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SECURITIES AND EXCHANGE COMMISSION
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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 FEBRUARY 2, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 1-11980
ANNTAYLOR, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0297083
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
(212) 541-3300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE.
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No .
As of March 1, 2002, 1 share of common stock was outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
The registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore filing this form with the
reduced disclosure format.
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1
PART I
ITEM 1. BUSINESS
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GENERAL
AnnTaylor, Inc. (the "Company" or "Ann Taylor"), through its wholly
owned subsidiaries, is a leading national specialty retailer of better
quality women's apparel, shoes and accessories sold primarily under the "Ann
Taylor" and "Ann Taylor Loft" brand names. 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 February 2, 2002, the Company operated 538 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 342 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 professional 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 February 2, 2002, the Company operated 186 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
and work environment, 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. In 1998, the Company
began opening Ann Taylor Loft stores outside the factory outlet environment,
in regional malls, strip shopping centers and urban and village street
locations. At February 2, 2002, 168 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 "Stores and Expansion",
"Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Statement Regarding Forward Looking
Disclosures" below.
As of February 2, 2002, the Company also operated 10 Ann Taylor Factory
stores in factory outlet centers. The Company plans to convert all 18 Ann
Taylor Loft outlet stores to Ann Taylor Factory stores during Fiscal 2002.
The Ann Taylor Factory outlet stores will then serve as a brand-appropriate
clearance vehicle for merchandise from both Ann Taylor and Ann Taylor Loft
stores and will also handle an increasing assortment of current season styles
created uniquely for these stores and sold under the Ann Taylor Factory store
label.
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 Fiscal 2001, the Company
discontinued its line of color cosmetics. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Fiscal 2001
Compared to Fiscal 2000".
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2
making Ann Taylor merchandise available for direct retail sale to customers
over the Internet. The Online Store was designed as an extension of the
in-store experience and offers a wide selection of each season's Ann Taylor
stores' collection. Although the Company's Online Store did not achieve the
expected sales volume during Fiscal 2001, the Company believes that the
Online Store further builds the Ann Taylor brand and enhances the Company's
relationships with customers, as well as creates the opportunity for sales to
new and existing customers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Fiscal 2001 Compared to
Fiscal 2000" for information regarding the asset write-off associated with
the Company's Online Store.
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").
The Company was acquired by ATSC in a leveraged buyout transaction in 1989.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES
Sections of this annual report on Form 10-K contain various
forward-looking statements, made pursuant to the safe harbor provisions 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, and the Company does not assume any obligation to update or
revise any forward-looking statements at any time for any reason. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Statement Regarding Forward-Looking Disclosures".
ITEM 2. PROPERTIES
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As of February 2, 2002, the Company operated 538 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 and 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
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ATSC settled the purported class action lawsuit pending in the United
States District Court for the Southern District of New York against the
Company, ATSC, and certain former officers and directors of the Company and
ATSC. Finalization of the settlement is subject to Court approval. The
complaint alleged that the defendants made false and misleading statements
about the Company and ATSC from February 3, 1994 through May 4, 1995. The
net cost to ATSC, after application of insurance proceeds, will be
approximately $3.3 million. The decision to settle this action was not an
admission of any wrongdoing, but reflected the significant legal fees, other
expenses and management time that would have to be devoted to continue to
vigorously defend it in the courts.
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
consolidated financial position, consolidated 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
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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
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RESULTS OF OPERATIONS
SALES
The following table sets forth certain sales and store data for the
periods indicated:
FISCAL YEAR
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2001 2000 1999
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(52 weeks) (53 weeks) (52 weeks)
Net sales ($000) .......................... $ 1,299,573 $ 1,232,776 $ 1,084,519
Total net sales increase
percentage (52-week basis) ............ 6.8% 12.2% 18.9%
Comparable store sales increase
(decrease) percentage (52-week basis) ... (6.1)% (0.5)% 8.4%
Net sales per average gross square foot ... $ 452 $ 496 $ 502
Total store square footage at end of period 3,057,000 2,695,000 2,280,000
Number of:
New stores .............................. 67 81 47
Expanded stores ......................... 6 4 8
Closed stores ........................... 7 8 7
Total stores open at end of period ........ 538 478 405
The Company's net sales do not show significant seasonal variation,
although net sales in the fourth quarter have historically been higher than in
the other quarters. As a result, the Company has not had significant overhead
and other costs generally associated with large seasonal variations.
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data
expressed as a percentage of net sales for the periods indicated:
FISCAL YEAR
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2001 2000 1999
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Net sales ....................................... 100.0% 100.0% 100.0%
Cost of sales ................................... 50.2 50.5 49.4
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Gross profit ................................ 49.8 49.5 50.6
Selling, general and administrative expenses .... 44.4 40.7 38.2
Amortization of goodwill ........................ 0.8 0.9 1.0
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Operating income ............................ 4.6 7.9 11.4
Interest income ................................. 0.1 0.2 0.4
Interest expense ................................ 0.5 0.6 1.1
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Income before income taxes and extraordinary loss 4.2 7.5 10.7
Income tax provision ............................ 2.0 3.3 4.6
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Income before extraordinary loss ................ 2.2 4.2 6.1
Extraordinary loss .............................. -- -- 0.1
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Net income ...................................... 2.2% 4.2% 6.0%
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4
FISCAL 2001 COMPARED TO FISCAL 2000
The Company's net sales increased to $1,299,573,000 over $1,232,776,000
in Fiscal 2000, an increase of $66,797,000, or 5.4%. Comparable store sales
for Fiscal 2001 decreased 6.1%, compared to a decrease of 0.5% in Fiscal
2000. Total sales for Fiscal 2001 were up 6.8% from $1,216,808,000 for the
52-week period ended January 27, 2001. The sales increase was primarily
attributable to the opening of new stores and the expansion of existing
stores, partially offset by the decrease in comparable store sales in Fiscal
2001. Management believes that the decrease in comparable store sales was,
in part, the result of customer dissatisfaction with certain of the Company's
product offerings and merchandise assortment available in Ann Taylor stores
in the Spring 2001 season. Sales were also impacted by an overall reduction
in client spending caused by the current economic environment, as well as the
impact of the events of September 11, 2001.
Gross margin as a percentage of net sales, excluding certain
nonrecurring expenses described below, increased to 50.2% in Fiscal 2001 from
49.5% in Fiscal 2000. The increase in gross margin reflects higher margins
achieved on full price and non-full price sales at both divisions, offset, in
part, by higher promotional sales activity in Fiscal 2001 compared to the
prior year. In addition, during the fourth quarter of Fiscal 2001, the
Company incurred a pre-tax nonrecurring charge of approximately $17,000,000.
Approximately $4,100,000 of this charge affected gross margin, and related to
the inventory write-off associated with the discontinuation of the Ann Taylor
cosmetics line, and inventory costs associated with canceling certain Fall
2001 and Spring 2002 merchandise orders. The remaining $12,900,000 were
additional selling, general and administrative costs, as further discussed
below. After taking these nonrecurring charges into account, gross margin,
as a percentage of sales, was 49.8%.
Selling, general and administrative expenses, excluding certain
nonrecurring expenses described below, were $563,658,000, or 43.4% of net
sales, in Fiscal 2001, compared to $490,760,000, or 39.8% of net sales, in
Fiscal 2000. The increase in selling, general and administrative expenses as
a percentage of net sales was primarily attributable to decreased leverage on
fixed expenses resulting from negative comparable store sales, and increases
in tenancy and Loft store operations expenses due to expansion. Of the
$17,000,000 pre-tax nonrecurring charge discussed above, approximately
$12,900,000 represented increased selling, general and administrative costs.
Approximately $7,200,000 of the nonrecurring charge related to the write-down
of certain anntaylor.com assets, based upon projected cash flows, which were
not deemed adequate to support the carrying value of the assets associated
with this ongoing business. An additional $3,300,000 related to the cost,
net of insurance proceeds, of settling a class action lawsuit (see Item 3 -
"Legal Proceedings"). The remaining $2,400,000 represented the write-off of
certain fixed assets related to the discontinuation of the Ann Taylor
cosmetics line, and severance costs associated with reductions made in the
Company's store and home office workforce. After taking these nonrecurring
charges into account, selling, general and administrative expenses, as a
percentage of net sales, were 44.4%. During the first quarter of Fiscal
2000, the Company incurred a pre-tax nonrecurring charge of approximately
$8,500,000 in connection with an extensive review conducted with the
Company's financial and legal advisors of various strategic approaches to
enhance shareholder value. In the fourth quarter of Fiscal 2000, the
Company recorded a nonrecurring pre-tax charge of $2,200,000 relating to the
costs of the Company's obligations under a former executive's employment
contract with the Company, in connection with the executive's resignation in
January 2001. After taking these nonrecurring charges into account, selling,
general and administrative expenses for Fiscal 2000, as a percentage of
sales, were 40.7%.
Operating income decreased to $60,141,000, or 4.6% of net sales, in
Fiscal 2001, from $98,240,000, or 7.9% of net sales, in Fiscal 2000.
Amortization of goodwill was $11,040,000, or 0.8% of net sales, in Fiscal
2001, compared to $11,040,000, or 0.9% of net sales, in Fiscal 2000.
Operating income without giving effect to such amortization was $71,181,000,
or 5.4% of net sales, in Fiscal 2001 and $109,280,000, or 8.8% of net sales,
in Fiscal 2000.
Interest income was $1,390,000 in Fiscal 2001, compared to $2,473,000 in
Fiscal 2000. The decrease was primarily attributable to lower cash on hand
and lower interest rates during Fiscal 2001 compared to Fiscal 2000.
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Interest expense was $6,869,000 in Fiscal 2001, compared to $7,315,000
in Fiscal 2000. The weighted average interest rate on the Company's
outstanding indebtedness at February 2, 2002 was 3.75%.
The income tax provision was $25,557,000, or 46.8% of income before
income taxes in Fiscal 2001, compared to $41,035,000, or 43.9% of income
before income taxes in Fiscal 2000. The effective tax rates for both periods
were higher than the statutory rates, primarily as a result of non-deductible
goodwill expense.
As a result of the foregoing factors, the Company had net income of
$29,105,000, or 2.2% of net sales, for Fiscal 2001, compared to net income of
$52,363,000, or 4.2% of net sales, for Fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999
The Company's net sales increased to $1,232,776,000 over $1,084,519,000
in Fiscal 1999, an increase of $148,257,000, or 13.7%. Comparable store
sales for Fiscal 2000 decreased 0.5%, compared to an increase of 8.4% in
Fiscal 1999. Total sales for the 52-week period ended January 27, 2001 were
up 12.2% to $1,216,808,000, compared to the same period in Fiscal 1999. The
sales increase was primarily attributable to the opening of new stores and
the expansion of existing stores, partially offset by a net decrease in
comparable store sales in Fiscal 2000. Management believes that the decrease
in comparable store sales was the result of customer dissatisfaction with
certain of the Company's product offerings and merchandise assortment in the
Fall 2000 season.
Gross profit as a percentage of net sales decreased to 49.5% in Fiscal
2000 from 50.6% in Fiscal 1999. This decrease in gross margin reflects a
higher markdown rate on goods sold below full price and the sale of a greater
amount of goods below full price as a percentage of sales, most significantly
in the fourth quarter of Fiscal 2000, compared to the prior year. These
decreases were offset, in part, by higher gross margins achieved on
merchandise that was sold at full price, attained through ongoing
efficiencies achieved through continued improvements in the Company's
sourcing, merchandising, and inventory processes.
Selling, general and administrative expenses, excluding certain
nonrecurring expenses described below, were $490,760,000, or 39.8% of net
sales, in Fiscal 2000, compared to $414,315,000, or 38.2% of net sales, in
Fiscal 1999. Selling, general and administrative expenses for Fiscal 2000
included approximately $10,300,000 of expenses related to the development of
the Company's Online Store, which commenced during Fiscal 2000. Selling,
general and administrative expenses as a percentage of net sales also
reflected increases in tenancy expenses and increases in Ann Taylor Loft
store operations expenses, offset by a decrease in the provision for
management performance bonus expense. During the first quarter of Fiscal
2000, the Company incurred a pre-tax nonrecurring charge of approximately
$8,500,000 in connection with an extensive review conducted with the
Company's financial and legal advisors of various strategic approaches to
enhance shareholder value. In the fourth quarter of Fiscal 2000, the
Company recorded a nonrecurring pre-tax charge of $2,200,000 relating to the
estimated costs of the Company's obligations under a former executive's
employment contract with the Company, in connection with the executive's
resignation in January 2001. After taking these nonrecurring charges into
account, selling, general and administrative expenses, as a percentage of
sales, were 40.7%.
Operating income decreased to $98,240,000, or 7.9% of net sales, in
Fiscal 2000, from $123,150,000, or 11.4% of net sales, in Fiscal 1999.
Amortization of goodwill was $11,040,000, or 0.9% of net sales, in Fiscal
2000, compared to $11,040,000, or 1.0% of net sales, in Fiscal 1999.
Operating income without giving effect to such amortization was $109,280,000,
or 8.8% of net sales, in Fiscal 2000 and $134,190,000, or 12.4% of net sales,
in Fiscal 1999.
Interest income was $2,473,000 in Fiscal 2000, compared to $4,378,000 in
Fiscal 1999. The decrease was primarily attributable to decreased cash on
hand in Fiscal 2000 as a result of a dividend to ATSC, described below under
"Liquidity and Capital Resources", to facilitate the repurchase by ATSC of
shares of its common stock during the second half of Fiscal 1999.
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Interest expense was $7,315,000 in 2000, compared to $11,814,000 in 1999.
The decrease in interest expense was attributable to the net reduction in the
Company's outstanding long-term debt and other obligations and a decrease in the
interest rate borne by the Company's remaining outstanding long- term debt.
During the second quarter of 1999, a note (the "intercompany note") payable by
the Company to ATSC in August 1998 was forgiven, and the Company's 8-3/4%
Subordinated Notes due 2000 ("8-3/4% Notes") referred to below were redeemed.
These transactions were completed using, in part, the proceeds from the issuance
in June 1999 of a promissory note to ATSC ("Note Payable to ATSC"), which bears
interest at a rate of 3.75% per annum. The weighted average interest rate on the
Company's outstanding indebtedness at February 3, 2001 was 3.79%.
The income tax provision was $41,035,000, or 43.9% of income before
income taxes in Fiscal 2000, compared to $50,221,000, or 43.4% of income
before income taxes and extraordinary loss in Fiscal 1999. The effective tax
rates for both periods were higher than the statutory rates, primarily as a
result of non-deductible goodwill expense.
As a result of the foregoing factors, the Company had net income of
$52,363,000, or 4.2% of net sales, for Fiscal 2000, compared to net income of
$64,531,000, or 6.0% of net sales, for Fiscal 1999.
CHANGES IN FINANCIAL POSITION
Accounts receivable increased to $65,296,000 at the end of Fiscal 2001
from $57,989,000 at the end of Fiscal 2000, an increase of $7,307,000, or
12.6%. This increase was primarily attributable to an increase of $6,083,000
in trade accounts receivable.
Merchandise inventories increased to $180,117,000 at February 2, 2002
from $170,631,000 at February 3, 2001, an increase of $9,486,000, or 5.6%.
Merchandise inventories at February 2, 2002 and February 3, 2001 included
approximately $37,558,000 and $33,469,000, respectively, of inventory
associated with the Company's sourcing division, which is principally
finished goods in transit from factories. The increase in merchandise
inventories is primarily due to inventory purchased to support 67 new stores
opened since the beginning of the year. Total store square footage increased
to approximately 3,057,000 square feet at February 2, 2002 from approximately
2,695,000 square feet at February 3, 2001. Merchandise inventory on a
per-square-foot basis, excluding inventory associated with the Company's
sourcing division, was approximately $47 at the end of Fiscal 2001, compared
to $51 at the end of Fiscal 2000. Inventory turned 4.7 times in Fiscal 2001,
compared to 4.9 times in Fiscal 2000, 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).
Accounts payable decreased to $59,482,000 at the end of Fiscal 2001 from
$65,903,000 at the end of Fiscal 2000, a decrease of $6,421,000, or 9.7%.
The decrease in accounts payable is primarily due to the timing of payments
at the end of Fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital is cash flow from
operations. The following table sets forth material measures of the Company's
liquidity:
FISCAL YEAR
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2001 2000 1999
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(DOLLARS IN THOUSANDS)
Cash provided by operating activities $ 77,598 $ 76,625 $ 98,299
Working capital ...................... $189,239 $172,767 $151,368
Current ratio ........................ 2.39:1 2.22:1 2.26:1
Debt to equity ratio ................. .20:1 .20:1 .22:1
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Cash provided by operating activities in Fiscal 2001, as presented on
the consolidated statements of cash flows, primarily resulted from earnings,
noncash charges, and a decrease in prepaid expenses and other current assets,
partially offset by increases in accounts receivable and inventory and
decreases in accounts payable and accrued liabilities.
On April 30, 2001, the Company entered into an Amended and Restated
$175,000,000 senior secured revolving Credit Facility (the "Credit Facility")
with Bank of America N.A. and a syndicate of lenders. This Credit Facility
was further amended on December 20, 2001 to adjust certain ratio provisions,
and amend certain definitions used in the calculation of ratios required in
the Credit Facility. The Credit Facility matures on April 29, 2004.
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 February 2, 2002 was $175,000,000.
Commercial and standby letters of credit outstanding under the Credit
Facility as of February 2, 2002 were approximately $77,934,000. Loans
outstanding under the Credit Facility at any time may not exceed
$75,000,000. There were no loans outstanding at fiscal year end. In
addition, the Credit Facility requires that the outstanding loan balance be
reduced to zero for a 30-day period each calendar year. This "cleandown"
period was achieved in January 2002.
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at the Company's option, the Bank of America Base Rate, defined as
the higher of (a) the Federal Funds Rate plus one-half of 1% and (b) the
Prime Rate for such day, or Eurodollar Rate; plus, in either case, a margin
ranging from 0.25% to 2.00%. The Company is also required to pay the lenders
a quarterly commitment fee on the unused revolving loan commitment amount at
a rate ranging from 0.30% to 0.50% per annum. Fees for outstanding
commercial and standby letters of credit range from 0.50% to 0.875% and from
1.25% to 2.00%, respectively. Premiums ranging from 0.125% to 0.50% may
apply to all interest and commitment fees, depending on the calculated
Leverage ratio.
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 specified levels of tangible 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 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.
During 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 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% 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 of Fiscal 1999 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 February 2, 2002 was $1,250,000.
The Company's capital expenditures totaled $83,693,000, $83,310,000 and
$53,409,000 in Fiscal 2001, 2000 and 1999, 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 the Company's corporate offices.
These expenditures also include, in Fiscal 2001 and Fiscal 2000, capital
expenditures related to the Company's Internet e-commerce Web site, and
related enhancements to the material handling system at the Company's
distribution center. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Fiscal 2001 Compared to Fiscal 2000"
for information regarding the asset write-off associated with the Company's
Online Store. The Company expects its total capital expenditure requirements
in Fiscal 2002 will be approximately $47,000,000, including capital for new
store construction for a planned square footage increase of approximately
246,000 square feet, or 8%, 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 January 26, 2000, the Company declared a cash dividend, authorized by
its Board of Directors, to ATSC in the amount of $89,944,612 to facilitate
the repurchase, by ATSC, of up to $90,000,000 of its common stock and/or
Convertible Debentures through open market purchases and privately negotiated
transactions. As of January 29, 2000, 3,012,500 shares of ATSC's common
stock had been repurchased for an aggregate purchase price of $89,900,900
(exclusive of brokerage commissions), completing ATSC's repurchase 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
purchased.
In order to finance its operations and capital requirements, the Company
expects to use internally generated funds and 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 ongoing cash needs for its business, as
presently conducted, for the foreseeable future.
On February 4, 2002, the Company sold the assets associated with its Ann
Taylor credit card accounts to World Financial Network National Bank (the
"Bank"). In connection with the sale, the Company contracted with Alliance
Data Systems Corporation ("ADS"), the Bank's affiliated servicer, to provide
private label credit card services to proprietary Ann Taylor credit card
customers. Under the terms of the transaction, ADS will manage the Ann Taylor
credit card program, and pay the Company a percentage of all collected
finance charges. The Company believes that having ADS provide these services
rather than continuing to handle this program in-house will further
strengthen the Company's relationship with its clients, and aid in the growth
of the Ann Taylor credit card.
In 1998, the Financial Accounting Standards Board (the "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", which establishes accounting and
reporting standards for derivatives, derivative instruments embedded in other
contracts and for hedging activities. In 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for certain derivatives,
derivative instruments embedded in other contracts and for certain hedging
activities. These statements were effective for the Company's Fiscal 2001
financial statements. The adoption of these standards had no impact on the
Company's consolidated financial statements.
-8-
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9
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
SFAS No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001 and clarifies the criteria for recognition of intangible
assets separately from goodwill. Management has determined that the adoption
of SFAS No. 141 will have no impact on the Company's consolidated financial
statements.
SFAS No. 142 requires that ratable amortization of goodwill be replaced
with periodic tests of the goodwill's impairment and that intangible assets,
other than goodwill, which have determinable useful lives be amortized over
that period. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Management intends to adopt SFAS No. 142 in Fiscal 2002,
and has determined that the fair value of the Company exceeds the carrying
value of its recorded net assets, including goodwill, as of February 2,
2002. Management further estimates that adoption of SFAS No. 142 will add
approximately $11,000,000 to Fiscal 2002 net income.
SFAS No. 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. Management does not believe that
the adoption of SFAS No. 143 will have a significant impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
accounting and reporting for the impairment or disposal of long-lived assets,
other than goodwill, including discontinued operations. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management has
determined that the adoption of SFAS No. 144 will have no impact on the
Company's consolidated financial statements.
On December 12, 2001, the United States Securities and Exchange
Commission (the "SEC") issued Financial Reporting Release ("FRR") No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies",
which encourages the identification and disclosure of the most critical
accounting policies applied in the preparation of a company's financial
statements. In response to FRR No. 60, Management has determined that the
Company's most critical accounting policies are those related to merchandise
inventory valuation and recorded goodwill. These policies are further
described in the Notes to the Consolidated Financial Statements, and in
relevant sections of this discussion and analysis.
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, made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements may use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar
expressions. These forward-looking statements reflect the Company's current
expectations concerning future events, and actual results may differ
materially from current expectations or historical results. Any such
forward-looking statements are subject to various risks and uncertainties,
including failure by the Company to predict accurately customer fashion
preferences; 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 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 the Company's Online Store; 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; acts of war or terrorism in the
United States or worldwide; and other factors set forth in the Company's
filings with the SEC. The Company does not assume any obligation to update
or revise any forward-looking statements at any time for any reason.
-9-
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10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------
The Company maintains the majority of its cash and cash equivalents in
financial instruments with original maturity dates 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 February 2, 2002 bears
interest at fixed rates; therefore, the Company's consolidated 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
February 2, 2002, 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 February 2, 2002, February 3, 2001 and January 29, 2000 are
included as a part of this Report (See Item 14):
Consolidated Statements of Income for the fiscal years ended February 2,
2002, February 3, 2001 and January 29, 2000.
Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001.
Consolidated Statements of Cash Flows for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------
FINANCIAL DISCLOSURES
None.
-10-
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11
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 18 through 33 and are filed as part of this Annual
Report:
Independent Auditors' Report; Consolidated Statements of Income for
the fiscal years ended February 2, 2002, February 3, 2001 and January
29, 2000; Consolidated Balance Sheets as of February 2, 2002 and
February 3, 2001; Consolidated Statements of Cash Flows for the
fiscal years ended February 2, 2002, February 3, 2001 and January 29,
2000; Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
The Company filed a report, dated January 10, 2002 with the
Commission on Form 8-K with respect to the amendment of AnnTaylor,
Inc.'s existing senior secured revolving credit facility.
(c) Exhibits
The exhibits listed below are filed as a part of this Annual Report.
Schedules other than the above have been omitted because they are
either not applicable or the required information has been disclosed
in the consolidated financial statements or notes thereto.
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 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).
10.1.1 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).
10.1.2 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.
-11-
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12
EXHIBIT NUMBER
- --------------
10.1.3 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.
10.1.4 Modification of Amendment and Extension to Lease, dated as of April
14, 1994 between Carven Associates and Ann Taylor. Incorporated
by reference to Exhibit 10.15.4 to the Annual Report on Form 10-K
of ATSC filed on April 28, 1995.
10.1.5 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.
10.1.6 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.
10.1.7 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.
10.1.8 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.
10.1.9 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.
10.1.10 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.
10.1.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between
Pacific Metropolitan Corporation and ATSC. Incorporated by
reference to Exhibit 10.3.11 to the Annual Report on Form 10-K of
ATSC filed on March 29, 1999.
10.1.12 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.
10.2 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).
10.3 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.
10.4 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 the Company filed on April 8, 1996.
-12-
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13
EXHIBIT NUMBER
- --------------
10.4.1 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.
10.4.2 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.
10.4.3 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.
*10.5 Employment Agreement, dated as of January 29, 2002, between the
Company and J. Patrick Spainhour.
10.6 Employment Agreement dated November 25, 1996 between ATSC and
Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to
Form 10Q of ATSC for the Quarter ended November 2, 1996 filed on
December 17, 1996.
10.6.1 Amendment #1 to the Employment Agreement, dated as of February 16,
2000, between ATSC and Patricia DeRosa. Incorporated by reference
to Exhibit 10.6.1 to the Annual Report on Form 10K of ATSC filed
on April 18, 2000. Confidential treatment has been granted with
respect to certain portions of this exhibit.
10.7 Separation Agreement, dated as of January 15, 2001 between ATSC and
Patricia DeRosa. Incorporated by reference to Exhibit 10.6.2 to
the Annual Report on Form 10-K of ATSC filed on April 5, 2001.
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 2002 Stock Option and Restricted Stock
and Unit Award Plan.
-13-
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14
EXHIBIT NUMBER
- --------------
10.10 AnnTaylor Stores Corporation Amended and Restated Management
Performance Compensation Plan, as approved by stockholders on June
18, 1997. Incorporated by reference to Exhibit 10.16 to the Form
10-Q of ATSC for the Quarter ended August 2, 1997 filed on
September 12, 1997.
10.10.1 Amendment to the AnnTaylor Stores Corporation Amended and
Restated Management Performance Compensation Plan dated as of
March 12, 1998. Incorporated by reference to Exhibit 10.17.1 to
the Annual Report on Form 10-K of ATSC filed on April 30, 1998.
10.10.2 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.
10.11 AnnTaylor Stores Corporation Deferred Compensation Plan ("Deferred
Compensation Plan"). Incorporated by reference to Exhibit 10.33
to the Annual Report on Form 10-K of ATSC filed on April 28, 1995.
10.11.1 Amendment to the 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.
*10.11.2 Amendment to the Deferred Compensation Plan, effective as of
January 1, 2002.
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 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.
10.14.1 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.
10.14.2 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.
10.14.3 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.
-14-
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15
EXHIBIT NUMBER
- --------------
10.14.4 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.
10.14.5 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.
10.14.6 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 10.19.6
to the Form 10-Q of ATSC for the Quarter ended July
31, 1999 filed on September 14, 1999.
10.14.7 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.
10.151 Amended and Restated Credit Agreement, dated as of April
30, 2001, among AnnTaylor, Inc., as Borrower, Bank of
America, N.A., as Administrative Agent, The CIT
Group/Business Credit, Inc., Firstar Bank, N.A., and
Transamerica Business Capital Corporation, as
Co-Agents, The Chase Manhattan Bank and First Union
National Bank, as Syndication Agents, Fleet National
Bank, as Documentation Agent, and Bank of America,
N.A., The Chase Manhattan Bank, and First Union
National Bank, as Issuing Banks and the Lenders from
time to time party thereto. Incorporated by reference
to Exhibit 10.18 to the Form 10-Q of the Company for
the Quarter ended May 5, 2001 filed on June 18, 2001.
10.15.1 Amendment No. 1 to Credit Agreement, dated as of
December 20, 2001, by and among AnnTaylor, Inc., the
Guarantors and Bank of America, N.A., as
Administrative Agent for each of the Lenders pursuant
to the Credit Agreement. Incorporated by reference to
Exhibit 10.1 on Form 8-K of the Company filed on
January 10, 2002.
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 of ATSC dated May 1, 1998 filed on
May 6, 1998.
10.16.1 Amendment to the AnnTaylor Stores Corporation
Long-Term Cash Incentive 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 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.
10.18 The AnnTaylor Stores Corporation 2000 Stock Option and
Restricted Stock Award Plan ("2000 Plan").
Incorporated by reference to the Registration
Statement on Form S-8 of ATSC filed on May 31, 2000.
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16
EXHIBIT NUMBER
- --------------
*10.18.1 First Amendment to the 2000 Plan, adopted January 29,
2002.
10.19 Employment Agreement, dated as of March 7, 2001, between
ATSC and Barry Erdos ("Erdos Agreement").
Incorporated by reference to Exhibit 10.17 to the
Annual Report on Form 10-K of ATSC filed on April 5,
2001.
10.19.1 Amendment, dated as of June 1, 2001, to the Erdos
Agreement. Incorporated by reference to Exhibit
10.17.1 to the Form 10-Q of the Company for the
Quarter ended May 5, 2001 filed on June 18, 2001.
*10.19.2 Amendment No. 2, dated as of November 25, 2001, to the
Erdos Agreement.
10.20 Employment Agreement, dated as of April 24, 2001,
between the Company and Kim Roy ("Roy Agreement").
Incorporated by reference to Exhibit 10.19 to the Form
10-Q of the Company for the Quarter ended May 5, 2001
filed on June 18, 2001.
*10.20.1 Amendment No. 1, dated as of November 25, 2001, to the
Roy Agreement.
10.21 Employment Agreement, dated as of May 3, 2001, between
the Company and Katherine Lawther Krill ("Krill
Agreement"). Incorporated by reference to Exhibit
10.20 to the Form 10-Q of the Company for the Quarter
ended May 5, 2001 filed on June 18, 2001.
*10.21.1 Amendment No. 1, dated as of November 25, 2001, to the
Krill Agreement.
*21 Subsidiaries of AnnTaylor, Inc.
*23 Consent of Deloitte & Touche LLP.
* Filed electronically herewith.
-16-
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17
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 4, 2002
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, Chief Executive April 4, 2002
- ------------------------ Officer ---------------------
J. Patrick Spainhour Date
/s/ Barry Erdos Senior Executive Vice April 4, 2002
- ------------------------ President, Chief ---------------------
Barry Erdos Operating Officer Date
and Director
/s/ James M. Smith Senior Vice President, April 4, 2002
- ------------------------ Chief Financial ---------------------
James M. Smith Officer, Treasurer and Date
Director
/s/ Barbara K. Eisenberg Director April 4, 2002
- ------------------------ ---------------------
Barbara K. Eisenberg Date
-17-
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18
ANNTAYLOR, INC.
---------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE NO.
--------
Independent Auditors' Report........................................ 19
Consolidated Financial Statements:
Consolidated Statements of Income for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000...... 20
Consolidated Balance Sheets as of February 2, 2002 and
February 3, 2001............................................. 21
Consolidated Statements of Cash Flows for the fiscal years
ended
February 2, 2002, February 3, 2001 and January 29, 2000...... 22
Notes to Consolidated Financial Statements..................... 23
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19
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 February 2, 2002 and
February 3, 2001 and the results of their operations and their
cash flows for each of the three fiscal years in the period ended
February 2, 2002 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
March 1, 2002
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20
ANNTAYLOR, INC.
---------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 3, 2001 AND
JANUARY 29, 2000
FISCAL YEARS ENDED
--------------------------------------
FEB.2, 2002 FEB.3, 2001 JAN.29, 2000
----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ............................. $1,299,573 $1,232,776 $1,084,519
Cost of sales ......................... 651,808 622,036 536,014
---------- ---------- ----------
Gross profit .......................... 647,765 610,740 548,505
Selling, general and administrative
expenses........................... 576,584 501,460 414,315
Amortization of goodwill .............. 11,040 11,040 11,040
---------- ---------- ----------
Operating income ...................... 60,141 98,240 123,150
Interest income ....................... 1,390 2,473 4,378
Interest expense ...................... 6,869 7,315 11,814
---------- ---------- ----------
Income before income taxes and
extraordinary loss ................ 54,662 93,398 115,714
Income tax provision .................. 25,557 41,035 50,221
---------- ---------- ----------
Income before extraordinary loss ...... 29,105 52,363 65,493
Extraordinary loss (net of income
tax benefit of $0, $0,
and $641,000, respectively) ....... -- -- 962
---------- ---------- ----------
Net income ........................ $ 29,105 $ 52,363 $ 64,531
========== ========== ==========
See accompanying notes to consolidated financial statements.
-20-
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21
ANNTAYLOR, INC.
---------------
CONSOLIDATED BALANCE SHEETSs
---------------------------
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
FEB. 2, FEB. 3,
2002 2001
-------- --------
ASSETS (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Current assets
Cash and cash equivalents ....................... $ 30,037 $ 31,962
Accounts receivable, net ........................ 65,296 57,989
Merchandise inventories ......................... 180,117 170,631
Prepaid expenses and other current assets........ 50,403 53,227
-------- --------
Total current assets ........................ 325,853 313,809
Property and equipment, net ....................... 250,735 220,032
Goodwill, net ..................................... 286,579 297,619
Deferred financing costs, net ..................... 5,044 4,281
Other assets ...................................... 14,775 12,374
-------- --------
Total assets ................................ $882,986 $848,115
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable ................................ 59,482 $ 65,903
Accrued tenancy ................................. 10,151 9,800
Gift certificates and merchandise
credits redeemable .......................... 21,806 20,375
Accrued expenses ................................ 43,925 43,564
Current portion of long-term debt ............... 1,250 1,400
-------- --------
Total current liabilities ................... 136,614 141,042
Long-term debt, net ............................... 118,280 116,210
Deferred lease costs and other liabilities ........ 15,963 16,834
Stockholder's equity
Common stock, $1.00 par value; 1,000
shares authorized 1 share issued
and outstanding ............................. 1 1
Additional paid-in capital ...................... 392,683 383,199
Retained earnings ............................... 219,445 190,829
-------- --------
Total stockholder's equity .................. 612,129 574,029
-------- --------
Total liabilities and stockholder's equity .. $882,986 $848,115
======== ========
See accompanying notes to consolidated financial statements.
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22
ANNTAYLOR, INC.
---------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 3, 2001 AND
JANUARY 29, 2000
FISCAL YEARS ENDED
----------------------------------------------------
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Operating activities:
Net income ........................................ $ 29,105 $ 52,363 $ 64,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss ............................ --- --- 1,603
Provision for loss on accounts receivable ..... 1,443 1,154 1,032
Depreciation and amortization ................. 43,529 35,033 30,347
Amortization of goodwill ...................... 11,040 11,040 11,040
Amortization of deferred compensation ......... 1,841 1,133 1,877
Non-cash interest ............................. 4,140 4,247 3,026
Deferred income taxes ......................... (5,115) (3,864) (3,843)
Loss on disposal and write-down of property
and equipment ............................. 9,483 1,884 1,219
Changes in assets and liabilities:
Accounts receivable ......................... (8,750) (457) (1,154)
Merchandise inventories ..................... (9,486) (30,605) (3,278)
Prepaid expenses and other current assets ... 6,948 (12,106) (1,601)
Other non-current assets and liabilities, net (2,303) (3,918) 3,131
Accounts payable and accrued liabilities .... (4,277) 20,721 (9,631)
------- ------- -------
Net cash provided by operating activities ......... 77,598 76,625 98,299
------- ------- -------
Investing activities:
Purchases of property and equipment ............... (83,693) (83,310) (53,409)
------- ------- -------
Net cash used by investing activities ............. (83,693) (83,310) (53,409)
------- ------- -------
Financing activities:
Parent company activity ........................... 7,154 4,911 (80,109)
Payment of financing costs ........................ (1,583) (45) (4,150)
Payments of mortgage .............................. (1,401) (1,300) (1,206)
Proceeds from issuance of Note Payable to ATSC ..... --- --- 110,000
Redemption of 8-3/4% Notes ........................ --- --- (101,375)
------- ------- -------
Net cash provided by (used by) financing activities 4,170 3,566 (76,840)
------- ------- -------
Net decrease in cash ................................. (1,925) (3,119) (31,950)
Cash, beginning of year .............................. 31,962 35,081 67,031
------- ------- -------
Cash, end of year .................................... $ 30,037 $ 31,962 $ 35,081
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ............ $ 2,504 $ 2,418 $ 9,405
======= ======= =======
Cash paid during the year for income taxes ........ $ 19,170 $ 43,393 $ 51,222
======= ======= =======
See accompanying notes to consolidated financial statements.
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23
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 and
Ann Taylor Loft brand names. Its principal market consists of
the United States. The Company sells its products through
traditional retail stores and over the Internet, through its
Online Store.
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 2000 amounts have been reclassified to
conform to the Fiscal 2001 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, except the fiscal year ended
February 3, 2001, which included 53 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 AND CASH EQUIVALENTS
Cash and short-term highly liquid investments with original
maturity dates 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. The majority of the Company's inventory
represents finished goods available for sale. A provision for
potentially slow-moving inventory is made based upon Management's
analysis of inventory levels and future sales projections.
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.
-23-
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24
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the
interest method over the term of the related debt. Accumulated
amortization at February 2, 2002 and February 3, 2001 was
$3,569,000 and $2,750,000, 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 $9,354,000 for Fiscal 2001,
$8,614,000 for Fiscal 2000 and $8,650,000 for Fiscal 1999.
GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill relating to the 1989 acquisition of Ann Taylor by
ATSC has been amortized on a straight-line basis over 40 years.
Goodwill relating to the 1996 acquisition of the operations
comprising the Company's sourcing division has been amortized on
a straight-line basis over 25 years. Accumulated amortization at
February 2, 2002 and February 3, 2001 was $132,011,000 and
$120,971,000, respectively.
In July 2001, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets". The
Company will adopt SFAS No. 142 in Fiscal 2002. In connection
with its annual evaluation of long-lived assets for impairment,
Management has determined that the fair value of the Company
exceeds the carrying value of its recorded net assets, including
goodwill, as of February 2, 2002. Management estimates that
adoption of SFAS No. 142 will add approximately $11,000,000 to
Fiscal 2002 net income.
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 $31,600,000, $30,900,000 and $25,700,000
in Fiscal 2001, 2000 and 1999, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 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. The Company and its domestic
subsidiaries file a consolidated Federal income tax return, while the Company's
foreign subsidiaries file in their respective local jurisdictions.
-24-
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25
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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.
SEGMENTS
The Company has one reportable segment given the economic characteristics
of the store formats, the similar nature of the products sold, the type of
customer and method of distribution.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 reporting period. Actual results could differ from these
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the FASB issued 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", which establishes accounting and reporting standards for
derivatives, derivative instruments embedded in other contracts and for hedging
activities. In 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for certain derivatives, derivative instruments embedded in
other contracts and for certain hedging activities. These statements were
effective for the Company's Fiscal 2001 financial statements. The adoption of
these standards had no impact on the Company's consolidated financial
statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", SFAS
No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 143, "Accounting
for Asset Retirement Obligations". SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations completed after June
30, 2001 and clarifies the criteria for recognition of intangible assets
separately from goodwill. Management has determined that the adoption of SFAS
No. 141 will have no impact on the Company's consolidated financial statements.
As discussed above, SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets, other than goodwill, which have determinable useful lives be
amortized over that period. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001. Management will adopt SFAS No. 142 in Fiscal 2002, and
has determined that the fair value of the Company exceeds the carrying value of
its recorded net assets, including goodwill, as of February 2, 2002. Management
further estimates that adoption of SFAS No. 142 will add approximately
$11,000,000 to Fiscal 2002 net income.
-25-
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26
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SFAS No. 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Management does not believe that the
adoption of SFAS No. 143 will have a significant impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
accounting and reporting for the impairment or disposal of long-lived assets,
other than goodwill, including discontinued operations. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management has
determined that the adoption of SFAS No. 144 will have no impact on the
Company's consolidated financial statements.
2. LONG-TERM DEBT
The following table summarizes long-term debt outstanding at February 2,
2002 and February 3, 2001:
FEBRUARY 2, 2002 FEBRUARY 3, 2001
-------------------- --------------------
CARRYING ESTIMATED CARRING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- -------- -------- --------
(IN THOUSANDS)
Mortgage .................. $ 1,250 $ 1,250 $ 2,650 $ 2,650
Note Payable to ATSC, net . 118,280 118,280 114,960 114,960
-------- -------- -------- --------
Total debt ......... 119,530 119,530 117,610 117,610
Less current portion ...... 1,250 1,250 1,400 1,400
-------- -------- -------- --------
Total long-term debt $118,280 $118,280 $116,210 $116,210
======== ======== ======== ========
In accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments", the Company determined the estimated fair
value of its financial instruments using quoted market information, as
available. As judgment is involved, the estimates are not necessarily indicative
of the amounts the Company could realize in a current market exchange.
On April 30, 2001, the Company entered into an Amended and Restated
$175,000,000 senior secured revolving Credit Facility (the "Credit Facility")
with Bank of America N.A. and a syndicate of lenders. This Credit Facility was
further amended on December 20, 2001 to adjust certain ratio provisions, and
amend certain definitions used in the calculation of ratios required in the
Credit Facility. The Credit Facility matures on April 29, 2004.
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 February 2, 2002 was $175,000,000. Commercial and standby
letters of credit outstanding under the Credit Facility as of February 2, 2002
were approximately $77,934,000. Loans outstanding under the Credit Facility at
any time may not exceed $75,000,000. There were no loans outstanding at fiscal
year end. In addition, the Credit Facility requires that the outstanding loan
balance be reduced to zero for a 30-day period each calendar year. This
"cleandown" period was achieved in January 2002.
-26-
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27
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
2. LONG-TERM DEBT (CONTINUED)
Amounts outstanding under the Credit Facility bear interest at a rate equal
to, at the Company's option, the Bank of America Base Rate, defined as the
higher of (a) the Federal Funds Rate plus one-half of 1% and (b) the Prime Rate
for such day, or Eurodollar Rate; plus, in either case, a margin ranging from
0.25% to 2.00%. The Company is also required to pay the lenders a quarterly
commitment fee on the unused revolving loan commitment amount at a rate ranging
from 0.30% to 0.50% per annum. Fees for outstanding commercial and standby
letters of credit range from 0.50% to 0.875% and from 1.25% to 2.00%,
respectively. Premiums ranging from 0.125% to 0.50% may apply to all interest
and commitment fees, depending on the calculated Leverage Ratio.
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 specified levels of tangible 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.
During 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 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 of Fiscal 1999 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 February 2, 2002 was $1,250,000.
-27-
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28
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
2. LONG-TERM DEBT (CONTINUED)
The aggregate principal payments for the next five years of all long-term
obligations at February 2, 2002 are as follows:
Fiscal Year (in thousands)
-----------
2002.....................................$ 1,250
2003..................................... ---
2004..................................... ---
2005..................................... ---
2006..................................... ---
------
Total....................................$ 1,250
======
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, the Trust redeemed all of the outstanding preferred securities.
All but $100,000 of the liquidation amount of the preferred securities was
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 February 2, 2002, February 3, 2001 and January 29, 2000 is as
follows:
FISCAL YEARS ENDED
------------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------ ------ ------
(IN THOUSANDS)
Balance at beginning of year ............ $ 621 $ 666 $ 820
Provision for loss on accounts receivable 1,443 1,154 1,032
Accounts written off .................... (1,501) (1,199) (1,186)
------ ------ ------
Balance at end of year .................. $ 563 $ 621 $ 666
====== ====== ======
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
-28-
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29
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 as of
February 2, 2002 are as follows:
FISCAL YEAR (IN THOUSANDS)
-----------
2002.................................. $ 133,305
2003.................................. 131,232
2004.................................. 126,691
2005.................................. 117,674
2006.................................. 97,100
2007 and thereafter................... 401,470
---------
Total................................. $1,007,472
=========
Rent expense for the fiscal years ended February 2, 2002, February 3, 2001
and January 29, 2000 was as follows:
FISCAL YEARS ENDED
-----------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Minimum rent ......... $107,858 $ 91,482 $ 73,363
Percentage rent....... 2,006 3,534 3,131
-------- -------- --------
Total ........... $109,864 $ 95,016 $ 76,494
======== ======== ========
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 consolidated financial position, consolidated results of
operations, or liquidity of the Company.
In addition, ATSC settled the purported class action lawsuit pending in the
United States District Court for the Southern District of New York against the
Company, ATSC, and certain former officers and directors of the Company and
ATSC. Finalization of the settlement is subject to Court approval. The complaint
alleged that the defendants made false and misleading statements about the
Company and ATSC from February 3, 1994 through May 4, 1995. The net cost to
ATSC, after application of insurance proceeds, will be approximately $3.3
million. The decision to settle this action was not an admission of any
wrongdoing, but reflected the significant legal fees, other expenses and
management time that would have to be devoted to continue to vigorously defend
it in the courts.
-29-
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30
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
FISCAL YEARS ENDED
------------------
FEB. 2, FEB. 3,
2002 2001
------- -------
(IN THOUSANDS)
Land and building ............................ $ 9,415 $ 8,774
Leasehold improvements ....................... 161,210 132,537
Furniture and fixtures ....................... 247,145 213,195
Construction in progress ..................... 20,181 25,279
------- -------
437,951 379,785
Less accumulated depreciation and amortization 187,216 159,753
------- -------
Net property and equipment ............... $250,735 $220,032
======== ========
7. EXTRAORDINARY ITEM
On July 22, 1999, the Company applied the proceeds received from the
issuance of its Note 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 $641,000.
8. INCOME TAXES
The provision for income taxes for the fiscal years ended February 2, 2002,
February 3, 2001, and January 29, 2000 consists of the following:
FISCAL YEARS ENDED
---------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------ ------ ------
(IN THOUSANDS)
Federal:
Current........................$ 27,492 $38,082 $ 41,682
Deferred....................... (4,359) (3,047) (3,033)
------ ------ ------
Total federal................ 23,133 35,035 38,649
------ ------ ------
State and local:
Current........................ 2,589 6,476 11,856
Deferred....................... (756) (817) (809)
------ ------ ------
Total state and local........ 1,833 5,659 11,047
------ ------ ------
Foreign:
Current........................ 591 471 525
Deferred....................... --- (130) ---
------ ------ ------
Total foreign................ 591 341 525
------ ------ ------
Total..........................$ 25,557 $41,035 $ 50,221
====== ====== =======
-30-
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31
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
8. INCOME TAXES (CONTINUED)
The reconciliation between the provision for income taxes and the provision
for income taxes at the federal statutory rate for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000 is as follows:
FISCAL YEARS ENDED
-------------------------------------
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Income before income taxes and
extraordinary loss ................... $ 54,662 $ 93,398 $ 115,714
========= ========= =========
Federal statutory rate .................. 35% 35% 35%
========= ========= =========
Provision for income taxes at
federal statutory rate................ $ 19,132 $ 32,689 $ 40,500
State and local income taxes, net of
federal income tax benefit ........... 2,916 4,751 6,278
Non-deductible amortization of goodwill . 3,500 3,500 3,500
Earnings of foreign subsidiaries ........ 29 78 79
Other ................................... (20) 17 (136)
--------- --------- ---------
Provision for income taxes .............. $ 25,557 $ 41,035 $ 50,221
========= ========= =========
The tax effects of significant items comprising the Company's deferred tax
assets as of February 2, 2002 and February 3, 2001 are as follows:
FEB. 2, FEB. 3,
2002 2001
------- -------
(IN THOUSANDS)
Current:
Inventory............................ $ 5,929 $ 4,375
Accrued expenses..................... 6,666 3,364
Real estate.......................... (2,819) (2,087)
------ ------
Total current......................... $ 9,776 $ 5,652
======= =======
Noncurrent:
Accrued expenses..................... $ --- $ 983
Depreciation and amortization........ (1,970) (2,616)
Rent expense......................... 6,057 5,510
Other................................ 765 (16)
------ ------
Total noncurrent...................... $ 4,852 $ 3,861
======= =======
Income taxes provided reflect the current and deferred tax consequences of
events that have been recognized in the Company's consolidated 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 February 2, 2002 amounted to approximately $6,803,000. However, if these
earnings were not considered permanently reinvested, under current law, the
incremental tax on such undistributed earnings would be approximately
$2,148,000.
9. 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 2001, Fiscal 2000 and
Fiscal 1999 were $950,000, $792,000 and $697,000, respectively.
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ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
9. RETIREMENT PLANS (CONTINUED)
PENSION PLAN. Substantially all full-time employees of the Company and its
subsidiaries are covered under a noncontributory defined benefit pension plan.
The pension plan calculates benefits based on a career average formula. 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.
The following table provides information for the pension plan at February
2, 2002, February 3, 2001 and January 29, 2000:
FISCAL YEARS ENDED
-----------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation, beginning of year ....... $ 6,782 $ 4,954 $ 4,642
Service cost ................................ 1,524 1,206 1,129
Interest .................................... 523 442 340
Actuarial loss .............................. 1,135 912 19
Benefits paid ............................... (941) (732) (1,176)
------- ------- -------
Benefit obligation, end of year ............. 9,023 6,782 4,954
------- ------- -------
Change in plan assets:
Fair value of plan assets, beginning of year 9,644 9,489 7,486
Actual return on plan assets ................ (1,414) 887 763
Employer contribution ....................... 1,838 --- 2,416
Benefits paid ............................... (941) (732) (1,176)
------- ------- -------
Fair value of plan assets, end of year ...... 9,127 9,644 9,489
------- ------- -------
Funded status (fair value of plan assets less
benefit obligation) ...................... 104 2,862 4,535
Unrecognized net actuarial (gain)/loss ...... 2,710 (763) (1,621)
Unrecognized prior service cost ............. 51 57 63
------- ------- -------
Prepaid benefit cost ........................ $ 2,865 $ 2,156 $ 2,977
======= ======= =======
Net pension cost includes the following components:
FISCAL YEARS ENDED
-----------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Service cost ..................... $ 1,524 $ 1,206 $ 1,129
Interest cost .................... 523 442 340
Expected return on assets ........ (924) (831) (776)
Amortization of prior gains ...... -- (1) (22)
Amortization of prior service cost 6 6 6
------- ------- -------
Net periodic pension cost ........ $ 1,129 $ 822 $ 677
======= ======= =======
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33
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
9. RETIREMENT PLANS (CONTINUED)
For the fiscal years ended February 2, 2002, February 3, 2001 and January
29, 2000, the following actuarial assumptions were used:
FISCAL YEARS ENDED
-------------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------- ------- --------
Discount rate................................. 7.50% 7.75% 8.25%
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%
10. STOCKHOLDER'S EQUITY
The following summarizes the changes in stockholder's equity during Fiscal
2001, Fiscal 2000 and Fiscal 1999:
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
--- -------- -------- --------
(IN THOUSANDS)
Balance at January 30, 1999 ............. $ 1 $354,762 $ 73,935 $428,698
Net income ........................... -- -- 64,531 64,531
Parent company contributions ......... -- 11,713 -- 11,713
Forgiveness of intercompany note ..... -- 100,625 -- 100,625
Dividend to ATSC ..................... -- (89,945) -- (89,945)
--- -------- -------- --------
Balance at January 29, 2000 ............. 1 377,155 138,466 515,622
Net income ........................... -- -- 52,363 52,363
Parent company contributions ......... -- 6,044 -- 6,044
--- -------- -------- --------
Balance at February 3, 2001 ............. 1 383,199 190,829 574,029
Net income ........................... -- -- 29,105 29,105
Parent company contributions (charges) -- 9,484 (489) 8,995
--- -------- -------- --------
Balance at February 2, 2002 ............. $ 1 $392,683 $219,445 $612,129
=== ======== ======== ========
During Fiscal 1999, ATSC's Board of Directors authorized a program under
which ATSC was authorized to purchase up to $90,000,000 of ATSC's common stock
and/or Convertible Debentures. As of January 29, 2000, 3,012,500 shares of
ATSC's common stock had been repurchased, using the funding provided by a
dividend from the Company to ATSC. The securities repurchase program was
completed in Fiscal 1999.
11. SUBSEQUENT EVENT
On February 4, 2002, the Company sold the assets associated with its Ann
Taylor credit card accounts to World Financial Network National Bank (the
"Bank"). In connection with the sale, the Company contracted with Alliance Data
Systems Corporation ("ADS"), the Bank's affiliated servicer, to provide private
label credit card services to proprietary Ann Taylor credit card customers.
Under the terms of the transaction, ADS will manage the Ann Taylor credit card
program, and pay the Company a percentage of all collected finance charges. The
Company believes that having ADS provide these services rather than continuing
to handle this program in-house will further strengthen the Company's
relationship with its clients, and aid in the growth of the Ann Taylor credit
card.
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