is as follows: Mr.
Spainhour, $3,949; Ms. DeRosa, $4,378; Mr. Parks, $7,295; Ms. Barandiaran,
$7,305; and Mr. Smith, $7,193. These benefits would not be subject to any
reduction for social security or other offset amounts.
EMPLOYMENT AGREEMENTS. Spainhour Employment Agreement. Effective as of
February 19, 1996, the Company and Mr. Spainhour entered into an employment
agreement in connection with his commencement of service as an employee of the
Company. This agreement was amended as of August 23, 1996 (as amended, the
"Spainhour Agreement"), in connection with Mr. Spainhour's promotion to Chairman
and Chief Executive Officer of the Company. The Spainhour Agreement provides for
Mr. Spainhour's employment as Chairman and Chief Executive Officer of the
Company for a term of three years, which term is automatically extended on an
annual basis for one additional year unless either party provides notice that it
does not wish to extend the term (a "Nonrenewal Notice"). Under the Spainhour
Agreement, effective January 1, 1998, Mr. Spainhour is entitled to an annual
base salary of not less than $725,000. Mr. Spainhour also is entitled to
participate in the Company's annual bonus and stock option plans, as well as
other Company benefit programs.
Pursuant to the terms of the Spainhour Agreement, Mr. Spainhour was
granted, under the Stock Option Plan, an option to purchase 100,000 shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date Mr. Spainhour commenced employment with the Company (February
19, 1996). These options vested 50% on each of the first two anniversaries of
the date of grant. In addition, in connection with his promotion to Chairman and
Chief Executive Officer of the Company, Mr. Spainhour received (i) a
"performance vesting" option to purchase 75,000 shares of Common Stock under the
Stock Option Plan, at an exercise price equal to the fair market value of the
Common Stock on the date of grant, which option vests on the ninth anniversary
of the date of grant, subject to earlier vesting upon the occurrence of certain
performance criteria and subject to accelerated vesting and termination in
accordance with the terms of the Stock Option Plan; and (ii) 75,000 restricted
shares of Common Stock, one-third of which vest on each of the first three
anniversaries of August 23, 1996, subject to accelerated vesting in accordance
with the terms of the Stock Option Plan, or upon the termination of Mr.
Spainhour's employment other than for Cause or by Mr. Spainhour for Good Reason
(as such terms are defined in the Spainhour Agreement).
In the event of termination of Mr. Spainhour's employment by the Company
without Cause, or by Mr. Spainhour for Good Reason, or in the event of the
expiration of the term of the Spainhour Agreement by reason of a Nonrenewal
Notice provided by the Company, Mr. Spainhour shall be entitled, among other
things, to receive, for the longer of one year or the remaining term of the
Spainhour Agreement, an amount representing his salary plus the average of his
last three annual bonuses, subject to Mr. Spainhour's compliance with the
noncompete and nonsolicitation provisions of the Spainhour Agreement. If any
payments or benefits received by Mr. Spainhour would be subject to the "golden
parachute" excise tax under the Code, the Company has agreed to pay Mr.
Spainhour such additional amounts as may be necessary to place him in the same
after-tax position as if the payments had not been subject to such excise tax.
DeRosa Employment Agreement. On November 25, 1996, the Company and Ms.
Patricia DeRosa entered into an employment agreement (the "DeRosa Agreement")
providing for her employment as President and Chief Operating Officer of the
Company for a term of three years. Under the terms of the DeRosa Agreement, Ms.
DeRosa is entitled to an annual base salary of not less than $600,000 and is
entitled to participate in the Company's annual bonus and stock option plans, as
well as other Company benefit programs.
===============================================================================
Pursuant to the terms of the DeRosa Agreement, Ms. DeRosa was granted under
the Stock Option Plan an option to acquire 100,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on November
25, 1996. One half of these options are "time vesting" options, one-third of
which become exercisable on each of the first three anniversaries of December 9,
1996 (the "Effective Date"). The other half of the options are "performance
vesting" options which vest on the ninth anniversary of Ms. DeRosa's employment,
subject to earlier vesting upon the occurrence of certain performance criteria
and subject to accelerated vesting and termination in accordance with the terms
of the Stock Option Plan. In addition, Ms. DeRosa received 30,000 restricted
shares of Common Stock and 20,000 restricted units, which represent the right to
receive a cash payment based on the closing price of the Common Stock on the
trading date immediately preceding the date the restrictions lapse. One-third of
each of the restricted shares and restricted units vest on each of the first
three anniversaries of the Effective Date.
In the event of termination of Ms. DeRosa's employment by the Company
without Cause or by Ms. DeRosa for Good Reason, Ms. DeRosa shall be entitled,
among other things, to receive (i) for the longer of one year or the remaining
term of the DeRosa Agreement, an amount representing her base salary and (ii)
the bonus for the season in which the date of termination occurs, pro rated to
reflect the number of days in such season through the date of termination,
subject to Ms. DeRosa's compliance with the noncompete and nonsolicitation
provisions of the DeRosa Agreement. Any unvested restricted shares and
restricted units would also vest at such time. If any payments or benefits
received by Ms. DeRosa would be subject to the "golden parachute" excise tax
under the Code, the Company has agreed to pay Ms. DeRosa such additional amounts
as may be necessary to place her in the same after-tax position as if the
payments had not been subject to such excise tax.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 22, 1999, the outstanding Common Stock was held of record by
613 stockholders. The following table sets forth certain information as of the
Record Date concerning the beneficial ownership of Common Stock by each
stockholder who is known by the Company to own beneficially in excess of 5% of
the outstanding Common Stock, by each director, by the named executives listed
in Table I above, and by all directors and executive officers as a group. Except
as otherwise indicated, all persons listed below have (i) sole voting power and
investment power with respect to their shares of Common Stock, except to the
extent that authority is shared by spouses under applicable law, and (ii) record
and beneficial ownership with respect to their shares of Common Stock.
No. of Percent
Shares of -------
Name of Beneficial Owner Common Stock
- ------------------------ ------------
Morgan Stanley Dean Witter & Co. (a).................. 4,191,741 16.0%
Fleet Financial Group, Inc. (b)....................... 1,824,484 7.0%
Merrill Lynch & Co., Inc. and certain affiliates (c).. 1,733,628 6.6%
FMR Corp. (d)......................................... 1,649,450 6.3%
AMVESCAP PLC (e)...................................... 1,325,800 5.1%
J. Patrick Spainhour (f).............................. 180,410 *
Patricia DeRosa (f)................................... 99,333 *
Walter J. Parks (f)................................... 625 *
Jocelyn F.L. Barandiaran (f).......................... 51,465 *
James M. Smith (f).................................... 2,781 *
Gerald S. Armstrong (g)(h)............................ 10,964 *
James J. Burke, Jr. (g)............................... 52,920 *
Wesley E. Cantrell.................................... 0 *
Robert C. Grayson..................................... 25,000 *
Ronald W. Hovsepian................................... 0 *
Rochelle B. Lazarus (i)............................... 600 *
Hanne M. Merriman..................................... 200 *
All executive officers and directors as a
group (12 persons) (j) 424,298 1.6%
- ------------------
* Less than 1%
==============================================================================
(a) Pursuant to a Schedule 13G dated February 12, 1999 and filed with the
Commission by Morgan Stanley Dean Witter & Co., Morgan Stanley Dean Witter
Advisors Inc., and Van Kampen Asset Management Inc., Morgan Stanley Dean
Witter & Co had shared voting power with respect to 3,708,741 shares, sole
voting power with respect to no shares, and shared dispositive power with
respect to 4,191,741 shares; Morgan Stanley Dean Witter Advisors Inc. had
shared voting power with respect to 1,891,400 shares, sole voting power
with respect to no shares, shared voting power with respect to 1,891,400
shares, and sole dispositive power with respect to no shares; and Van
Kampen Asset Management Inc. had shared voting power with respect to
1,164,082 shares, sole dispositive power with respect to no shares, shared
dispositive power with respect to 1,294,382 shares, and sole dispositive
power with respect to no shares. The address for Morgan Stanley Dean
Witter & Co. is 1585 Broadway, New York, NY 10036; for Morgan Stanley Dean
Witter Advisors Inc. is Two World Trade Center, New York, NY 10048; and
for Van Kampen Asset Management Inc. is One Parkview Plaza, Oakbrook
Terrace, IL 60181.
(b) Pursuant to a Schedule 13G dated February 13, 1998 and filed with the
Commission by Fleet Financial Group, Inc. ("Fleet"), Fleet had sole voting
power with respect to 25,000 shares, shared voting power with respect to
1,799,484 shares, sole dispositive power with respect to 25,000 shares,
and shared dispositive power with respect to 1,686,400 shares. The address
for Fleet Financial Group, Inc. is One Federal Street, Boston,
Massachusetts 02110.
(c) Pursuant to an amendment to a Schedule 13G dated February 12, 1999 and
filed with the Commission by ML&Co., its subsidiary Merrill Lynch Group,
Inc. ("ML Group") and certain of their affiliates (collectively, the
"Merrill Lynch Entities"), ML&Co. and ML Group are deemed to beneficially
own an aggregate of 1,733,628 shares of Common Stock. ML&Co. and ML Group
may be deemed to beneficially own these shares as a result of their control
of their wholly owned subsidiaries (i) Merrill Lynch Capital Partners,
Inc., which is the general partner of both (a) MLCP Associates L.P. No. I,
and (b) Merrill Lynch LBO Partners No. B-I, L.P., a limited partnership
that acts as general partner of Merrill Lynch Capital Appreciation
Partnership No. B-II, which, as reported in the Schedule 13G, is the owner
of record of shares representing approximately 3.29% of the outstanding
Common Stock, and ML Offshore LBO Partners No. B-II which, as reported in
the Schedule 13G, is the owner of record of shares representing
approximately 1.92% of the shares; (ii) KECALP Inc. and Merrill Lynch MBP
Inc., each of which acts as general partners of limited partnerships that
are record owners of shares (no single limited partnership is the record
holder of more than 5% of the outstanding Common Stock); and (iii) ML IBK
Positions, Inc. that, as reported in the Schedule 13G, owns of record less
than 1% of such shares. The Merrill Lynch Entities are deemed to have
shared voting and investment power with other ML&Co. affiliates with
respect to the shares of Common Stock deemed to be beneficially owned by
them. On March 25, 1999, ML Capital Partners orally advised the Company
that the Merrill Lynch Entities had sold all of these shares in March 1999.
The address for ML&Co., ML Group and ML IBK Positions, Inc. is 250 Vesey
Street, World Financial Center, North Tower, New York, New York 10281. The
address for each of the other Merrill Lynch Entities named above is 225
Liberty Street, New York, New York 10080. (d) Pursuant to an amendment
dated January 7, 1999 to a Schedule 13G filed with the Commission by FMR
Corp., Edward C. Johnson 3d and Abigail P. Johnson, FMR Corp. indicated
that it had sole voting power with respect to 222,000 shares and shared
voting power with respect to no shares, and each of FMR Corp., Edward C.
Johnson 3d and Abigail P. Johnson indicated that they had sole
dispositive power with respect to 1,649,450 shares. The address for
each of FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson is 82
Devonshire Street, Boston, MA 02109.
(e) Pursuant to a Schedule 13G dated February 10, 1999 and filed with the
Commission by AMVESCAP PLC on behalf of itself and its subsidiaries AVZ,
Inc., AIM Management Group Inc., AMVESCAP Group Services, Inc., INVESCO,
Inc., INVESCO North American Holdings, Inc., INVESCO Capital Management,
Inc., INVESCO Funds Group, Inc., INVESCO Management & Research, Inc.,
INVESCO Realty Advisers, Inc., and INVESCO (NY) Asset Management, Inc.
(collectively, "AMVESCAP"), AMVESCAP beneficially owns 1,325,800 shares
and has shared voting power and shared dispositive power with respect to
all such shares. The address for AMVESCAP is 11 Devonshire Square, London
EC2M 4YR England, and 1315 Peachtree Street, N.E., Atlanta, Georgia 30309.
===============================================================================
(f) The shares listed include shares subject to options exercisable within 60
days of March 22, 1999 as follows: Mr. Spainhour, 155,000 shares; Ms.
DeRosa, 69,333 shares; Mr. Parks, 625 shares; Ms. Barandiaran, 51,465
shares; and Mr. Smith, 2,581 shares. The shares listed also include
restricted shares which have not yet vested and which are subject to
forfeiture, as follows: Mr. Spainhour, 25,000 shares; and Ms. DeRosa,
10,000 shares.
(g) James J. Burke, Jr. and Gerald S. Armstrong serve on the Board of
Directors of the Company and Ann Taylor as designees of ML&Co. and
certain of its affiliates. Both Mr. Burke and Mr. Armstrong disclaim
beneficial ownership of the shares beneficially owned by the Merrill
Lynch Entities.
(h) 3,000 of these shares are held by Mr. Armstrong's spouse, as custodian for
their children. Mr. Armstrong disclaims beneficial ownership of these
shares.
(i) Shares are held in a pension fund of which Ms. Lazarus' spouse is the sole
beneficiary. Ms. Lazarus has no voting or investment power with respect to
these shares.
(j) The shares listed include 279,004 shares subject to options exercisable
within 60 days of March 22, 1999, and 35,000 restricted shares that have
not yet vested and are subject to forfeiture.
SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (as amended) (the
"Exchange Act"), requires the Company's directors and certain officers, and
holders of more than 10% of the Company's Common Stock, to file with the
Securities and Exchange Commission and the New York Stock Exchange reports of
their ownership and changes in ownership of Common Stock. Copies of Section
16(a) reports are required to be furnished to the Company. Based solely on a
review of the copies of such statements furnished to the Company, or written
representations from certain reporting persons that no Forms 5 were required for
such persons, the Company believes that during fiscal year 1998, all
transactions were reported on a timely basis, except that Mr. Hovsepian's
initial statement of ownership was filed by the Company's counsel one business
day late.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an amendment to a Schedule 13G dated February 12, 1999 and
filed with the Commission by the Merrill Lynch Entities, the Merrill Lynch
Entities beneficially owned an aggregate of 1,733,628 shares, or
approximately 6.7%, of the outstanding Common Stock. Messrs. Armstrong and
Burke serve on the Boards of Directors of the Company and Ann Taylor as
representatives of ML&Co. and its affiliates. Accordingly, ML&Co. and its
affiliates are in a position to influence the management of the Company.
Messrs. Armstrong and Burke are also members of the Compensation Committee of
the Board of Directors of the Company. On March 25, 1999, ML Capital
Partners orally advised the Company that the Merrill Lynch Entities had
sold all of these shares in March 1999.
==============================================================================
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Annual Report:
The following consolidated financial statements of the Company and
the independent auditors' report are included on pages 36 through
56 and are filed as part of this Annual Report:
Consolidated Statements of Operations for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997;
Consolidated Balance Sheets as of January 30, 1999 and January 31,
1998; Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 30, 1999, January 31, 1998, and February
1, 1997; Consolidated Statements of Cash Flows for the fiscal years
ended January 30, 1999, January 31, 1998, and February 1, 1997;
Notes to Consolidated Financial Statements; Independent Auditors'
Report.
(b) Reports on Form 8-K
The Company filed a report with the Commission on Form 8-K dated
November 9, 1998 with respect to the dismissal of the amended
complaint, filed in April 1998, of the purported class action lawsuit
against the Company, Ann Taylor, certain officers and directors of the
Company and Ann Taylor, ML&Co. and certain affiliates of ML&Co. The
Company filed a report with the Commission on Form 8-K dated December
17, 1998 with respect to the plaintiffs' filing of a notice of appeal
of such dismissal.
(c) Exhibits
The exhibits listed below are filed as a part of this Annual Report.
Exhibit Number
--------------
3.1 Restated Certificate of Incorporation of the Company. Incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission (the
"Commission") on August 10, 1992 (Registration
No. 33-50688).
3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.2 to
the Form 10-Q of the Company for the Quarter ended November 2, 1991
filed on December 17, 1991 (Registration No. 33-28522).
4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet
Bank, N.A., as Trustee, including the form of Subordinated Note due
2000. Incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K of Ann Taylor filed on July 7, 1993.
4.1.1 Instrument of Resignation, Appointment and Acceptance, dated as of
December 1, 1995, among Ann Taylor, Fleet Bank, N.A., as Resigning
Trustee, and Norwest Bank Minnesota, N.A., the Successor Trustee.
Incorporated by reference to Exhibit 4.1.1 to the Annual Report on
Form 10-K of the Company filed on April 8, 1996.
10.1 Form of Warrant Agreement entered into between Ann Taylor and The
Connecticut Bank and Trust Company, National Association, including
the form of Warrant. Incorporated by reference to Exhibit 4.3 to
Amendment No. 1 to the Registration Statement of the Company and Ann
Taylor filed on June 21, 1989 (Registration No. 33-28522).
10.2 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18
to the Registration Statement of the Company and Ann Taylor filed on
May 3, 1989 (Registration No. 33-28522).
10.2.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to
Exhibit 10.15.1 to the Annual Report on Form 10-K of the Company
filed on April 30, 1993.
===============================================================================
Exhibit Number
- --------------
10.3 Lease, dated as of March 17, 1989, between Carven Associates and Ann
Taylor concerning the West 57th Street headquarters. Incorporated by
reference to Exhibit 10.21 to the Registration Statement of the
Company and Ann Taylor filed on May 3, 1989 (Registration No.
33-28522).
10.3.1 First Amendment to Lease, dated as of November 14, 1990, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.1 to the Registration Statement of the Company filed
on April 11, 1991 (Registration No. 33-39905).
10.3.2 Second Amendment to Lease, dated as of February 28, 1993, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.2 to the Annual Report on Form 10-K of the Company
filed on April 29, 1993.
10.3.3 Extension and Amendment to Lease dated as of October 1, 1993,
between Carven Associates and Ann Taylor. Incorporated by reference
to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter
ended October 30, 1993 filed on November 26, 1993.
10.3.4 Modification of Amendment and Extension to Lease, dated as of April
14, 1994 between Carven Associates and Ann Taylor. Incorporated by
reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of
the Company filed on April 28, 1995.
10.3.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven
Associates and Ann Taylor. Incorporated by reference to Exhibit
10.15.5 to the Annual Report on Form 10-K of the Company filed on
April 28, 1995.
10.3.6 Sixth Amendment to Lease, dated as of January 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.6 to the Annual Report on Form 10-K of the
Company filed on April 30, 1998.
10.3.7 Seventh Amendment to Lease, dated as of June 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.7 to the Annual Report on Form 10-K of the
Company filed on April 30, 1998.
10.3.8 Eighth Amendment to Lease, undated, between Pacific Metropolitan
Corporation and Ann Taylor. Incorporated by reference to Exhibit
10.8.8 to the Annual Report on Form 10-K of the Company filed on
April 30, 1998.
10.3.9 Ninth Amendment to Lease, dated as of May 13, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference
to Exhibit 10.8.9 to the Annual Report on Form 10-K of the Company
filed on April 30, 1998.
10.3.10 Tenth Amendment to Lease, dated as of May 21, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference
to Exhibit 10.8.10 to the Annual Report on Form 10-K of the Company
filed on April 30, 1998.
10.3.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between
Pacific Metropolitan Corporation and Ann Taylor.
10.4 Tax Sharing Agreement, dated as of July 13, 1989, between the
Company and Ann Taylor. Incorporated by reference to Exhibit 10.24
to Amendment No. 2 to the Registration Statement of the Company and
Ann Taylor filed on July 13, 1989 (Registration No.
33-28522).
10.5 Employment Agreement dated as of February 1, 1994 between the
Company and Sally Frame Kasaks. Incorporated by reference to Exhibit
10.8 to the Form 10-Q of the Company for the Quarter ended October
29, 1994 filed on December 9, 1994.
==============================================================================
Exhibit Number
- --------------
10.6 Employment Agreement dated February 16, 1996 between the Company and
J. Patrick Spainhour. Incorporated by reference to Exhibit 10.4 to
the Annual Report on Form 10-K of the Company filed on April 8,
1996.
10.6.1 Amendment to the Employment Agreement, dated August 23, 1996,
between the Company and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.11.1 to the Annual Report on Form 10-K of
the Company filed on May 1, 1997.
10.7 Employment Agreement dated November 25, 1996 between the Company and
Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to Form
10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on
December 17, 1996.
10.8 Employment Agreement dated September 20, 1996 between Ann Taylor and
Dwight F. Meyer. Incorporated by reference to Exhibit 10.4 to the
Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed
on December 17, 1996.
10.9 Separation Agreement dated July 15, 1997 between Ann Taylor and
Barry Shapiro. Incorporated by reference to Exhibit 10.15 to the
Annual Report on Form 10-K of the Company filed on April 30, 1998.
10.10 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted
Stock and Unit Award Plan, Amended and Restated as of February 23,
1994 (the "1992 Option Plan"). Incorporated by reference to Exhibit
10.15 to the Annual Report on Form 10-K of the Company filed on May
1, 1997.
10.10.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan, as
approved by stockholders on June 18, 1997. Incorporated by reference
to Exhibit 10.15.1 to the Form 10-Q of the Company for the Quarter
Ended August 2, 1997 filed on September 12, 1997.
10.10.2 Amendment to the AnnTaylor Stores Corporation Amended and Restricted
1992 Stock Option and Restricted Stock and Unit Award Plan dated as
of January 16, 1998. Incorporated by reference to Exhibit 10 of Form
8-K of the Company filed on March 12, 1998.
10.10.3 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan dated as
of May 2, 1998. Incorporated by reference to Exhibit 10.16.3 to the
Form 10-Q of the Company for the Quarter ended April 2, 1998 filed
on June 16, 1998.
10.11 AnnTaylor Stores Corporation Amended and Restated Management
Performance Compensation Plan, as approved by stockholders on June
18, 1997. Incorporated by reference to Exhibit 10.16 to the Form
10-Q of the Company for the Quarter Ended August 2, 1997 filed on
September 12, 1997.
10.11.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan dated as of March 12, 1998.
Incorporated by reference to Exhibit 10.17.1 to the Annual Report on
Form 10-K of the Company filed on April 30, 1998.
10.12 Associate Stock Purchase Plan. Incorporated by reference to Exhibit
10.31 to the Form 10-Q of the Company for the Quarter Ended October
31, 1992 filed on December 15, 1992.
10.13 AnnTaylor Stores Corporation Deferred Compensation Plan.
Incorporated by reference to Exhibit 10.33 to the Annual Report on
Form 10-K of the Company filed on April 28, 1995.
==============================================================================
Exhibit Number
- --------------
10.13.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation
Plan as approved by the Board of Directors on August 11, 1995.
Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of the
Company for the Quarter Ended July 29, 1995 filed on September 11,
1995.
10.14 Mortgage, Assignment of Rents and Leases, Security Agreement and
Fixture Financing Statement dated November 20, 1995, between
AnnTaylor Distribution Services, Inc., as Mortgagor, and General
Electric Capital Assurance Company, as Mortgagee. Incorporated by
reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the
Quarter ended October 28, 1995 filed on December 8, 1995.
10.15 Promissory Note dated November 20, 1995 from Ann Taylor and
AnnTaylor Distribution Services, Inc., collectively as Borrower, to
General Electric Capital Assurance Company, as Lender. Incorporated
by reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for the
Quarter ended October 28, 1995 filed on December 8, 1995.
10.16 Stock and Asset Purchase Agreement, dated as of June 7, 1996, by and
among the Company, Ann Taylor, Cygne and Cygne Group (F.E.) Limited.
Incorporated by reference to Exhibit 2 to the Registrants' Current
Report on Form 8-K filed on June 10, 1996.
10.16.1 Amendment to Stock and Asset Purchase Agreement, dated as of August
27, 1996, by and among the Company, Ann Taylor, Cygne and Cygne
Group (F.E.) Limited. Incorporated by reference to Exhibit 3 to the
Registrants' Current Report on Form 8-K filed on August 30, 1996.
10.16.2 Stockholders Agreement, dated as of September 20, 1996, among the
Company, Cygne and Cygne Group (F.E.) Limited, a Hong Kong
corporation and wholly owned subsidiary of Cygne. Incorporated by
reference to Exhibit 10.26.2 to the Annual Report on Form 10-K
of the Company filed on May 1, 1997.
10.16.3 Consulting Agreement, dated as of September 20, 1996, by and between
the Company, Cygne and Mr. Irving Benson. Incorporated by reference
to Exhibit 10.26.4 to the Annual Report on Form 10-K of the Company
filed on May 1, 1997.
10.17 Certificate of Trust of AnnTaylor Finance Trust. Incorporated by
reference to Exhibit 4.1 to the Registration Statement of the
Company and AnnTaylor Finance Trust filed on June 21, 1996
(Registration 333-06605).
10.17.1 Amended and Restated Declaration of Trust of AnnTaylor Finance
Trust, dated as of April 25, 1996 among the Company, as Sponsor,
The Bank of New York, as Property Trustee, The Bank of New York
(Delaware), as Delaware Trustee and J. Patrick Spainhour, Paul E.
Francis and Walter J. Parks, as Trustees. Incorporated by
reference to Exhibit 4.2 to the Registration Statement of the
Company and AnnTaylor Finance Trust filed on June 21, 1996
(Registration 333-06605).
10.17.2 Indenture, dated as of April 15, 1996, among AnnTaylor Stores
Corporation and The Bank of New York, as Trustee, including form of
Preferred Securities and form of Convertible Subordinated Debentures
due 2016. Incorporated by reference to Exhibit 4.3 to the
Registration Statement of the Company and AnnTaylor Finance Trust
filed on June 21, 1996 (Registration No. 333-06605).
10.18 Commitment Letter dated as of May 7, 1998 among AnnTaylor, Bank of
America National Trust and Savings Association, BancAmerica
Robertson Stephens, Citicorp USA and CoreStates Bank, N.A.
Incorporated by reference to Exhibit 10.27 to the Form 10-Q of the
Company for the Quarter Ended May 2, 1998 filed on June 16, 1998.
===============================================================================
Exhibit Number
- --------------
10.19 Credit Agreement, dated as of June 30, 1998 among AnnTaylor, Bank
of America, Citicorp USA and First Union National Bank, as
Co-Agents, the financial institutions from time to time party
thereto, BancAmerica Robertson Stephens, as Arranger, and Bank of
America, as Administrative Agent. Incorporated by reference to
Exhibit 10.28 to the Form 10-Q of the Company for the Quarter
Ended August 1, 1998 filed on September 14, 1998.
10.19.1 Trademark Security Agreement, dated as of June 30, 1998, made by Ann
Taylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.1 to the Form 10-Q of the
Company for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.19.2 Guaranty, dated as of June 30, 1998, made by the Company in favor of
Bank of America, as Administrative Agent. Incorporated by reference
to Exhibit 10.28.2 to the Form 10-Q of the Company for the Quarter
Ended August 1, 1998 filed on September 14, 1998.
10.19.3 Security and Pledge Agreement, dated as of June 30, 1998, made by
the Company in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.3 to the Form 10-Q of the
Company for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.19.4 Security and Pledge Agreement, dated as of June 30, 1998 made by
AnnTaylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.4 to the Form 10-Q of the
Company for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.19.5 Subsidiary Guaranty, dated as of June 30, 1998 made by AnnTaylor
Distribution Services in favor of Bank of America, as Administrative
Agent. Incorporated by reference to Exhibit 10.28.5 to the Form 10-Q
of the Company for the Quarter Ended August 1, 1998 filed on
September 14, 1998.
10.20 AnnTaylor Stores Corporation Long-Term Cash Incentive Compensation
Plan, as approved by stockholders on June 17, 1998. Incorporated by
reference to Exhibit A to the Proxy Statement dated May 1, 1998
filed on May 6, 1998.
18 Preferability letter relating to the change in accounting principle.
Incorporated by reference to Exhibit 18 to the Form 10-Q of the
Company for the Quarter Ended May 2, 1998 filed on June 16, 1998.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
==============================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANNTAYLOR STORES CORPORATION
By: /s/ J. Patrick Spainhour
------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. Patrick Spainhour Chairman and Chief Executive March 26, 1999
------------------------ Officer and Director
J. Patrick Spainhour
/s/ Patricia DeRosa President and Chief Operating March 26, 1999
------------------- Officer and Director
Patricia DeRosa
/s/ Walter J. Parks Senior Vice President - March 26, 1999
------------------- Chief Financial Officer
Walter J. Parks and Treasurer
/s/ James M. Smith Vice President and Controller March 26, 1999
-------------------- Principal Accounting Officer
James M. Smith
/s/ Gerald S. Armstrong Director March 26, 1999
-----------------------
Gerald S. Armstrong
/s/ James J. Burke, Jr. Director March 26, 1999
-----------------------
James J. Burke, Jr.
/s/ Wesley E. Cantrell Director March 26, 1999
----------------------
Wesley E. Cantrell
/s/ Robert C. Grayson Director March 26, 1999
---------------------
Robert C. Grayson
/s/ Ronald W. Hovsepian Director March 26, 1999
-----------------------
Ronald W. Hovsepian
/s/ Rochelle B. Lazarus Director March 26, 1999
-------------------
Rochelle B. Lazarus
/s/ Hanne M. Merriman Director March 26, 1999
---------------------
Hanne M. Merriman
===============================================================================
ANNTAYLOR STORES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Independent Auditors' Report........................................... 37
Consolidated Financial Statements:
Consolidated Statements of Operations for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997........ 38
Consolidated Balance Sheets as of January 30, 1999
and January 31, 1998........................................... 39
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 30, 1999, January 31,
1998 and February 1, 1997..................................... 40
Consolidated Statements of Cash Flows for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997....... 41
Notes to Consolidated Financial Statements....................... 42
==============================================================================
INDEPENDENT AUDITORS' REPORT
To the Stockholders of ANNTAYLOR STORES CORPORATION:
We have audited the accompanying consolidated financial statements of
AnnTaylor Stores Corporation and its subsidiaries, listed in the accompanying
index. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries at January 30, 1999 and January 31, 1998 and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 30, 1999 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of inventory valuation to the average cost method
from the retail method.
DELOITTE & TOUCHE LLP
New York, New York
March 8, 1999
==============================================================================
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997
Fiscal Years Ended
------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands, except per share amounts)
Net sales................................$911,939 $781,028 $798,117
Cost of sales............................ 455,724 411,756 443,443
------- ------- -------
Gross profit............................. 456,215 369,272 354,674
Selling, general and administrative
expenses 349,955 308,232 291,027
Studio shoe stores closing expense....... --- --- 3,600
Employment contract separation expense... --- --- 3,500
Retirement of assets..................... 3,633 --- ---
Amortization of goodwill................. 11,040 11,040 10,086
------ ------ ------
Operating income......................... 91,587 50,000 46,461
Interest expense......................... 18,117 19,989 24,416
Other expense, net....................... 567 548 403
------ ------ ------
Income before income taxes and
extraordinary loss 72,903 29,463 21,642
Income tax provision..................... 33,579 17,466 12,975
------ ------ ------
Income before extraordinary loss......... 39,324 11,997 8,667
Extraordinary loss (net of income
tax benefit of $130,000)............... --- 173 ---
------ ------ ------
Net income........................... $39,324 $11,824 $ 8,667
======= ======= =======
Basic earnings per share:
Basic earnings per share before
extraordinary loss.................$ 1.53 $ 0.47 $ 0.36
Extraordinary loss per share......... --- 0.01 ---
------ ------ -------
Basic earnings per share.............$ 1.53 $ 0.46 $ 0.36
======= ======== =======
Diluted earnings per share:
Diluted earnings per share before
extraordinary loss.................$ 1.44 $ 0.47 $ 0.36
Extraordinary loss per share......... --- 0.01 ---
------ ------ ------
Diluted earnings per share...........$ 1.44 $ 0.46 $ 0.36
======= ======== =======
See accompanying notes to consolidated financial statements.
==============================================================================
ANNTAYLOR STORES CORPORATION
CONSOLIDATED BALANCE SHEETS
January 30, 1999 and January 31, 1998
January 30, January 31,
1999 1998
---- ----
Assets (in thousands)
Current assets
Cash and cash equivalents........................ . $ 67,031 $ 31,369
Accounts receivable, net ........................... 71,049 60,211
Merchandise inventories ............................ 136,748 97,234
Prepaid expenses and other current assets .......... 23,637 21,291
------- -------
Total current assets ............................... 298,465 210,105
Property and equipment, net ........................ 151,785 139,610
Goodwill, net ...................................... 319,699 330,739
Deferred financing costs, net ...................... 2,627 1,258
Other assets ....................................... 2,841 1,949
------- -------
Total assets........................................ 775,417 $ 683,661
======= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable.................................... $ 65,419 $ 38,185
Accrued salaries and bonus ......................... 17,132 5,848
Accrued tenancy .................................... 8,465 6,727
Gift certificates redeemable ....................... 7,008 5,935
Accrued expenses ................................... 30,527 30,110
Current portion of long-term debt .................. 1,206 1,119
------- -------
Total current liabilities .......................... 129,757 87,924
Long-term debt ..................................... 103,951 105,157
Other liabilities .................................. 12,386 10,082
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of Subsidiary, AnnTaylor
Finance Trust, Holding Solely Convertible
Debentures ......................................... 96,624 96,391
Stockholders' equity
Common stock, $.0068 par value;
40,000,000 shares authorized;
26,035,301 and 25,657,590 shares
issued, respectively ............................... 177 174
Additional paid-in capital ......................... 359,805 350,647
Warrants to acquire 2,814 shares of common stock ... 46 46
Retained earnings .................................. 73,295 34,204
Deferred compensation on restricted stock .......... (272) (737)
------- -------
433,051 384,334
Treasury stock, 17,201 and 12,659
shares, respectively,
at cost ............................................ (352) (227)
------- -------
Total stockholders' equity ......................... 432,699 384,107
------- -------
Total liabilities and stockholders' equity.......... $ 775,417 $ 683,661
========= =========
See accompanying notes to consolidated financial statements.
==============================================================================
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended January 30, 1999, January 31, 1998
and February 1, 1997
(in thousands)
Common Stock Additional Warrants Restricted Treasury Stock
----------------- Paid-In -------- Retained Stock ---------------
Shares Amount Capital Shares Amount Earnings Awards Shares Amount
------ ------ ------- ------ ------- -------- ------ ------ ------
Balance at February 3, 1996...... 23,128 $ 157 $311,284 37 $596 $14,120 $ (33) 45 $(436)
Net income....................... --- --- --- --- --- 8,667 --- --- ---
Exercise of stock options and
related tax benefit........... 18 --- 216 --- --- --- --- --- ---
Exercise of warrants............. --- --- 314 (34) (550) --- --- (34) 236
Issuance of stock for Sourcing
Acquisition.................. 2,348 16 35,984 --- --- --- --- --- ---
Amortization of discount on
preferred securities......... --- --- --- --- --- (174) --- --- ---
Activity related to common
stock issued as employee
incentives.................... 104 1 1,747 --- --- --- (1,557) 1 (6)
------ --- ------- ---- ---- ------ ------ --- --
Balance at February 1, 1997...... 25,598 174 349,545 3 46 22,613 (1,590) 12 (206)
Net income....................... --- --- --- --- --- 11,824 --- --- ---
Exercise of stock options and
related tax benefit........... 48 --- 890 --- --- --- --- 1 (10)
Amortization of discount on
preferred securities......... --- --- --- --- --- (233) --- --- ---
Activity related to common
stock issued as employee
incentives.................... 12 --- 212 --- --- --- 853 --- (11)
------ --- ------- ---- ---- ------ ------ --- --
Balance at January 31, 1998...... 25,658 174 350,647 3 46 34,204 (737) 13 (227)
Net income....................... --- --- --- --- --- 39,324 --- --- ---
Exercise of stock options and
related tax benefit........... 373 3 9,061 --- --- --- --- 3 (106)
Amortization of discount on
preferred securities......... --- --- --- --- --- (233) --- --- ---
Activity related to common
stock issued as employee
incentives.................... 4 --- 97 --- --- --- 465 1 (19)
------ --- ------- ---- ---- ------ ------ --- --
Balance at January 30, 1999...... 26,035 $ 177 $359,805 3 $46 $73,295 $ (272) 17 $(352)
====== ==== ======== ==== ==== ======= ====== === =====
See accompanying notes to consolidated financial statements.
===============================================================================
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997
Fiscal Years Ended
---------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Operating activities:
Net income .......................................... $ 39,324 $ 11,824 $ 8,667
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss .................................. -- 303 --
Equity earnings in CAT .............................. -- -- (1,402)
Provision for loss on accounts receivable ........... 1,476 1,795 1,803
Depreciation and amortization ....................... 28,783 27,803 26,208
Amortization of goodwill ............................ 11,040 11,040 10,086
Amortization of deferred compensation ............... 465 1,065 191
Non-cash interest ................................... 1,290 1,419 1,574
Deferred income taxes ............................... 3,966 (2,687) (985)
Loss on disposal of property and equipment .......... 4,175 248 3,209
Change in assets and liabilities net of effects from
purchase of sourcing division:
Decrease (increase) in receivables .................. (12,314) 1,599 4,987
Decrease (increase) in merchandise inventories ...... (39,514) 3,003
9,342
Decrease (increase) in prepaid expenses and
other current assets ................................ (5,581) 1,894 247
Decrease in other non-current assets and liabilities,
net ................................................. 679 2,861 738
Increase in accounts payable and accrued liabilities 41,746 9,422 2,867
------ ----- -----
Net cash provided by operating activities ........... 75,535 71,589 67,532
------ ----- -----
Investing activities:
Purchases of property and equipment ................. (45,131) (22,945) (16,107)
Purchase of sourcing division ....................... -- -- (227)
------ ----- -----
Net cash used by investing activities ............... (45,131) (22,945) (16,334)
------ ----- -----
Financing activities:
Repayments under revolving credit facility .......... -- -- (101,000)
Net proceeds from issuance of preferred securities .. -- -- 95,984
Repayment of term loan .............................. -- (24,500) --
Term loan prepayment penalty ........................ -- (184) --
Payments of mortgage ................................ (1,119) (416) (266)
Repayments under receivables facility ............... -- -- (40,000)
Proceeds from exercise of stock options ............. 9,036 869 210
Payment of financing costs .......................... (2,659) (69) (384)
------ ----- -----
Net cash provided by (used by) financing activities . 5,258 (24,300) (45,456)
------ ----- -----
Net increase in cash ................................ 35,662 24,344 5,742
Cash, beginning of year ............................. 31,369 7,025 1,283
------ ----- -----
Cash, end of year ................................... $ 67,031 $ 31,369 $ 7,025
====== ====== =====
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .............. $ 18,582 $ 19,251 $ 22,689
====== ====== =====
Cash paid during the year for income taxes .......... $ 33,934 $ 17,220 $ 8,990
====== ====== =====
See accompanying notes to consolidated financial statements.
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ann Taylor is a leading national specialty retailer of better quality
women's apparel, shoes and accessories sold principally under the Ann Taylor
brand name.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AnnTaylor
Stores Corporation (the "Company") and AnnTaylor, Inc. ("Ann Taylor"). The
Company has no material assets other than the common stock of Ann Taylor and the
common securities of AnnTaylor Finance Trust, a special purpose financing
vehicle, and conducts no business other than the management of Ann Taylor. All
intercompany accounts have been eliminated in consolidation.
Certain Fiscal 1997 and 1996 amounts have been reclassified to conform to
the Fiscal 1998 presentation.
FISCAL YEAR
The Company follows the standard fiscal year of the retail industry, which
is a 52 or 53 week period ending on the Saturday closest to January 31 of the
following calendar year. All fiscal years presented included 52 weeks.
FINANCE SERVICE CHARGE INCOME
Income from finance service charges relating to customer receivables,
which is deducted from selling, general and administrative expenses, amounted to
$8,422,000 for Fiscal 1998, $8,568,000 for Fiscal 1997 and $9,024,000 for Fiscal
1996.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of average cost or market.
Effective February 1, 1998, the Company elected to change its method of
inventory valuation from the retail method to the average cost method. The
Company believes the average cost method is a preferable method for matching the
cost of merchandise with the revenues generated. The cumulative effect of this
accounting change on February 1, 1998 was not material, and therefore no
disclosure is noted on the Consolidated Statement of Operations. The effect of
this accounting change on Fiscal 1998 net income was an increase of $1,272,000,
or $0.04 per share on a diluted basis. It is not possible to determine the
effect of the change on income in any previously reported fiscal years.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
assets (3 to 40 years) or, in the case of leasehold improvements, over the lives
of the respective leases, if shorter.
===============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the interest method
over the term of the related debt. Accumulated amortization at January 30, 1999
and January 31, 1998 was $3,119,000 and $4,427,000, respectively.
GOODWILL
Goodwill relating to the 1989 acquisition of Ann Taylor by the Company is
being amortized on a straight-line basis over 40 years. Goodwill relating to the
1996 Sourcing Acquisition (see Note 14) is being amortized on a straight-line
basis over 25 years. Accumulated amortization at January 30, 1999 and January
31, 1998 was $98,891,000 and $87,851,000, respectively. On an annual basis, the
Company compares the carrying value of its goodwill to an estimate of the
Company's fair value to evaluate the reasonableness of the carrying value and
remaining amortization period. Fair value is computed using projections of
future non-discounted cash flows.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires an asset and liability method of accounting for deferred income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized, and income or expense is recorded, for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which is effective for the Company for
the quarter ended October 30, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivatives and for hedging activities. Management is
currently evaluating the impact of this standard and believes its adoption will
not affect the Company's consolidated financial position, results of operations
or cash flows.
===============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which is effective
for the Company for fiscal years beginning after December 15, 1998. The
application of SOP 98-1 is not anticipated to have a material impact on the
Company's consolidated financial statements.
2. LONG-TERM DEBT
The following table summarizes long-term debt outstanding at January 30,
1999 and January 31, 1998:
January 30, 1999 January 31, 1998
---------------- ----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
Mortgage.................................... $ 5,157 $ 5,157 $ 6,276 $ 6,276
8 3/4% Notes ............................... 100,000 101,875 100,000 100,500
- - - - ------- ------- ------- -------
Total debt ................................. 105,157 107,032 106,276 106,776
------- ------- ------- -------
Less current portion ..................... 1,206 1,206 1,119 1,119
Total long-term debt...................... $103,951 $105,826 $105,157 $105,657
======== ======== ======== ========
In accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the
Company determined the estimated fair value of its financial instruments using
quoted market information, as available. As judgement is involved, the estimates
are not necessarily indicative of the amounts the Company could realize in a
current market exchange.
On June 30, 1998, Ann Taylor entered into a new $150,000,000 senior
secured revolving credit facility (the "Credit Facility") with a syndicate of
lenders. This facility replaced Ann Taylor's then-existing $122,000,000 bank
credit agreement that was scheduled to expire in July 1998 and also resulted in
the non-renewal by Ann Taylor's sourcing division of its $50,000,000 credit
facility and in the non-renewal by AnnTaylor Funding, Inc. of a $40,000,000
accounts receivable facility. The Credit Facility is used by Ann Taylor for the
issuance of commercial and standby letters of credit and to provide funds for
other general corporate purposes.
Loans outstanding under the Credit Facility at any time may not exceed
$50,000,000. The Company did not make any borrowings under the loan provisions
of the Credit Facility during Fiscal 1998 and there were no loans outstanding at
fiscal year end. The outstanding loan balance is required to be reduced to zero
for the thirty-day period commencing January 1 each year. This cleandown period
was achieved for January 1999. Maximum availability for loans and letters of
credit under the Credit Facility is governed by a monthly borrowing base,
determined by the application of specified advance rates against certain
eligible assets. Based on this calculation, the maximum amount available for
loans and letters of credit under the Credit Facility at January 30, 1999 was
approximately $131,054,000. Commercial and standby letters of credit outstanding
under the Credit Facility at January 30, 1999 were approximately $65,763,000.
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at Ann Taylor's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%,
respectively. In addition, Ann Taylor is required to pay the lenders a quarterly
commitment fee on the unused revolving loan commitment amount at a rate ranging
from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby
letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens, investments and capital expenditures,
restrictions on dividends or other distributions to stockholders and maintenance
of certain financial ratios including specified levels of net worth. For Fiscal
1998, the capital expenditure limit was $52,000,000. For Fiscal 1999, capital
expenditures are limited to a maximum of $55,000,000.
The lenders have been granted a pledge of the common stock of Ann Taylor
and certain of its subsidiaries, and a security interest in substantially all
other tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of Ann Taylor and its subsidiaries, as
collateral for Ann Taylor's' obligations under the Credit Facility.
The Credit Facility matures on June 30, 2000 and includes an automatic
one-year extension, contingent upon the satisfaction of certain conditions. In
addition, the commitments under the Credit Facility terminate on February 16,
2000 unless Ann Taylor's outstanding 8 3/4% Subordinated Notes due 2000 (the "8
3/4% Notes") are refinanced on or prior to such date with the proceeds of
subordinated debt or capital stock, the terms and conditions of which are
reasonably satisfactory to the Requisite Lenders under the Credit Facility.
On June 28, 1993, Ann Taylor issued $110,000,000 principal amount of its 8
3/4% Notes. The outstanding principal amount of these notes as of January 30,
1999 was $100,000,000.
In July 1993, Ann Taylor entered into a $110,000,000 (notional amount)
interest rate swap agreement, which had the effect of converting the Company's
interest obligations on the 8 3/4% Notes to a variable rate. Under the
agreement, the Company received a fixed rate of 4.75% and paid a floating rate
based on LIBOR, as determined in six month intervals. The swap agreement matured
in July 1996. Net receipts or payments under the agreement were recognized as
adjustments to interest expense.
Ann Taylor and its wholly owned subsidiary AnnTaylor Distribution
Services, Inc. are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage loan
balance at January 30, 1999 was $5,157,000.
The aggregate principal payments of all long-term obligations are as
follows:
Fiscal Year (in thousands)
-----------
1999........................................... $ 1,206
2000........................................... 101,300
2001........................................... 1,401
2002........................................... 1,250
-------
Total....................................... $105,157
========
===============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. PREFERRED SECURITIES
In April and May of Fiscal 1996, the Company completed the sale of an
aggregate of $100,625,000 of 8 1/2% Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities (the "preferred securities") issued by its
financing vehicle, AnnTaylor Finance Trust, a Delaware business trust (the
"Trust"). The preferred securities have a liquidation preference of $50 per
security ($100,625,000 in the aggregate) and are convertible at the option of
the holders thereof into the Company's common stock at a conversion rate of
2.545 shares of common stock for each preferred security (equivalent to $19.65
per share of common stock, which represented a 20% premium to the $16.375
closing price of the common stock on the New York Stock Exchange at the date of
the execution of the purchase agreement relating to the sale of the preferred
securities). The sole assets of the Trust are $103,700,000 of 8 1/2% Convertible
Subordinated Debentures of the Company maturing on April 15, 2016. A total of
2,012,500 preferred securities were issued, and are convertible into an
aggregate of 5,121,812 shares of the Company's common stock. The Company
received net proceeds of $95,984,000 in connection with the sale of the
preferred securities. The carrying value and estimated fair value of the
preferred securities at January 30, 1999 were $96,624,000 and $196,219,000,
respectively.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the allowance for doubtful accounts for the
fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 is as
follows:
Fiscal Years Ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Balance at beginning of year ............ $ 812 $ 811 $ 736
Provision for loss on accounts receivable 1,476 1,795 1,803
Accounts written off .................... (1,468) (1,794) (1,728)
------ ------ ------
Balance at end of year .................. $ 820 $ 812 $ 811
======= ======= =======
5. COMMITMENTS AND CONTINGENCIES
RENTAL COMMITMENTS
Ann Taylor occupies its retail stores and administrative facilities under
operating leases, most of which are non-cancelable. Some leases contain renewal
options for periods ranging from one to ten years under substantially the same
terms and conditions as the original leases. Most of the store leases require
Ann Taylor to pay a specified minimum rent, plus a contingent rent based on a
percentage of the store's net sales in excess of a specified threshold. In
addition, most of the leases require Ann Taylor to pay real estate taxes,
insurance and certain common area and maintenance costs in addition to the
future minimum lease payments shown below.
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under non-cancelable operating leases at
January 30, 1999 are as follows:
Fiscal Year (in thousands)
-----------
1999.........................................$ 78,042
2000......................................... 77,068
2001......................................... 73,767
2002......................................... 71,265
2003......................................... 64,978
2004 and thereafter.......................... 252,340
-------
Total........................................$ 617,460
=======
Rent expense for the fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997 was as follows:
Fiscal Years Ended
--------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Minimum rent ................... $66,358 $59,495 $55,571
Percentage rent................. 2,414 1,671 2,433
----- ----- -----
Total .......................... $68,772 $61,166 $58,004
====== ====== ======
LITIGATION
The Company has been named as a defendant in several legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to these actions cannot be accurately predicted, in the
opinion of the Company, any such liability will not have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
In addition, the Company, Ann Taylor, certain directors and former
officers and directors of the Company and Ann Taylor, Merrill Lynch & Co.
("ML&Co.") and certain affiliates of ML&Co. have been named as defendants in a
purported class action lawsuit filed in April 1996 by certain alleged
stockholders alleging that the Company and the other defendants engaged in a
fraudulent scheme and course of business that operated a fraud or deceit on
purchasers of the Company's common stock during the period from February 3, 1994
through May 4, 1995. On March 10, 1998, the Court issued an Opinion dismissing
the complaint. The Court's Opinion granted the plaintiffs leave to amend and
re-file the complaint within thirty days of the date of the Opinion, and an
amended complaint was filed by the plaintiffs on April 9, 1998. On November 9,
1998, the Court issued an Opinion dismissing, with prejudice, the amended
complaint. On or about December 15, 1998, the plaintiffs filed a notice of
appeal to the U.S District Court of Appeals, Second Circuit, seeking review of
the Appellate Court's decision. The appeal is presently pending, and any
liability that may arise from this action cannot be predicted at this time. The
Company believes that the amended complaint is without merit and intends to
defend the action vigorously.
6. NET INCOME PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share assumes the issuance of additional shares of common stock,
that are issuable by the Company upon the conversion of all outstanding
warrants, stock options, and convertible preferred securities. Basic and diluted
earnings per share calculations follow:
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. NET INCOME PER SHARE (CONTINUED)
Fiscal Years Ended
-------------------------------------------------------------------------------------
January 30, 1999 January 31, 1998 February 1, 1997
----------------------- ----------------------------- ---------------------------
(In thousands, except per share amounts)
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------
Basic Earnings per Share
Income available
to common stockholders
before extraordinary loss 39,324 25,715 $1.53 $11,997 25,628 $0.47 $8,667 23,981 $0.36
Effect of Dilutive
Securities
Warrants ................. -- 3 -- 3 -- 22
Stock options ............ -- 166 -- 62 -- 57
Preferred securities ..... 5,189 5,122 -- -- -- --
----- ----- ----- ------ ---- -----
Diluted Earnings per Share
Income available
to common stockholders
before extraordinary loss 44,513 31,006 $1.44 $11,997 25,693 $0.47 $8,667 24,060 $0.36
====== ====== ===== ======= ====== ===== ====== ====== =====
Conversion of the preferred securities into common stock is not included in the
computation of diluted earnings per share for the fiscal years ended January 31,
1998 and February 1, 1997 due to the antidilutive effect of the conversion as of
such dates.
7. ENTERPRISE-WIDE OPERATING INFORMATION
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, major customers and the material countries in which the entity holds
assets and reports revenues.
The Company is a specialty retailer of women's apparel, shoes and
accessories. Given the economic characteristics of the store formats, the
similar nature of the products sold, the type of customer and method of
distribution, the operations of the Company are aggregated into one reportable
segment. The Company believes that the customer base for its stores consists
primarily of relatively affluent, fashion-conscious women from the ages of 25 to
55, and that the majority of its customers are working women with limited time
to shop.
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. OTHER EQUITY
COMMON STOCK WARRANTS
At January 30, 1999, the Company had outstanding warrants to acquire, in
the aggregate, 2,814 shares of the common stock of the Company (the "Warrants").
The Warrants, when exercised, entitle the holders thereof to acquire such
shares, subject to adjustment, at no additional cost. The Warrants became
exercisable as a result of the initial public offering of the Company's common
stock in May 1991, and expire on July 15, 1999.
PREFERRED STOCK
At January 30, 1999, January 31, 1998 and February 1, 1997, there were
2,000,000 shares of preferred stock, par value $0.01, authorized and unissued.
9. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Fiscal Years Ended
------------------------
January 30, January 31,
1999 1998
---- ----
(in thousands)
Land and building.......................... $ 8,683 $ 8,625
Leasehold improvements..................... 93,168 85,332
Furniture and fixtures..................... 153,395 136,314
Construction in progress................... 11,059 6,422
------- -------
266,305 236,693
Less accumulated depreciation and
amortization 114,520 97,083
------- ------
Net property and equipment............ $151,785 $139,610
======== ========
10. STOCK OPTION PLANS
In 1989 and 1992, the Company established stock option plans. At January
30, 1999 71,683 shares of common stock were reserved for issuance under the 1989
plan and 2,601,906 shares of common stock were reserved for issuance under the
1992 plan. Under the terms of both plans, the exercise price of any option may
not be less than 100% of the fair market value of the common stock on the date
of grant. Stock options granted prior to 1994 generally vest over a five year
period, with 20% becoming exercisable immediately upon grant of the option and
20% per year for the next four years. Stock options granted since 1994 generally
vest either (i) over a four year period, with 25% becoming exercisable on each
of the first four anniversaries of the grant, or (ii) in seven or nine years
with accelerated vesting upon the achievement of specified earnings or stock
price targets within a five year period. All stock options granted under the
1989 plan and the 1992 plan expire ten years from the date of grant. At January
30, 1999, there were 21,077 shares under the 1989 plan and 1,260,614 shares
under the 1992 plan available for future grant.
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. STOCK OPTIONS PLANS (CONTINUED)
The Company accounts for the stock options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation costs have been
recognized for stock option awards. Had compensation costs of option awards been
determined under a fair value alternative method as stated in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company would have been required to prepare a fair value
model for such options and record such amount in the financial statements as
compensation expense. Proforma net income before extraordinary loss and net
income per share before extraordinary loss after taking into account such
expense would have been $38.4 million and $1.41, respectively for Fiscal 1998,
$11.0 million and $0.43, respectively, for Fiscal 1997, and $8.2 million and
$0.34, respectively, for Fiscal 1996. For purposes of this calculation, the
Company arrived at the fair value of each stock grant at the date of grant by
using the Black Scholes option pricing model with the following weighted average
assumptions used for grants for the fiscal years ended January 30, 1999, January
31, 1998 and February 1, 1997: risk-free interest rate of 5.4%, 6.2% and 5.8%,
respectively; expected life of 4.0 years, 5.0 years and 4.3 years, respectively;
and expected volatility of 59.4%, 67.9% and 55.2%, respectively.
The following summarizes stock option transactions for the fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997:
Weighted Number
Option Prices Average Price of Shares
------------- ------------- ---------
Outstanding Options February 3, 1996 $6.80 - $44.125 $ 28.00 1,554,177
Granted ............................ $11.00-$21.625 $ 17.52 463,500
Exercised .......................... $ 6.80 $ 6.80 (18,234)
Canceled ........................... $11.50-$42.75 $ 27.31 (335,358)
---------
Outstanding Options February 1, 1997 $ 6.80-$44.125 $22.69 1,664,085
Granted ............................ $14.25-$22.75 $20.60 590,000
Exercised .......................... $ 6.80-$20.00 $15.45 (47,436)
Canceled ........................... $11.50-$39.75 $25.11 (585,557)
---------
Outstanding Options January 31, 1998 $ 6.80-$44.125 $21.20 1,621,092
Granted ............................ $14.00-$36.25 $17.52 306,574
Exercised .......................... $ 6.80-$36.25 $19.09 (373,544)
Canceled ........................... $ 6.80-$42.50 $23.68 (162,224)
---------
Outstanding Options January 30, 1999 $ 6.80-$44.125 $20.67 1,391,898
=========
At January 30, 1999, January 31, 1998 and February 1, 1997 there were
exercisable 696,596 options, 450,776 options and 660,290 options, respectively,
which have weighted average exercise prices of $19.76 per share, $19.02 per
share and $21.03 per share, respectively.
In 1994, the Company's 1992 stock option plan was amended and restated to
include restricted stock and unit awards. A unit represents the right to receive
the cash value of a share of common stock on the date the restrictions on the
unit lapse. The restrictions on grants generally lapse over a four year period
from the date of the grant. In the event a grantee terminates employment with
the Company, any restricted stock or restricted units remaining subject to
restrictions are forfeited. During 1997 and 1998, certain executives were
awarded restricted common stock and, in some cases restricted units. The
resulting unearned compensation expense, based upon the market value on the date
of grants, was charged to stockholders' equity and is being amortized over the
restricted period.
===============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. EXECUTIVE COMPENSATION
Effective August 23, 1996, a former executive and Director of the Company
and Ann Taylor resigned from her position. See Note 13 for a discussion of the
Company's obligations under the former executive's employment agreement.
Upon this resignation, the Company's then-President and Chief Operating
Officer J. Patrick Spainhour was promoted to the position of Chairman and Chief
Executive Officer. In connection with this promotion, Mr. Spainhour was granted
75,000 shares of restricted common stock. The resulting unearned compensation
expense of $1,171,875, based on the market value on the date of the grant, was
charged to stockholders' equity and is being amortized over the restricted
period applicable to these shares. Additionally, as of December 9, 1996, the
President and Chief Operating Officer of the Company received a grant of 30,000
restricted shares of common stock and 20,000 restricted units. The resulting
unearned compensation expense of $592,500, based on the market value on the date
of the grant, was charged to stockholders' equity and is being amortized over
the restricted period applicable to these shares. As of January 30, 1999, 35,000
shares of restricted stock and 6,667 restricted units had not yet vested.
12. EXTRAORDINARY ITEM
On July 2, 1997, the Company used available cash to prepay $24,500,000,
the outstanding balance of its term loan due September 1998, which resulted in
an extraordinary charge to earnings in Fiscal 1997 of $173,000, net of income
tax benefit.
13. NONRECURRING CHARGES
STUDIO SHOE STORES CLOSING
In connection with the planned closing of all of the Company's Ann Taylor
Studio shoe stores, announced in January 1997, the Company recorded a pre-tax
charge of $3,600,000 in Fiscal 1996. Of the total impairment loss, $2,500,000
represented impairment of long-lived assets such as properties and store
fixtures and $1,100,000 pertained to lease and other related costs for these
locations until the properties are sublet.
RESIGNATION OF A FORMER EXECUTIVE
Effective August 23, 1996, a former executive and Director of the Company
and Ann Taylor resigned. In connection with this resignation, a one-time pre-tax
charge of $3,500,000 was recorded in Fiscal 1996 relating to the estimated costs
of the Company's obligations under the former executive's employment contract
with the Company.
RETIREMENT OF ASSETS
In the fourth quarter of Fiscal 1998, the Company recorded a $3,633,000
non-cash pre-tax charge for the retirement of certain assets. This charge
related to the write-off of the net book value of the assets relinquished during
the renovation of the Company's corporate offices.
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MERRILL LYNCH AND ITS AFFILIATES
At January 30, 1999, certain affiliates of ML&Co. held approximately
6.7% of the Company's outstanding common stock. Two of the members of the
Board of Directors of the Company and Ann Taylor serve as representatives of
ML&Co. and its affiliates. As a result, ML&Co. and such affiliates are in a
position to influence the management of the Company and Ann Taylor.
In Fiscal 1996, the Company paid approximately $1,207,500 to ML&Co. and
Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill Lynch") in
connection with their services as placement agents for the sale of the preferred
securities (see Note 3). The Company agreed to indemnify ML&Co. and Merrill
Lynch, as placement agents, against certain liabilities, including certain
liabilities under the federal securities law, in connection with the sale of the
preferred securities.
SOURCING ACQUISITION
In Fiscal 1995, the Company purchased approximately 16% of its merchandise
directly from Cygne Designs, Inc. ("Cygne") and an additional 38% of its
merchandise through the Company's direct sourcing joint venture with Cygne known
as CAT. On September 20, 1996 (the "Effective Date"), pursuant to the Stock and
Asset Purchase Agreement dated as of June 7, 1996, by and among the Company, Ann
Taylor, Cygne and Cygne Group F.E. Limited (as amended, the "Purchase
Agreement"), Ann Taylor acquired the entire interest of Cygne in CAT and certain
of the assets (the "Assets") of the Ann Taylor Woven Division of Cygne (the
"Division") that were used for sourcing merchandise for Ann Taylor (the
"Sourcing Acquisition"). As a result of the Sourcing Acquisition, CAT became an
indirect wholly owned subsidiary of the Company. CAT was subsequently merged
into Ann Taylor and now performs all of Ann Taylor's direct sourcing functions,
including those previously provided by the Division, as a division of Ann
Taylor. For financial reporting purposes, the transaction has been accounted for
as of the Effective Date under the purchase method of accounting in accordance
with Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations".
In consideration for Cygne's interest in CAT and the Assets, the Company
paid (i) 2,348,145 shares of common stock of the Company having an aggregate
value, as of the Effective Date, of $36,000,000, (ii) $3,200,000 in cash as
payment for inventory and fixed assets and (iii) approximately $6,500,000 in
cash in settlement of open accounts payable by Ann Taylor to Cygne for
merchandise delivered by Cygne prior to the closing. The Company also assumed
certain liabilities related to the operations of the Division. The purchase
price was subject to post-closing adjustments based upon final determination of
the value of certain of the assets purchased and liabilities assumed. As of
February 1, 1997, certain post-closing adjustments reduced the net cash paid to
approximately $227,000. The total purchase price to the Company of the Sourcing
Acquisition has been allocated to the tangible and intangible assets and
liabilities of CAT and the Division that were acquired, based on estimates of
their respective fair values. The excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and is being amortized
on a straight-line basis over 25 years.
The following unaudited proforma consolidated data for the Company for the
fiscal year ended February 1, 1997 has been presented to reflect the Sourcing
Acquisition as if it had occurred at the beginning of such period:
===============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
Fiscal Year Ended
February 1, 1997
-----------------
Actual Proforma
------ --------
(in thousands, except per share amounts)
Net sales......................................$ 798,117 $798,117
Net income.....................................$ 8,667 $11,595
Basic and diluted earnings per share...........$ 0.36 $ 0.45
Weighted average shares........................ 23,981 25,458
Weighted average shares, assuming dilution..... 24,060 25,537
The proforma data set forth above does not purport to be indicative of the
results that actually would have occurred if the Sourcing Acquisition had
occurred at the beginning of the period presented or of results which may occur
in the future.
A summary of the noncash activity that occurred in the fiscal year ended
February 1, 1997 in conjunction with the Sourcing Acquisition is as follows:
(in thousands)
Fair value of assets acquired ............................. $ 4,727
Excess of purchase price over the fair value
of net assets acquired.................................. 38,340
Ann Taylor's previous investment in CAT.................... (6,840)
Issuance of the Company's common stock..................... (36,000)
-------
Cash paid ................................................. $ 227
=======
15. INCOME TAXES
The provision for income taxes for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997 consists of the following:
Fiscal Years Ended
------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Federal:
Current...........................$ 21,589 $14,427 $ 9,898
Deferred.......................... 2,748 (1,917) (802)
------ ------ -------
Total federal................... 24,337 12,510 9,096
------ ------ -------
State and local:
Current........................... 7,869 5,538 3,844
Deferred.......................... 1,217 (769) (152)
------ ------ -------
Total state and local........... 9,086 4,769 3,692
------ ------ -------
Foreign:
Current........................... 156 187 187
Deferred.......................... --- --- ---
------ ------ -------
Total foreign................... 156 187 187
------ ------ -------
Total.............................$ 33,579 $17,466 $12,975
======== ======= =======
=============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. INCOME TAXES (CONTINUED)
The reconciliation between the provision for income taxes and the
provision for income taxes at the federal statutory rate for the fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997 is as follows:
Fiscal Years Ended
--------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Income before income taxes and extraordinary
loss ............................................... $ 72,903 $ 29,463 $ 21,642
======== ======== ========
Federal statutory rate ............................. 35% 35% 35%
======== ======== ========
Provision for income taxes at federal statutory rate $ 25,516 $ 10,312 $ 7,575
State and local income taxes, net of federal
income tax benefit ................................. 4,660 3,800 2,273
Non-deductible amortization of goodwill ............ 3,500 3,500 3,429
Unremitted earnings of foreign subsidiaries ........ (188) (314)
(382)
Other .............................................. 91 168 80
-------- -------- --------
Provision for income taxes.......................... $ 33,579 $ 17,466 $ 12,975
======== ======== ========
The tax effects of significant items comprising the Company's net deferred
tax assets as of January 30, 1999 and January 31, 1998 are as follows:
January 30, 1999 January 31, 1998
---------------- ----------------
(in thousands)
Current:
Inventory.................................. $ 128 $ 2,854
Accrued expenses........................... 3,812 4,269
Real estate................................ (1,686) (1,634)
Other...................................... --- ---
------ -------
Total current............................... $ 2,254 $ 5,489
======= =======
Noncurrent:
Depreciation and amortization.............. $ (5,510) $ (4,982)
Rent expense............................... 4,786 4,364
Other...................................... 276 901
------ -------
Total noncurrent............................ $ (448) $ 283
======= =======
Income taxes provided reflect the current and deferred tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. U.S. federal income taxes are provided on unremitted foreign earnings
except those that are considered permanently reinvested, which at January 30,
1999 amounted to approximately $6,864,000. However, if these earnings were not
considered permanently reinvested, under current law, the incremental tax on
such undistributed earnings would be approximately $2,149,000.
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. RETIREMENT PLANS
SAVINGS PLAN. Ann Taylor maintains a defined contribution 401(k) savings
plan for substantially all full-time employees of Ann Taylor and its
subsidiaries. Participants may contribute to the plan an aggregate of up to 10%
of their annual earnings. Ann Taylor makes a matching contribution of 50% with
respect to the first 3% of each participant's annual earnings contributed to the
plan. Ann Taylor's contributions to the plan for Fiscal 1998, Fiscal 1997 and
Fiscal 1996 were $592,000, $519,000 and $390,000, respectively.
PENSION PLAN. Substantially all full-time employees of Ann Taylor and its
subsidiaries are covered under a noncontributory defined benefit pension plan.
Through December 31, 1997, the pension plan was a "cash balance pension plan".
Each participant accrued a benefit based on compensation and years of service
with Ann Taylor. As of January 1, 1998, the Plan was amended and the formula to
calculate benefits was changed to a career average formula. The new career
average formula was used to determine the funding status of the plan beginning
in Fiscal 1997. Ann Taylor's funding policy for the plan is to contribute
annually the amount necessary to provide for benefits based on accrued service
and projected pay increases. Plan assets consist primarily of cash, equity and
fixed income securities.
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which standardizes the disclosure requirements for
pension and other postretirement benefits, eliminates certain disclosures, and
requires additional information on the changes in the benefit obligations and
fair value of plan assets.
The following table provides information for the Pension Plan at January
30, 1999, January 31, 1998 and February 1, 1997:
Fiscal Years Ended
---------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
(in thousands)
Change in benefit obligation:
Benefit obligation, beginning of year ....... $ 3,820 $ 3,413 $ 2,893
Service cost ................................ 669 571 981
Interest .................................... 292 250 212
Plan amendments ............................. -- 81 --
Actuarial loss (gain) ....................... 348 (103) (316)
Benefits paid ............................... (487) (392) (357)
------ ------ ------
Benefit obligation, end of year.............. 4,642 3,820 3,413
------ ------ ------
Change in plan assets:
Fair value of plan assets, beginning of year 5,128 4,745 2,537
Actual return on plan assets ................ 1,205 907 2,333
Employer contribution (refund) .............. 1,640 (132) 232
Benefits paid ............................... (487) (392) (357)
------ ------ ------
Fair value of plan assets, end of year ...... 7,486 5,128 4,745
------ ------ ------
Funded status (fair value of plan assets less
benefit obligation) ......................... 2,844 1,308 1,332
Unrecognized net actuarial gain ............. (1,675) (1,361) (802)
Unrecognized prior service cost ............. 69 75 --
------ ------ ------
Prepaid benefit cost......................... $ 1,238 $ 22 $ 530
====== ======= =======
==============================================================================
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. RETIREMENT PLANS (CONTINUED)
Net pension cost includes the following components:
Fiscal Years Ended
------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
Service cost..............................$ 669 $ 571 $ 981
Interest cost............................. 292 250 213
Expected return on assets................. (481) (409) (218)
Amortization of prior gains............... (61) (42) (9)
Amortization of prior service cost........ 6 6 ---
----- ------- --------
Net periodic pension cost.................$ 425 $ 376 $ 967
======== ======== =========
For the fiscal years ended January 30, 1999, January 31, 1998 and February 1,
1997, the following actuarial assumptions were used:
Fiscal Years Ended
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
Discount rate............................. 6.75% 7.50% 8.00%
Long-term rate of return on assets........ 9.00% 9.00% 9.00%
Rate of increase in future compensation... 4.00% 4.00% 4.00%
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter
-------------------------------------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share amounts)
Fiscal 1998
Net sales .......................... $198,170 $223,393 $227,535 $262,841
Gross profit ....................... 101,334 104,934 124,418 125,529
Net income ......................... $ 6,419 $ 7,044 $ 14,074 $ 11,787
======== ======== ======== ========
Basic earnings per share ........... $ 0.25 $ 0.27 $ 0.55 $ 0.46
======== ======== ======== ========
Diluted earnings per share ......... $ 0.25 $ 0.27 $ 0.50 $ 0.42
======== ======== ======== ========
Fiscal 1997
Net sales .......................... $197,064 $184,999 $187,200 $211,765
Gross profit ....................... 98,636 85,354 92,732 92,550
Income before extraordinary loss ... 6,475 985 2,185 2,352
Extraordinary loss ................. -- 173 -- --
-------- -------- -------- --------
Net income ......................... $ 6,475 $ 812 $ 2,185 $ 2,352
======== ======== ======== ========
Basic and diluted earnings per share
before extraordinary loss .......... $ 0.25 $ 0.04 $ 0.09 $ 0.09
Extraordinary loss per share ....... -- 0.01 -- --
-------- -------- -------- --------
Basic and diluted earnings per share $ 0.25 $ 0.03 $ 0.09 $ 0.09
======== ======== ======== ========
In the fourth quarter of Fiscal 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share". All previously
reported per share information has been recalculated. The sum of the quarterly
per share data may not equal the annual amounts due to changes in the weighted
average shares and share equivalents outstanding.