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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(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 29, 2000
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OR
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|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 1-11980
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ANNTAYLOR, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0297083
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
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(Address of principal executive offices) (Zip Code)
(212) 541-3300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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None.
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Securities registered pursuant to Section 12(g) of the Act:
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None.
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Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No__.
As of February 25, 2000, 1 share of Common Stock was outstanding.
Documents Incorporated by Reference:
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None
The registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
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PART I
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ITEM 1. BUSINESS
GENERAL
AnnTaylor, Inc. (the "Company" or "AnnTaylor") 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, dresses, tops, weekend wear, shoes and accessories,
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 29, 2000, the Company operated 405 retail stores in 42
states, the District of Columbia and Puerto Rico under the names Ann Taylor, Ann
Taylor Loft and Ann Taylor Factory Store. The Company's 319 Ann Taylor stores
compete in the "better"-priced market. These stores represent the Company's core
merchandise line. Approximately three-quarters of these stores are located in
regional malls and upscale specialty retail centers, with the balance located in
downtown and village locations. 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 29, 2000, the Company operated 75 Ann Taylor Loft stores.
Ann Taylor Loft stores compete in the "upper-moderate"-priced market. Ann Taylor
Loft is designed for women with a more relaxed lifestyle, who appreciate the Ann
Taylor style but are more price sensitive. Merchandise is created uniquely for
these stores and is sold under the Ann Taylor Loft label. The first Ann Taylor
Loft stores opened by the Company 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 began
opening Ann Taylor Loft stores outside the factory outlet environment, in
regional malls and strip shopping centers. At January 29, 2000, over 40 Ann
Taylor Loft stores were located in these venues. Management believes that Ann
Taylor Loft represents a significant opportunity for the Company to compete in
the upper-moderate-priced women's apparel market. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Statement
Regarding Forward Looking Disclosures" below.
At January 29, 2000, the Company also operated 11 Ann Taylor Factory
stores in factory outlet centers. These stores 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.
From time to time, the Company introduces new product categories to its
merchandise assortment. The Company believes that product extensions support the
Company's total wardrobing strategy and provide existing and new customers with
additional reasons to shop at the Company's stores. Product extensions
introduced over the last several years include petite sizes in the Company's
apparel offerings, and fragrance and personal care products in both Ann Taylor
and Ann Taylor Loft stores. In Fall of 2000, the Company intends to test market
its own line of color cosmetics in a select group of Ann Taylor stores.
The Company was incorporated under the laws of the state of Delaware in
1986. All of the outstanding capital stock of the Company, consisting of one
share of common stock, is owned by AnnTaylor Stores Corporation ("ATSC"). Ann
Taylor was acquired by ATSC in a leveraged buyout transaction in 1989.
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STATEMENT REGARDING FORWARD LOOKING DISCLOSURES
Sections of this Annual Report on Form 10-K 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 29, 2000, the Company operated 405 stores, all of which were
leased. The store leases typically provide for initial terms of ten years,
although some leases have shorter or longer initial periods, and grant the
Company the right to extend the term for one or two additional five-year
periods. Most of the store leases require Ann Taylor to pay a specified minimum
rent, plus a contingent rent based on a percentage of the store's net sales in
excess of a specified threshold. Most of the leases also require Ann Taylor to
pay real estate taxes, insurance and certain common area and maintenance costs.
Ann Taylor leases corporate offices at 142 West 57th Street in New York
City and office space at 1372 Broadway in New York City. The Company also leases
office space in New Haven, Connecticut.
Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution Services,
Inc., owns its 256,000 square foot distribution center located in Louisville,
Kentucky. Nearly all Ann Taylor merchandise is distributed to the Company's
stores through this facility. The parcel on which the Louisville distribution
center is located comprises approximately 20 acres and could accommodate
possible future expansion of the facility.
ITEM 3. LEGAL PROCEEDINGS
On April 26, 1996, certain alleged stockholders of ATSC filed a purported
class action lawsuit in the United States District Court Southern District of
New York, against ATSC, the Company, certain officers and directors of ATSC and
the Company, Merrill Lynch & Co. ("ML&Co.") and certain affiliates of ML&Co.
(Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The complaint
alleged causes of action under Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended, by alleging that ATSC and the other defendants
engaged in a fraudulent scheme and course of business that operated a fraud or
deceit on purchasers of ATSC's common stock during the period commencing
February 3, 1994 through May 4, 1995, due to alleged false and misleading
statements about the Company and ATSC. The complaint sought, among other things,
certification as a class action on behalf of all purchasers of common stock
during the period commencing February 3, 1994 through May 4, 1995, the awarding
of compensatory damages to the plaintiffs and purported members of the class,
the awarding of costs, including pre-judgment and post-judgment interest,
reasonable attorneys' fees and expert witness fees to the plaintiffs and
purported members of the class and equitable and/or injunctive relief. On
November 9, 1998, the District Court issued an order granting the defendants'
motion to dismiss the amended complaint with prejudice, for its failure to plead
fraud with particularity. On or about December 15, 1998, the plaintiffs filed a
notice of appeal to the United States Court of Appeals for the Second Circuit,
seeking review of the District court's order. The Court heard oral argument on
this appeal on September 15, 1999. ML&Co., its affiliates and the two directors
who previously served on the Company's Board of Directors as representatives of
certain affiliates of ML&Co. (the "settling defendants"), reached a settlement
with the plaintiffs, which provides, among other things, for the establishment
of a settlement fund in the amount of $3,000,000 plus interest. On or about
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December 14, 1999, the District Court entered an Order and Final Judgment
approving this partial settlement, dismissing the amended complaint with
prejudice as to the settling defendants, and barring and enjoining any future
claims by, among others, the remaining defendants against the settling
defendants for contribution. The appeal as against the remaining defendants,
including the Company, is pending before the Second Circuit Court of Appeals. As
a result, any liability that may arise from this action cannot be predicted at
this time. The Company believes that the amended complaint is without merit and
intends to continue to defend the action vigorously.
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.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for the common stock of the Company. All of the
outstanding stock of the Company, consisting of one share of common stock is
owned by ATSC.
The payment of dividends by Ann Taylor to ATSC is subject to certain
restrictions under the Company's Credit Facility described below under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". From time to time, the Company
pays dividends to ATSC in amounts sufficient to fund ATSC's operating expenses.
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
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1999 1998 1997
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Net sales ($000)...................$1,084,519 $911,939 $ 781,028
Total net sales increase
(decrease) percentage............ 18.9% 16.8% (2.1)%
Comparable store sales increase
(decrease) percentage............ 8.4% 7.9% (5.5)%
Net sales per average square foot..$ 502 $ 474 $ 445
Total store square footage
at end of period................. 2,280,000 2,038,000 1,808,000
Number of
New stores....................... 47 45 27
Expanded stores.................. 8 8 9
Closed stores.................... 7 4 12
Total stores open at end of period. 405 365 324
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.
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RESULTS OF OPERATIONS
The following table sets forth income statement data expressed as a
percentage of net sales for the periods indicated:
Fiscal Year
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1999 1998 1997
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Net sales............................ 100.0% 100.0% 100.0%
Cost of sales........................ 49.4 50.0 52.7
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Gross profit..................... 50.6 50.0 47.3
Selling, general and administrative
expenses........................... 38.1 38.4 39.5
Retirement of assets................. --- 0.4 ---
Amortization of goodwill............. 1.0 1.2 1.4
---- --- ----
Operating income................. 11.5 10.0 6.4
Interest income...................... 0.4 0.2 0.1
Interest expense..................... 1.1 2.2 2.7
Other expense, net................... 0.1 --- ---
---- --- ----
Income before income taxes and
extraordinary loss................. 10.7 8.0 3.8
Income tax provision................. 4.6 3.7 2.3
---- --- ----
Income before extraordinary loss..... 6.1 4.3 1.5
Extraordinary loss................... 0.1 --- ---
---- --- ----
Net income........................... 6.0% 4.3% 1.5%
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FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net sales increased to $1,084,519,000 over $911,939,000 in
Fiscal 1998, an increase of $172,580,000, or 18.9%. Comparable store sales for
Fiscal 1999 increased 8.4%, compared to an increase of 7.9% in Fiscal 1998. The
sales increase was primarily attributable to the opening of new stores, the
expansion of existing stores and the net increase in comparable store sales in
1999. Management believes that the increase in comparable store sales was the
result of improved customer acceptance of the Company's product offerings and
merchandise assortment.
Gross profit as a percentage of net sales increased to 50.6% in 1999 from
50.0% in 1998. This increase in gross margin reflects a higher initial markup
rate, reflecting on-going improvements achieved by the Company's sourcing
division, offset in part by a higher markdown rate on goods that were sold below
full price.
Selling, general and administrative expenses were $413,058,000, or 38.1%
of net sales, in 1999, compared to $349,955,000, or 38.4% of net sales, in 1998.
The decrease in selling, general and administrative expenses as a percentage of
net sales was primarily attributable to increased leverage on fixed expenses
resulting from increased comparable store sales and improved operating
efficiencies. The benefits of this leverage were partially offset by an increase
in marketing expenditures in support of the Company's strategic initiatives to
enhance the Ann Taylor brand and increased investment in infrastructure,
including in the Company's stores organization, to support the planned expansion
of the Company's Ann Taylor Loft business.
Operating income increased to $124,407,000, or 11.5% of net sales, in 1999
from $91,587,000, or 10.0% of net sales, in 1998. Amortization of goodwill was
$11,040,000, or 1.0% of net sales, in 1999 compared to $11,040,000, or 1.2% of
net sales, in 1998. Operating income without giving effect to such amortization
was $135,447,000, or 12.5 % of net sales, in 1999 and $102,627,000, or 11.2% of
net sales, in 1998.
Interest income was $4,378,000 in 1999 compared to $2,241,000 in 1998. The
increase was primarily attributable to interest income earned on increased cash
on hand for the portion of the fiscal year prior to execution, in the second
half of 1999, of ATSC's securities repurchase program described below under
"Liquidity and Capital Resources".
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Interest expense was $11,814,000 in 1999 compared to $20,358,000 in 1998.
The decrease in interest expense is attributable to the forgiveness during the
second quarter of 1999 of a note (the "intercompany note") payable by the
Company to ATSC in August 1998 referred to below and the redemption during the
second quarter of 1999 of the Company's 8 3/4% Subordinated Notes due 2000 (the
"8 3/4% Notes") referred to below, offset in part by interest expense on a
promissory note to ATSC (the "Note Payable to ATSC") that was issued in the
second quarter of 1999. The weighted average interest rate on the Company's
outstanding indebtedness at January 29, 2000 was 3.88% compared to 8.60% at
January 30, 1999.
The income tax provision was $50,221,000, or 43.4% of income before income
taxes and extraordinary loss, in the 1999 period, compared to $33,579,000, or
46.1% of income before income taxes in 1998. The effective tax rates for both
periods were higher than the statutory rates, primarily as a result of
non-deductible goodwill expense.
On July 22, 1999, the Company redeemed its outstanding 8 3/4% Notes. This
resulted in an extraordinary charge to earnings in Fiscal 1999 of $962,000, net
of income tax benefit.
As a result of the foregoing factors, the Company had net income of
$64,531,000, or 6.0% of net sales, for 1999, compared to net income of
$39,324,000, or 4.3% of net sales, for 1998.
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. The sales increase was primarily attributable to the opening of new
stores, the expansion of existing stores and the net increase in comparable
store sales in 1998. Management believes that the net increase in comparable
store sales was the result of improved customer acceptance of the Company's
product offerings and merchandise assortment.
Gross profit as a percentage of net sales increased to 50.0% in 1998 from
47.3% in 1997. As discussed in Note 1 to the Consolidated Financial Statements,
the Company elected in Fiscal 1998 to change the method by which the Company
accounts for inventory, from the retail method to the average cost method. The
effect of this accounting change on Fiscal 1998 net income was an increase of
$1,272,000. Under the retail method, gross margin as a percentage of net sales
would have been approximately 49.8%. The increase in gross margin reflects
continued merchandise margin improvements resulting from the maturation of the
Company's sourcing organization, since the acquisition of the Company's sourcing
joint venture in September 1996, as well as a reduction in markdowns as a
percentage of sales.
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 income was $2,241,000 in 1998 compared to $1,157,000 in 1997. The
increase was primarily attributable to interest income earned on increased cash
on hand.
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Interest expense was $20,358,000 in 1998 compared to $21,146,000 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. 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.
CHANGES IN FINANCIAL POSITION
Accounts receivable decreased to $67,092,000 at the end of 1999 from
$71,049,000 at the end of 1998, a decrease of $3,957,000, or 5.6%. This decrease
was primarily attributable to construction allowance receivables, which
decreased $4,079,000 to $8,406,000 in 1999.
Merchandise inventories increased to $140,026,000 at January 29, 2000 from
$136,748,000 at January 30, 1999, an increase of $3,278,000, or 2.4%. The
increase in merchandise inventories is primarily due to inventory purchased for
new store square footage. Merchandise inventories at January 29, 2000 and
January 30, 1999 included approximately $22,959,000 and $32,329,000,
respectively, of inventory associated with the Company's sourcing division,
which is principally finished goods in transit from factories. Total square
footage increased to approximately 2,280,000 square feet at January 29, 2000
from approximately 2,038,000 square feet at January 30, 1999. Merchandise
inventory on a per square foot basis, excluding inventory associated with the
Company's sourcing division, was approximately $51 at the end of 1999 as well as
1998. Inventory turned 4.8 times in 1999 compared to 5.0 times in 1998,
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. The following table sets forth material measures of the Company's
liquidity:
Fiscal Year
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1999 1998 1997
---- ---- ----
(dollars in thousands)
Cash provided by operating activities....... $ 98,299 $ 75,535 $ 71,589
Working capital............................. $151,368 $168,708 $122,181
Current ratio............................... 2.26:1 2.30:1 2.39:1
Debt to equity ratio........................ .22:1 .48:1 .28:1
Cash provided by operating activities, as presented on the consolidated
statements of cash flows, increased in 1999 principally as a result of earnings,
noncash charges and decreases in net long term assets and receivables partially
offset by decreases in accounts payable and accrued liabilities and increases in
deferred income taxes, prepaid expenses and other current assets and merchandise
inventories.
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The Company's principal credit facility is a bank credit facility that it
entered into in June 1998 with a syndicate of lenders (the "Credit Facility").
The Company uses the Credit Facility for the issuance of commercial and standby
letters of credit and to provide funds for other general corporate purposes. The
lenders' commitment under the Credit Facility was originally $150,000,000. The
Credit Facility had an original maturity date of June 30, 2000, subject to
extension upon the satisfaction of certain conditions. Effective September 3,
1999, the Company elected to reduce the commitment of the lenders under the
Credit Facility by $25,000,000 to $125,000,000 and extended the term of the
Credit Facility to June 30, 2001.
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 1999, 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 2000. 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 29, 2000 was
$125,000,000. Commercial and standby letters of credit outstanding under the
Credit Facility at January 29, 2000 were approximately $69,649,000.
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at the Company's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%,
respectively. In addition, the Company is required to pay the lenders a
quarterly commitment fee on the unused revolving loan commitment amount at a
rate ranging from 0.375% to 0.5% per annum. Fees for outstanding commercial and
standby letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens and investments, restrictions on dividends or
other distributions to stockholders and maintenance of certain financial ratios
including a specified fixed charge ratio and specified levels of net worth.
The lenders have been granted a pledge of the common stock of ATSC and
certain of its subsidiaries, and a security interest in substantially all other
tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of the Company and its subsidiaries, as
collateral for the Company's obligations under the Credit Facility.
The Company had outstanding an intercompany note payable of $100,625,000
to ATSC. During the second quarter of Fiscal 1999, the Company made a prepayment
on the intercompany note in the amount of $100,000, and the balance was forgiven
by ATSC. This forgiveness of debt constitutes a contribution of capital by ATSC
to the Company.
In the second quarter of Fiscal 1999, the Company issued a promissory
note, as amended, to ATSC of an aggregate of $199,072,000 principal amount at
maturity. The Note Payable to ATSC was issued, as amended, by the Company during
the second quarter of 1999 for value received and has interest and payment terms
substantially similar to the terms of the Convertible Debentures Due 2019
("Convertible Debentures") that were issued in 1999 by ATSC. ATSC has pledged
the Note Payable to ATSC to the lenders under the Company's bank Credit Facility
as collateral for ATSC's guarantee of the Company's performance of its
obligations under the Credit Facility.
On July 22, 1999, the Company redeemed all of the outstanding 8 3/4%
Notes, at a redemption price of 101.375% of principal amount, plus accrued
unpaid interest to the redemption date. The redemption of the 8 3/4% Notes
resulted in an extraordinary charge to earnings in the second quarter and year
to date period of $962,000, net of income tax benefit.
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The Company and its wholly owned subsidiary, AnnTaylor Distribution
Services, Inc., are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage loan
balance at January 29, 2000 was $3,950,000.
The Company's capital expenditures totaled $53,409,000, $45,131,000, and
$22,945,000, in Fiscal 1999, 1998 and 1997, 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 1999 and 1998, the Company's corporate
offices. The Company expects its total capital expenditure requirements in
Fiscal 2000 will be approximately $78,000,000, including capital for new store
construction for a planned square footage increase of approximately 460,000
square feet, or 20%, 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.
On September 9, 1999, the Company announced its participation in a
securities repurchase program of ATSC, authorized by its Board of Directors,
pursuant to which ATSC and the Company were authorized to purchase up to
$40,000,000 of ATSC's common stock and/or Convertible Debentures, through open
market purchases and privately negotiated transactions. In January 2000, the
Board of Directors authorized a $50,000,000 increase in the securities
repurchase program, bringing the total amount of securities that may be
repurchased under the program to $90,000,000. In the third and fourth quarters
of 1999, ATSC repurchased an aggregate of 3,012,500 shares of its Common Stock,
for an aggregate repurchase price of $89,900,000 (exclusive of brokerage
commissions), pursuant to this program. All of the repurchased shares became
treasury shares of ATSC and may be used for general corporate and other
purposes. No Convertible Debentures were repurchased.
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, which traces each inventory unit and
its cost, is a preferable method for matching the cost of merchandise with the
revenues generated. The retail method does not provide for individual unit cost
information. The cumulative effect of this accounting change on February 1, 1998
was not material. The effect of this accounting change on Fiscal 1998 net income
was an increase of $1,272,000. It is not possible to determine the effect of the
change on income in fiscal periods ending prior to February 1, 1998 as no cost
information was available.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of FASB Statement No. 133". This statement establishes accounting
and reporting standards for derivative instruments embedded in other contracts,
and for hedging activities. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management is currently
evaluating the impact of this statement and believes its adoption will not
affect the Company's consolidated financial position, results of operations or
cash flows.
-9-
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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 upper-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; lack of sufficient consumer interest in an Ann Taylor Internet
Website; 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; 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 29, 2000 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 29, 2000, 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 29, 2000, January 30, 1999 and January 31, 1998 are
included as a part of this Report (See Item 14):
Consolidated Statements of Income for the fiscal years ended January 29,
2000, January 30, 1999 and January 31, 1998.
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999.
Consolidated Statements of Cash Flows for the fiscal years ended January
29, 2000, January 30, 1999 and January 31, 1998.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
-10-
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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 are
included on pages 17 through 34 and are filed as part of this Annual
Report: Independent Auditors' Report; Consolidated Statements of
Income for the fiscal years ended January 29, 2000, January 30, 1999
and January 31, 1998; Consolidated Balance Sheets as of January 29,
2000 and January 30, 1999; Consolidated Statements of Cash Flows for
the fiscal years ended January 29, 2000, January 30, 1999, and January
31, 1998; Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed below are filed as a part of this Annual Report.
Exhibit Number
--------------
3.1 Certificate of Incorporation of the Company, as amended.
Incorporated by reference to Exhibit 3.3 to the Registration
Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration
No. 33-28522).
3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.4 to
the Registration Statement of ATSC and Ann Taylor filed on May 3,
1989 (Registration No.
33-28522).
4.1 Indenture, dated as of June 18, 1999, between the Company, ATSC and
the Bank of New York, as Trustee. Incorporated by reference to
Exhibit 4.01 to the Registration Statement of ATSC filed on
September 13, 1999.
10.1 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18
to the Registration Statement of ATSC and Ann Taylor filed on May
3, 1989 (Registration No. 33-28522).
10.1.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to
Exhibit 10.15.1 to the Annual Report on Form 10-K of the Company
filed on April 30, 1993.
10.2 Lease, dated as of March 17, 1989, between Carven Associates and
Ann Taylor concerning the West 57th Street headquarters.
Incorporated by reference to Exhibit 10.21 to the Registration
Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration
No. 33-28522).
10.2.1 First Amendment to Lease, dated as of November 14, 1990, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.1 to the Registration Statement of ATSC filed on
April 11, 1991 (Registration No.
33-39905).
10.2.2 Second Amendment to Lease, dated as of February 28, 1993, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.2 to the Annual Report on Form 10-K of ATSC filed on
April 29, 1993.
10.2.3 Extension and Amendment to Lease dated as of October 1, 1993,
between Carven Associates and Ann Taylor. Incorporated by reference
to Exhibit 10.11 to the Form 10-Q of the Company for the Quarter
ended October 30, 1993 filed on November 26, 1993.
10.2.4 Modification of Amendment and Extension to Lease, dated as of April
14, 1994 between Carven Associates and Ann Taylor. Incorporated by
reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of
ATSC filed on April 28, 1995.
-11-
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Exhibit Number
- --------------
10.2.5 Fifth Amendment to Lease, dated as of March 14, 1995, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.15.5 to the Annual Report on Form 10-K of ATSC filed on
April 28, 1995.
10.2.6 Sixth Amendment to Lease, dated as of January 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.6 to the Annual Report on Form 10-K of
ATSC filed on April 30, 1998.
10.2.7 Seventh Amendment to Lease, dated as of June 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.7 to the Annual Report on Form 10-K of
ATSC filed on April 30, 1998.
10.2.8 Eighth Amendment to Lease, undated, between Pacific Metropolitan
Corporation and Ann Taylor. Incorporated by reference to Exhibit
10.8.8 to the Annual Report on Form 10-K of ATSC filed on April 30,
1998.
10.2.9 Ninth Amendment to Lease, dated as of May 13, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference
to Exhibit 10.8.9 to the Annual Report on Form 10-K of ATSC filed
on April 30, 1998.
10.2.10 Tenth Amendment to Lease, dated as of May 21, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference
to Exhibit 10.8.10 to the Annual Report on Form 10-K of ATSC filed
on April 30, 1998.
10.2.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.3.11 to the Annual Report on Form 10-K of
ATSC filed on March 29, 1999.
10.2.12 Sublease Agreement, dated as of February 23, 1999, between Societe
Air France (formerly known as Compagnie Nationale Air France) and
the Company. Incorporated by reference to Exhibit 10.2.12 to the
Annual Report on Form 10-K of ATSC filed on April 18, 2000.
10.3 Tax Sharing Agreement, dated as of July 13, 1989, between ATSC and
Ann Taylor. Incorporated by reference to Exhibit 10.24 to Amendment
No. 2 to the Registration Statement of ATSC and Ann Taylor filed on
July 13, 1989 (Registration No. 33-28522).
10.4 Employment Agreement dated as of February 1, 1994 between
ATSC and Sally Frame Kasaks. Incorporated by reference to
Exhibit 10.8 to the Form 10-Q of ATSC for the Quarter ended October
29, 1994 filed on December 9, 1994.
10.5 Employment Agreement dated February 16, 1996 between ATSC and J.
Patrick Spainhour. Incorporated by reference to Exhibit 10.4 to the
Annual Report on Form 10-K of ATSC filed on April 8, 1996.
10.5.1 Amendment to the Employment Agreement, dated August 23, 1996,
between ATSC and J. Patrick Spainhour. Incorporated by reference to
Exhibit 10.11.1 to the Annual Report on Form 10-K of ATSC filed on
May 1, 1997.
10.5.2 Amendment #2 to the Employment Agreement, dated August 12, 1999,
between ATSC and J. Patrick Spainhour. Incorporated by reference to
Exhibit 10.6.2 to the Form 10-Q of ATSC for the Quarter ended
July 31, 1999 filed on September 14, 1999. Confidential
treatment has been granted with respect to certain portions
of this exhibit.
10.5.3 Amendment #3 to the Employment Agreement, dated March 10, 2000,
between ATSC and J. Patrick Spainhour. Incorporated by reference to
Exhibit 10.5.3 to the Annual Report on Form 10-K of ATSC filed on
April 18, 2000.
-12-
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Exhibit Number
- --------------
10.6 Employment Agreement dated November 25, 1996 between ATSC and
Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to Form
10-Q of ATSC for the Quarter ended November 2, 1996 filed on
December 17, 1996.
10.6.1 Amendment #1 to the Employment Agreement, dated February 16, 2000,
between ATSC and Patricia DeRosa. Confidential treatment has been
requested with respect to certain portions of this exhibit.
Incorporated by reference to Exhibit 10.6.1 to the Annual Report on
Form 10-K of ATSC filed on April 18, 2000.
10.7 Employment Agreement dated September 20, 1996 between Ann Taylor
and Dwight F. Meyer. Incorporated by reference to Exhibit 10.4 to
the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996
filed on December 17, 1996.
10.8 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted
Stock and Unit Award Plan, Amended and Restated as of February 23,
1994. Incorporated by reference to Exhibit 10.15 to the Annual
Report on Form 10-K of ATSC filed on May 1, 1997.
10.8.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan, as
approved by stockholders on June 18, 1997. Incorporated by
reference to Exhibit 10.15.1 to the Form 10-Q of ATSC for the
Quarter Ended August 2, 1997 filed on September 12, 1997.
10.8.2 Amendment to the AnnTaylor Stores Corporation Amended and
Restated 1992 Stock Option and Restricted Stock and Unit Award
Plan dated as of January 16, 1998. Incorporated by reference to
Exhibit 10 of Form 8-K of ATSC filed on March 12, 1998.
10.8.3 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan dated as
of May 2, 1998. Incorporated by reference to Exhibit 10.16.3 to the
Form 10-Q of ATSC for the Quarter ended April 2, 1998 filed on June
16, 1998.
10.8.4 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan dated as
of March 10, 2000. Incorporated by reference to Exhibit 10.8.4 to
the Annual Report on Form 10-K of ATSC filed on April 18, 2000.
10.9 AnnTaylor Stores Corporation Amended and Restated Management
Performance Compensation Plan, as approved by stockholders on June
18, 1997. Incorporated by reference to Exhibit 10.16 to the Form
10-Q of ATSC for the Quarter Ended August 2, 1997 filed on
September 12, 1997.
10.9.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan dated as of March 12,
1998. Incorporated by reference to Exhibit 10.17.1 to the Annual
Report on Form 10-K of ATSC filed on April 30, 1998.
10.9.2 Amendment to the AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan dated as of March 10,
2000. Incorporated by reference to Exhibit 10.9.2 to the Annual
Report on Form 10-K of ATSC filed on April 18, 2000.
10.10 Associate Stock Purchase Plan. Incorporated by reference to Exhibit
10.31 to the Form 10-Q of ATSC for the Quarter Ended October 31,
1992 filed on December 15, 1992.
10.11 AnnTaylor Stores Corporation Deferred Compensation Plan.
Incorporated by reference to Exhibit 10.33 to the Annual Report on
Form 10-K of ATSC filed on April 28, 1995.
-13-
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Exhibit Number
- --------------
10.11.1 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
ATSC for the Quarter Ended July 29, 1995 filed on September 11,
1995.
10.12 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.
10.13 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.
10.14 Commitment Letter dated as of May 7, 1998 among the Company, Bank
of America National Trust and Savings Association, BancAmerica
Robertson Stephens, Citicorp USA and CoreStates Bank, N.A.
Incorporated by reference to Exhibit 10.27 to the Form 10-Q of ATSC
for the Quarter Ended May 2, 1998 filed on June 16, 1998.
10.15 Credit Agreement, dated as of June 30, 1998 among the Company,
Bank of America, Citicorp USA and First Union National Bank,
as Co-Agents, the financial institutions from time to time party
thereto, BancAmerica Robertson Stephens, as Arranger, and Bank of
America, as Administrative Agent. Incorporated by reference to
Exhibit 10.28 to the Form 10-Q of ATSC for the Quarter Ended August
1, 1998 filed on September 14, 1998.
10.15.1 Trademark Security Agreement, dated as of June 30, 1998, made by
Ann Taylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.1 to the Form 10-Q of
ATSC for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.15.2 Guaranty, dated as of June 30, 1998, made by the Company in favor
of Bank of America, as Administrative Agent. Incorporated by
reference to Exhibit 10.28.2 to the Form 10-Q of ATSC for the
Quarter Ended August 1, 1998 filed on September 14, 1998.
10.15.3 Security and Pledge Agreement, dated as of June 30, 1998, made by
ATSC in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.3 to the Form 10-Q of
ATSC for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.15.4 Security and Pledge 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 10.28.4 to the Form 10-Q of
ATSC for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.15.5 Subsidiary Guaranty, dated as of June 30, 1998 made by AnnTaylor
Distribution Services in favor of Bank of America, as
Administrative Agent. Incorporated by reference to Exhibit 10.28.5
to the Form 10-Q of ATSC for the Quarter Ended August 1, 1998 filed
on September 14, 1998.
10.15.6 First Amendment to the Credit Agreement, dated as of September 7,
1999, among the Company, Bank of America, N.A., Citibank, N.A.,
First Union National Bank and each of the other lenders party to
the Credit Agreement, NationsBanc Montgomery Securities LLC, as
Arranger and Bank of America, as Administrative Agent. Incorporated
by reference to Exhibit 10.17.6 to the Form 10-Q of ATSC for the
Quarter Ended July 31, 1999 filed on September 14, 1999.
-14-
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Exhibit Number
- --------------
10.15.7 Second Amendment to the Credit Agreement, dated December 1999,
among the Company, Bank of America, N.A., Citibank, N.A., First
Union National Bank, and each of the other lenders party to the
Credit Agreement, NationsBanc Montgomery Securities LLC, as
Arranger and Bank of America, as Administrative Agent. Incorporated
by reference to Exhibit 10.15.7 to the Annual Report on Form 10-K
of ATSC filed on April 18, 2000.
10.16 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.
10.16.1 Amendment to the AnnTaylor Stores Corporation Long-Term Cash
Inventive Compensation Plan, dated as of March 10, 2000.
Incorporated by reference to Exhibit 10.16.1 to the Annual Report
on Form 10-K of ATSC filed on April 18, 2000.
10.17 Separation Agreement dated March 25, 1999 between the Company and
Walter Parks. Incorporated by reference to Exhibit 10.21 to the
Form 10-Q of ATSC for the Quarter Ended May 1, 1999 filed on June
1, 1999.
10.18 AnnTaylor Stores Corporation Special Severance Plan, dated as of
March 10, 2000. Incorporated by reference to Exhibit 10.18 to the
Annual Report on Form 10-K of ATSC filed on April 18, 2000.
18 Preferability letter relating to the change in accounting
principle. Incorporated by reference to Exhibit 18 to the Form
10-Q of ATSC for the Quarter Ended May 2, 1998 filed on June
16, 1998.
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule.
-15-
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANNTAYLOR, INC.
By: /s/ J. Patrick Spainhour
---------------------------
J. Patrick Spainhour
Chairman and Chief Executive Officer
Date: April 18, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. Patrick Spainhour Chairman and Chief Executive April 18, 2000
--------------------------- Officer and Director
J. Patrick Spainhour
/s/ Patricia DeRosa President and Chief Operating April 18, 2000
--------------------------- Officer and Director
Patricia DeRosa
/s/ Barry Erdos Executive Vice President - April 18, 2000
-------------------------- Chief Financial Officer
Barry Erdos and Treasurer
/s/ James M. Smith Vice President and Controller April 18, 2000
-------------------------- Principal Accounting Officer
James M. Smith
/s/ Gerald S. Armstrong Director April 18, 2000
--------------------------
Gerald S. Armstrong
/s/ James J. Burke, Jr. Director April 18, 2000
--------------------------
James J. Burke, Jr.
/s/ Wesley E. Cantrell Director April 18, 2000
--------------------------
Wesley E. Cantrell
/s/ Robert C. Grayson Director April 18, 2000
--------------------------
Robert C. Grayson
/s/ Ronald W. Hovsepian Director April 18, 2000
--------------------------
Ronald W. Hovsepian
/s/ Rochelle B. Lazarus Director April 18, 2000
--------------------------
Rochelle B. Lazarus
/s/ Hanne M. Merriman Director April 18, 2000
--------------------------
Hanne M. Merriman
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ANNTAYLOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Independent Auditors' Report...................................... 18
Consolidated Financial Statements:
Consolidated Statements of Income for the fiscal years ended
January 29, 2000, January 30, 1999 and January 31, 1998... 19
Consolidated Balance Sheets as of January 29, 2000 and
January 30, 1999.......................................... 20
Consolidated Statements of Cash Flows for the fiscal years
ended January 29, 2000, January 30, 1999 and
January 31, 1998.......................................... 21
Notes to Consolidated Financial Statements................... 22
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INDEPENDENT AUDITORS' REPORT
To the Stockholder of
ANNTAYLOR, INC.:
We have audited the accompanying consolidated financial statements of
AnnTaylor, Inc. and its subsidiaries, listed in the accompanying index. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 29, 2000 and January 30, 1999 and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 29, 2000 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, during
the fiscal year ended January 30, 1999, 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 6, 2000
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ANNTAYLOR, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Fiscal Years Ended January 29, 2000, January 30, 1999 and
January 31, 1998
Fiscal Years Ended
-----------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
(in thousands)
Net sales.............................. $1,084,519 $ 911,939 $ 781,028
Cost of sales.......................... 536,014 455,724 411,756
-------- -------- --------
Gross profit........................... 548,505 456,215 369,272
Selling, general and administrative
expenses............................. 413,058 349,955 308,232
Retirement of assets................... --- 3,633 ---
Amortization of goodwill............... 11,040 11,040 11,040
-------- -------- --------
Operating income....................... 124,407 91,587 50,000
Interest income........................ 4,378 2,241 1,157
Interest expense....................... 11,814 20,358 21,146
Other expense, net..................... 1,257 567 548
-------- -------- --------
Income before income taxes and
extraordinary loss.................. 115,714 72,903 29,463
Income tax provision................... 50,221 33,579 17,466
-------- -------- --------
Income before extraordinary loss....... 65,493 39,324 11,997
Extraordinary loss (net of income tax
benefit of $641,000, $0 and
$130,000, respectively).............. 962 --- 173
-------- -------- -------
Net income......................... $ 64,531 $ 39,324 $ 11,824
======== ======== ========
See accompanying notes to consolidated financial statements.
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ANNTAYLOR, INC.
CONSOLIDATED BALANCE SHEETS
January 29, 2000 and January 30, 1999
January 29, January 30,
2000 1999
-------- --------
ASSETS (in thousands)
Current assets
Cash and cash equivalents............................... $ 35,081 $ 67,031
Accounts receivable, net ............................... 67,092 71,049
Merchandise inventories ................................ 140,026 136,748
Prepaid expenses and other current assets .............. 29,390 23,637
-------- --------
Total current assets ............................... 271,589 298,465
Property and equipment, net .............................. 173,639 151,785
Goodwill, net ............................................ 308,659 319,699
Deferred financing costs, net ............................ 5,358 2,627
Other assets ............................................. 5,872 2,841
-------- --------
Total assets........................................ $765,117 $775,417
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable........................................ $ 56,175 $ 65,419
Accrued salaries and bonus ............................. 23,297 17,132
Accrued tenancy ........................................ 7,800 8,465
Gift certificates and merchandise credits redeemable ... 15,618 12,102
Accrued expenses ....................................... 16,031 25,433
Current portion of long-term debt ...................... 1,300 1,206
-------- --------
Total current liabilities .......................... 120,221 129,757
Long-term debt, net ...................................... 114,485 204,576
Deferred lease costs and other liabilities ............... 14,789 12,386
Commitments and contingencies
Stockholder's equity
Common stock, $1.00 par value; 1,000 shares authorized;
1 share issued and outstanding ........................ 1 1
Additional paid-in capital ............................. 377,155 354,762
Retained earnings ...................................... 138,466 73,935
-------- --------
Total stockholder's equity ......................... 515,622 428,698
-------- --------
Total liabilities and stockholder's equity.......... $765,117 $775,417
======== ========
See accompanying notes to consolidated financial statements.
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ANNTAYLOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended January 29, 2000, January 30, 1999
and January 31, 1998
Fiscal Years Ended
-------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
--------- --------- ---------
(in thousands)
Operating activities:
Net income ..................................................... $ 64,531 $ 39,324 $ 11,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss ........................................ 1,603 -- 303
Provision for loss on accounts receivable ................. 1,032 1,476 1,795
Depreciation and amortization ............................. 30,347 28,783 27,803
Amortization of goodwill .................................. 11,040 11,040 11,040
Amortization of deferred compensation ..................... 1,877 465 1,065
Non-cash interest ......................................... 3,026 1,290 1,419
Deferred income taxes ..................................... (3,843) 3,966 (2,687)
Loss on disposal of property and equipment ................ 1,219 4,175 248
Changes in assets and liabilities:
Decrease (increase) in receivables .................. 2,925 (12,314) 1,599
Decrease (increase) in merchandise inventories ...... (3,278) (39,514) 3,003
Decrease (increase) in prepaid expenses and
other current assets ............................ (5,680) (5,581) 1,894
Decrease in other non-current assets and liabilities,
net ............................................. 3,131 679 2,861
Increase (decrease) in accounts payable and
and accrued liabilities .............................. (9,631) 41,746 9,422
--------- --------- ---------
Net cash provided by operating activities ...................... 98,299 75,535 71,589
--------- --------- ---------
Investing activities:
Purchases of property and equipment ............................ (53,409) (45,131) (22,945)
--------- --------- ---------
Net cash used by investing activities .......................... (53,409) (45,131) (22,945)
--------- --------- ---------
Financing activities:
Parent company activity ........................................ 29,891 9,036 869
Repayment of term loan ......................................... -- -- (24,500)
Term loan prepayment penalty ................................... -- -- (184)
Payments of mortgage ........................................... (1,206) (1,119) (416)
Redemption of 8 3/4% Notes ..................................... (101,375) -- --
Payment of deferred financing costs ............................ (4,150) (2,659) (69)
--------- --------- ---------
Net cash provided (used by) financing activities ............... (76,840) 5,258 (24,300)
--------- --------- ---------
Net increase (decrease) in cash ................................... (31,950) 35,662 24,344
Cash, beginning of year ........................................... 67,031 31,369 7,025
--------- --------- ---------
Cash, end of year ................................................. $ 35,081 $ 67,031 $ 31,369
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ......................... $ 9,405 $ 18,582 $ 19,251
========= ========= =========
Cash paid during the year for income taxes ..................... $ 51,222 $ 33,934 $ 17,220
========= ========= =========
See accompanying notes to consolidated financial statements.
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading national
specialty retailer of better quality women's apparel, shoes and accessories sold
principally under the Ann Taylor brand name.
All of the outstanding capital stock of the Company, consisting of one
share of common stock, is owned by AnnTaylor Stores Corporation ("ATSC").
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts have been eliminated in
consolidation.
Certain Fiscal 1998 and 1997 amounts have been reclassified to conform to
the Fiscal 1999 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 include 52 weeks.
REVENUE RECOGNITION
The Company records revenue as merchandise is sold. The Company's policy
with respect to gift certificates is to record revenue as the certificates are
redeemed for merchandise. Prior to their redemption, the certificates are
recorded as a liability.
CASH EQUIVALENTS
Cash and short-term highly liquid investments with original maturities of
three months or less are considered cash or cash equivalents.
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. This is principally because the
average cost method traces each individual unit sold during a period and its
individual cost, while the retail method estimates the cost value of the
inventory sold, instead of using the actual cost of each individual unit. The
cumulative effect of this accounting change on February 1, 1998 was not
material. The effect of this accounting change on Fiscal 1998 net income was an
increase of $1,272,000. It is not possible to determine the effect of the change
on income in any previously reported fiscal years as no cost information was
available.
The majority of the Company's inventory represents finished goods
available for sale.
-22-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the interest method
over the term of the related debt. Accumulated amortization at January 29, 2000
and January 30, 1999 was $1,628,000 and $3,119,000, respectively.
FINANCE SERVICE CHARGE INCOME
Income from finance service charges relating to customer receivables,
which is deducted from selling, general and administrative expenses, amounted to
$8,650,000 for Fiscal 1999, $8,422,000 for Fiscal 1998 and $8,568,000 for Fiscal
1997.
GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill relating to the 1989 acquisition of Ann Taylor by ATSC is being
amortized on a straight-line basis over 40 years. Goodwill relating to the
acquisition, in 1996, of the operations comprising the Company's sourcing
division, is being amortized on a straight-line basis over 25 years. Accumulated
amortization at January 29, 2000 and January 30, 1999 was $109,931,000 and
$98,891,000, respectively.
The Company evaluates its long-lived assets for impairment annually or
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. The Company compares the carrying value of its long-lived
assets to an estimate of their expected future cash flows (undiscounted and
without interest charges) to evaluate the reasonableness of the carrying value
and remaining depreciation or amortization period. If the sum of the expected
future cash flows is less than the carrying amount of the asset, an impairment
loss is recognized.
ADVERTISING
Costs associated with the production of advertising, such as printing and
other costs, are expensed as incurred. Costs associated with communicating
advertising that has been produced, such as magazine ads, are expensed when the
advertising first takes place. Costs of direct mail catalogs and postcards are
expensed when the advertising arrives in customers' homes. Advertising costs
were $25,700,000, $17,800,000 and $10,500,000 in Fiscal 1999, 1998 and 1997,
respectively.
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.
-23-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
Pursuant to a Tax Sharing Agreement, ATSC and the Company have agreed to
elect to file consolidated income tax returns for federal income tax purposes
and may elect to file such returns in states and other relevant jurisdictions
that permit such an election, for income tax purposes. With respect to such
consolidated income tax returns, the Tax Sharing Agreement generally requires
the Company to pay to ATSC the entire tax shown to be due on such consolidated
returns, provided that the amount paid by the Company shall not exceed the
amount of taxes that would have been owed by the Company on a stand-alone basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of FASB Statement No. 133". This statement establishes accounting
and reporting standards for derivative instruments embedded in other contracts,
and for hedging activities. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management is currently
evaluating the impact of this statement and believes its adoption will not
affect the Company's consolidated financial position, results of operations or
cash flows.
2. LONG-TERM DEBT
The following table summarizes long-term debt outstanding at January 29,
2000 and January 30, 1999:
January 29, 2000 January 30, 1999
-------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- -------- -------- --------
(in thousands)
Mortgage........................................... $ 3,950 $ 3,950 $ 5,157 $ 5,157
8 3/4% Notes ...................................... -- -- 100,000 101,875
Intercompany note ................................. -- -- 100,625 100,625
Note payable to ATSC, net ......................... 111,835 111,835 -- --
-------- -------- -------- --------
Total debt ................................. 115,785 115,785 205,782 207,657
Less current portion .............................. 1,300 1,300 1,206 1,206
-------- -------- -------- --------
Total long-term debt........................ $114,485 $114,485 $204,576 $206,451
======== ======== ======== ========
-24-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
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.
The Company's principal credit facility is a bank credit facility that it
entered into in June 1998 with a syndicate of lenders (the "Credit Facility").
The Company uses the Credit Facility for the issuance of commercial and standby
letters of credit and to provide funds for other general corporate purposes. The
lenders' commitment under the Credit Facility was originally $150,000,000. The
Credit Facility had an original maturity date of June 30, 2000, subject to
extension upon the satisfaction of certain conditions. Effective September 3,
1999, the Company elected to reduce the commitment of the lenders under the
Credit Facility by $25,000,000 to $125,000,000 and extended the term of the
Credit Facility to June 30, 2001.
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 1999, 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 2000. 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 29, 2000 was
$125,000,000. Commercial and standby letters of credit outstanding under the
Credit Facility at January 29, 2000 were approximately $69,649,000.
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at the Company's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%,
respectively. In addition, the Company is required to pay the lenders a
quarterly commitment fee on the unused revolving loan commitment amount at a
rate ranging from 0.375% to 0.5% per annum. Fees for outstanding commercial and
standby letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens and investments, restrictions on dividends or
other distributions to stockholders and maintenance of certain financial ratios
including a specified fixed charge coverage ratio and specified levels of net
worth.
The lenders have been granted a pledge of the common stock of ATSC and
certain of its subsidiaries, and a security interest in substantially all other
tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of the Company and its subsidiaries, as
collateral for the Company's obligations under the Credit Facility.
-25-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
In the second quarter of Fiscal 1999, the Company issued a promissory
note, as amended, to ATSC of an aggregate of $199,072,000 principal amount at
maturity (the "Note Payable to ATSC"). The Note Payable to ATSC was issued, as
amended, by the Company during the second quarter of 1999 for value received and
has interest and payment terms substantially similar to the terms of the
Convertible Debentures Due 2019 ("Convertible Debentures") that were issued in
1999 by ATSC. ATSC has pledged the Note Payable to ATSC to the lenders under the
Company's bank Credit Facility as collateral for ATSC's guarantee of the
Company's performance of its obligations under the Credit Facility.
On July 22, 1999, the Company redeemed all of its outstanding 8 3/4%
Subordinated Notes due 2000 (the "8 3/4% Notes"), at a redemption price of
101.375% of principal amount, plus accrued unpaid interest to the redemption
date. The redemption of the 8 3/4% Notes resulted in an extraordinary charge to
earnings in the second quarter and year to date period of $962,000, net of
income tax benefit.
The Company had outstanding a note (the "intercompany note") payable of
$100,625,000 to ATSC. The intercompany note was issued by the Company on August
28, 1998 and had interest and payment terms substantially similar to the terms
of the 8 1/2% Convertible Subordinated Debentures Due 2016 that were issued in
1996 by ATSC to AnnTaylor Finance Trust. ATSC had pledged the intercompany note
to the lenders as collateral for ATSC's guarantee of the Company's performance
of its obligations under the Credit Facility. During the second quarter of
Fiscal 1999, the Company made a prepayment on the intercompany note in the
amount of $100,000 and the balance was forgiven by ATSC. The forgiveness of debt
constituted a contribution of capital by ATSC to the Company.
The Company and its wholly owned subsidiary AnnTaylor Distribution
Services, Inc. are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage loan
balance at January 29, 2000 was $3,950,000.
The aggregate principal payments for the next five years of all long-term
obligations at January 29, 2000 are as follows :
Fiscal Year (in thousands)
-----------
2000............................................$ 1,300
2001............................................ 1,400
2002............................................ 1,250
2003............................................ ---
2004............................................ ---
------
Total...........................................$ 3,950
======
3. PREFERRED SECURITIES
In April and May of Fiscal 1996, ATSC completed the sale of an aggregate
of $100,625,000 of 8 1/2% Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities (the "preferred securities") issued by its financing
vehicle, AnnTaylor Finance Trust, a Delaware business trust (the "Trust"). On
June 29, 1999, AnnTaylor Finance Trust redeemed all of the outstanding preferred
-26-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. PREFERRED SECURITIES (CONTINUED)
securities. All but $100,000 of the liquidation amount of the preferred
securities were tendered for conversion into an aggregate of 5,116,717 shares of
ATSC common stock prior to the redemption date, at a conversion price of $19.65
per share of ATSC common stock, or 2.545 shares of ATSC common stock per $50
liquidation amount of the security. Holders of preferred securities that were
not tendered for conversion received 105.95% of the liquidation amount of the
preferred securities redeemed, plus accrued distributions.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the allowance for doubtful accounts for the
fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998 is as
follows:
Fiscal Years Ended
---------------------------------
January 29, January 30, January 31,
2000 1999 1998
------- ------- -------
(in thousands)
Balance at beginning of year ............ $ 820 $ 812 $ 811
Provision for loss on accounts receivable 1,032 1,476 1,795
Accounts written off .................... (1,186) (1,468) (1,794)
------- ------- -------
Balance at end of year .................. $ 666 $ 820 $ 812
======= ======= =======
5. COMMITMENTS AND CONTINGENCIES
RENTAL COMMITMENTS
The Company 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
payment of 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 payment of real estate taxes, insurance and
certain common area and maintenance costs in addition to the future minimum
lease payments shown below.
Future minimum lease payments under non-cancelable operating leases at
January 29, 2000 are as follows:
Fiscal Year (in thousands)
-----------
2000.........................................$ 95,655
2001......................................... 94,422
2002......................................... 91,391
2003......................................... 85,413
2004......................................... 81,065
2005 and thereafter.......................... 288,433
-------
Total........................................$ 736,379
=======
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for the fiscal years ended January 29, 2000, January 30, 1999
and January 31, 1998 was as follows:
Fiscal Years Ended
----------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
(in thousands)
Minimum rent..................... $72,763 $66,358 $59,495
Percentage rent.................. 3,131 2,414 1,671
----- ----- -----
Total....................... $75,894 $68,772 $61,166
====== ====== ======
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, ATSC, Ann Taylor, certain directors and former officers and
directors of ATSC and Ann Taylor, Merrill Lynch & Co. ("ML&Co.") and certain
affiliates of ML&Co. have been named as defendants in a purported class action
lawsuit filed in April 1996 by certain alleged stockholders, alleging that ATSC
and the other defendants engaged in a fraudulent scheme and course of business
that operated a fraud or deceit on purchasers of ATSC's common stock during the
period from February 3, 1994 through May 4, 1995. On November 9, 1998, the
District Court issued an order granting the defendants' motion to dismiss the
amended complaint with prejudice for its failure to plead fraud with
particularity. On or about December 15, 1998, the plaintiffs filed a notice of
appeal to the United States Court of Appeals for the Second Circuit, seeking
review of the District court's order. The Court heard oral argument on this
appeal on September 15, 1999. ML&Co., its affiliates and the two directors who
previously served on the Company's Board of Directors as representatives of
certain affiliates of ML&Co. (the "settling defendants") reached a settlement
with the plaintiffs, which provides, among other things, for the establishment
of a settlement fund in the amount of $3,000,000 plus interest. On or about
December 14, 1999, the District Court entered an Order and Final Judgment
approving this partial settlement, dismissing the amended complaint with
prejudice as to the settling defendants, and barring and enjoining any future
claims by, among others, the remaining defendants against the settling
defendants for contribution. The appeal as against the remaining defendants,
including the Company, is pending before the Second Circuit Court of Appeals. As
a result, any liability that may arise from this action cannot be predicted at
this time. The Company believes that the amended complaint is without merit and
intends to continue to defend the action vigorously.
6. ENTERPRISE-WIDE OPERATING INFORMATION
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, major customers and the material countries in which the entity holds
assets and reports revenues.
-28-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. ENTERPRISE-WIDE OPERATING INFORMATION (CONTINUED)
The Company is a specialty retailer of women's apparel, shoes and
accessories. Given the economic characteristics of the store formats, the
similar nature of the products sold, the type of customer and method of
distribution, the operations of the Company are aggregated into one reportable
segment. The Company believes that the customer base for its stores consists
primarily of relatively affluent, fashion-conscious women from the ages of 25 to
55, and that the majority of its customers are working women with limited time
to shop.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Fiscal Years Ended
-------------------------
January 29, January 30,
2000 1999
---- ----
(in thousands)
Land and building..........................$ 8,774 $ 8,683
Leasehold improvements..................... 110,573 93,168
Furniture and fixtures..................... 169,521 153,395
Construction in progress................... 23,518 11,059
------- -------
312,386 266,305
Less accumulated depreciation
and amortization......................... 138,747 114,520
------- -------
Net property and equipment............$173,639 $151,785
======= =======
8. OTHER EQUITY AND STOCK OPTION PLANS
REPURCHASE PROGRAM
During the third quarter of Fiscal 1999, the Company's Board of Directors
authorized the Company's participation in a program under which ATSC and the
Company were authorized to purchase up to $40,000,000 of ATSC's common stock
and/or Convertible Debentures through open market purchases and/or in privately
negotiated transactions. On January 10, 2000, the Board of Directors increased
the amount of securities that could be purchased under the program to
$90,000,000. As of January 29, 2000, ATSC had repurchased 3,012,500 shares of
its common stock for an aggregate purchase price of $89,900,000 (exclusive of
brokerage commissions), completing the securities repurchase program. All of the
repurchased shares of ATSC became treasury shares and may be used for general
corporate or other purposes. No Convertible Debentures were purchased.
ASSOCIATE DISCOUNT STOCK PURCHASE PLAN
In Fiscal 1999, ATSC established an Associate Discount Stock Purchase Plan
(the "Plan") through which participating eligible employees may purchase shares
of ATSC's common stock semiannually, at a price equal to the lower of 85% of the
closing price of ATSC's common stock on the grant date or the purchase date of
each semiannual stock purchase period. Participating employees pay for their
stock purchases under the Plan by authorizing limited payroll deductions of up
to a maximum of 15% of their compensation. No shares of ATSC's common stock will
be issued pursuant to the Plan until Fiscal 2000. At January 29, 2000, there
were 250,000 shares of ATSC common stock available for future issuance under
this Plan.
-29-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. OTHER EQUITY AND STOCK OPTION PLANS (CONTINUED)
STOCK OPTION PLANS
ATSC accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation costs have been recognized for
stock option awards. Had compensation costs of option awards been determined
under a fair value alternative method as stated in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ATSC
would have been required to prepare a fair value model for such options and
record such amount in the financial statements as compensation expense. Pro
forma net income before extraordinary loss, after taking into account such
expense would have been $63.9 million, $38.4 million and $11.0 million for
Fiscal 1999, 1998 and 1997, respectively. For purposes of this calculation, ATSC
arrived at the fair value of each stock grant at the date of grant by using the
Black Scholes option pricing model with the following weighted average
assumptions used for grants for the fiscal years ended January 29, 2000, January
30, 1999 and January 31, 1998: risk-free interest rate of 4.9%, 5.4% and 6.2%,
respectively; expected life of 4.0 years, 4.0 years and 5.0 years, respectively;
and expected volatility of 49.1%, 59.4% and 67.9%, respectively.
9. EXTRAORDINARY ITEMS
On July 22, 1999, the Company applied the proceeds received from the
issuance of its Notes Payable to ATSC to redeem the outstanding 8 3/4% Notes.
This resulted in an extraordinary charge to earnings in Fiscal 1999 of $962,000,
net of income tax benefit of $641,000.
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 of $130,000.
10. NONRECURRING CHARGES
RETIREMENT OF ASSETS
In the fourth quarter of Fiscal 1998, the Company recorded a $3,633,000
non-cash pre-tax charge for the retirement of certain assets. This charge
related to the write-off of the net book value of assets relinquished during the
renovation of the Company's corporate offices.
-30-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. INCOME TAXES
The provision for income taxes for the fiscal years ended January 29,
2000, January 30, 1999 and January 31, 1998 consists of the following:
Fiscal Years Ended
----------------------------------
January 29,January 30, January 31,
2000 1999 1998
---- ---- ----
(in thousands)
Federal:
Current...........................$ 41,682 $21,589 $14,427
Deferred.......................... (3,033) 2,748 (1,917)
------- ------ -------
Total federal................... 38,649 24,337 12,510
------ ------ ------
State and local:
Current........................... 11,856 7,869 5,538
Deferred.......................... (809) 1,217 (769)
------- ------ -------
Total state and local........... 11,047 9,086 4,769
------ ------ ------
Foreign:
Current........................... 525 156 187
Deferred.......................... --- --- ---
------ ------ ------
Total foreign................... 525 156 187
------ ------ ------
Total.............................$ 50,221 $33,579 $17,466
====== ====== ======
The reconciliation between the provision for income taxes and the
provision for income taxes at the federal statutory rate for the fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998 is as follows:
Fiscal Years Ended
----------------------------------
January 29,January 30, January 31,
2000 1999 1998
---- ---- ----
(in thousands)
Income before income taxes and
exraordinary loss....................$ 115,714 $ 72,903 $ 29,463
======= ======= =======
Federal statutory rate.................. 35% 35% 35%
====== ======= =======
Provision for income taxes at
federal statutory rate...............$ 40,500 $ 25,516 $ 10,312
State and local income taxes,
net of federal income
tax benefit.......................... 6,278 4,660 3,800
Non-deductible amortization of goodwill. 3,500 3,500 3,500
Earnings of foreign subsidiaries........ 79 (188) (314)
Other................................... (136) 91 168
------- ------- -------
Provision for income taxes..............$ 50,221 $ 33,579 $ 17,466
====== ======= =======
-31-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. INCOME TAXES (CONTINUED)
The tax effects of significant items comprising the Company's deferred tax
assets (liabilities) as of January 29, 2000 and January 30, 1999 are as follows:
January 29, January 30,
2000 1999
---- ----
(in thousands)
Current:
Inventory.................................. $ 2,071 $ 128
Accrued expenses........................... 2,306 3,812
Real estate................................ (2,050) (1,686)
Other...................................... --- ---
------- -------
Total current............................... $ 2,327 $ 2,254
======= =======
Noncurrent:
Accrued expenses........................... $ 763 $ ---
Depreciation and amortization.............. (2,936) (5,510)
Rent expense............................... 5,168 4,786
Other...................................... 327 276
------- -------
Total noncurrent............................ $ 3,322 $ (448)
======= ========
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 29,
2000 amounted to approximately $6,852,000. However, if these earnings were not
considered permanently reinvested, under current law, the incremental tax on
such undistributed earnings would be approximately $2,137,000.
12. RETIREMENT PLANS
SAVINGS PLAN. The Company maintains a defined contribution 401(k) savings
plan for substantially all full-time employees of the Company and its
subsidiaries. Participants may contribute to the plan an aggregate of up to 10%
of their annual earnings. The Company makes a matching contribution of 50% with
respect to the first 3% of each participant's annual earnings contributed to the
plan. The Company's contributions to the plan for Fiscal 1999, Fiscal 1998 and
Fiscal 1997 were $697,000, $592,000 and $519,000, respectively.
PENSION PLAN. Substantially all full-time employees of the Company and its
subsidiaries are covered under a noncontributory defined benefit pension plan.
Through December 31, 1997, the pension plan was a "cash balance pension plan",
under which each participant accrued a benefit based on compensation and years
of service with the Company. As of January 1, 1998, the plan was amended and the
formula to calculate benefits was changed to a career average formula. The new
career average formula was used to determine the funding status of the plan
beginning in Fiscal 1997. The Company's funding policy for the plan is to
contribute annually the amount necessary to provide for benefits based on
accrued service and projected pay increases. Plan assets consist primarily of
cash, equity and fixed income securities.
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which standardizes the disclosure requirements for
pension and other postretirement benefits, eliminates certain disclosures, and
requires additional information on the changes in the benefit obligations and
fair value of plan assets.
-32-
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. RETIREMENT PLANS (CONTINUED)
The following table provides information for the Pension Plan at January
29, 2000, January 30, 1999 and January 31, 1998:
Fiscal Years Ended
------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
(in thousands)
Change in benefit obligation:
Benefit obligation, beginning of year ...... $ 4,642 $ 3,820 $ 3,413
Service cost ............................... 1,129 669 571
Interest ................................... 340 292 250
Plan amendments ............................ -- -- 81
Actuarial loss (gain) ...................... 19 348 (103)
Benefits paid .............................. (1,176) (487) (392)
------- ------- -------
Benefit obligation, end of year ............ 4,954 4,642 3,820
------- ------- -------
Change in plan assets:
Fair value of plan assets,
beginning of year ........................ 7,486 5,128 4,745
Actual return on plan assets ............... 763 1,205 907
Employer contribution (refund) ............. 2,416 1,640 (132)
Benefits paid .............................. (1,176) (487) (392)
------- ------- -------
Fair value of plan assets, end of year ..... 9,489 7,486 5,128
------- ------- -------
Funded status (fair value of plan
assets less benefit obligation) ......... 4,535 2,844 1,308
Unrecognized net actuarial gain ............ (1,621) (1,675) (1,361)
Unrecognized prior service cost ............ 63 69 75
------- ------- -------
Prepaid benefit cost........................ $ 2,977 $ 1,238 $ 22
======= ======= =======
Net pension cost includes the following components:
Fiscal Years Ended
-------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
(in thousands)
Service cost..............................$ 1,129 $ 669 $ 571
Interest cost............................. 340 292 250
Expected return on assets................. (776) (481) (409)
Amortization of prior gains............... (22) (61) (42)
Amortization of prior service cost........ 6 6 6
------- ------- --------
Net periodic pension cost.................$ 677 $ 425 $ 376
======= ======= ========
For the fiscal years ended January 29, 2000, January 30, 1999 and January
31, 1998, the following actuarial assumptions were used:
Fiscal Years Ended
-------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
Discount rate............................. 8.25% 6.75% 7.50%
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%
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ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. STOCKHOLDER'S EQUITY
The following summarizes the changes in stockholder's equity during Fiscal
1999, Fiscal 1998 and Fiscal 1997:
Total
Additional Stock-
Common Paid-in Retained holder's
Stock Capital Earnings Equity
------ ---------- -------- --------
(in thousands)
Balance at February 1, 1997............$ 1 $443,952 $ 22,787 $466,740
Net income.......................... --- --- 11,824 11,824
Parent company contributions........ --- 1,934 --- 1,934
--- ------ ----- -------
Balance at January 31, 1998............ 1 445,886 34,611 480,498
Net income.......................... --- --- 39,324 39,324
Parent company contributions........ --- 9,501 --- 9,501
Intercompany note................... --- (100,625) --- (100,625)
--- -------- ----- -------
Balance at January 30, 1999............ 1 354,762 73,935 428,698
Net income.......................... --- --- 64,531 64,531
Parent company contributions........ --- 31,768 --- 31,768
Forgiveness of intercompany note.... --- 100,625 --- 100,625
Note payable to ATSC................ --- (110,000) --- (110,000)
--- -------- ------- -------
Balance at January 29, 2000............$ 1 $377,155 $138,466 $515,622
=== ======= ======= =======
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