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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended February 3, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
Commission File No. 1-107384
ANNTAYLOR STORES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3499319
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
(212) 541-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock, The New York Stock Exchange
$.0068 Par Value
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |_|No |X| .
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 28, 2001 was $744,913,993.
The number of shares of the registrant's common stock outstanding as of
March 2, 2001 was 28,888,161.
Documents Incorporated by Reference:
Portions of the Registrant's Proxy Statement for the Registrant's 2000
Annual Meeting of Stockholders to be held on May 3, 2001 are incorporated by
reference into Part III.
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PART I
------
ITEM 1. BUSINESS
- ----------------
GENERAL
AnnTaylor Stores Corporation (the "Company"), 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 brand name.
The Company believes that "Ann Taylor" is a highly recognized national brand
that defines a distinct fashion point of view. Ann Taylor merchandise represents
classic styles, updated to reflect current fashion trends. The Company's stores
offer a full range of career and casual separates, dresses, tops, weekend wear,
shoes and accessories, coordinated as part of a total wardrobing strategy. This
total wardrobing strategy is reinforced by an emphasis on customer service. Ann
Taylor sales associates are trained to assist customers in merchandise selection
and wardrobe coordination, helping them achieve the "Ann Taylor look" while
reflecting the customers' personal styles.
As of February 3, 2001, the Company operated 478 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 332 Ann Taylor stores
compete in the "better"-priced market. These stores represent the Company's core
merchandise line. Approximately three-quarters of these stores are located in
regional malls and upscale specialty retail centers, with the balance located in
downtown and village locations. The Company believes that the customer base for
its Ann Taylor stores consists primarily of relatively affluent,
fashion-conscious women from the ages of 25 to 55, and that the majority of its
customers are working women with limited time to shop, who are attracted to Ann
Taylor by its focused merchandising and total wardrobing strategies,
personalized customer service, efficient store layouts and continual flow of new
merchandise.
As of February 3, 2001, the Company operated 133 Ann Taylor Loft stores.
Ann Taylor Loft stores compete in the "upper-moderate"-priced market. Ann Taylor
Loft is designed for women with a more relaxed lifestyle, who appreciate the Ann
Taylor style but are more price sensitive. Merchandise is created uniquely for
these stores and is sold under the Ann Taylor Loft label. The first Ann Taylor
Loft stores opened by the Company were located in factory outlet centers,
including some Ann Taylor Factory Stores that, in 1996, were converted to Loft
stores after the introduction of the Loft concept. In 1998, the Company began
opening Ann Taylor Loft stores outside the factory outlet environment, in
regional malls, strip shopping centers and urban and village street locations.
At February 3, 2001, 105 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.
At February 3, 2001, the Company also operated 13 Ann Taylor Factory
stores in factory outlet centers. These stores serve primarily as a clearance
vehicle for merchandise from Ann Taylor stores. In Fall 2000, the Company also
introduced a limited 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 Fall of 2000, the Company began test marketing
its own line of color cosmetics in a select group of 57 Ann Taylor stores.
In November 2000, the Company launched anntaylor.com, an Online Store
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. 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.
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2
The Company was incorporated under the laws of the state of Delaware in
1988 under the name AnnTaylor Holdings, Inc. The Company changed its name to
AnnTaylor Stores Corporation in April 1991. The Company completed an initial
public offering of its common stock in May 1991. Unless the context indicates
otherwise, all references herein to the Company include the Company and its
wholly owned subsidiaries.
MERCHANDISE DESIGN AND PRODUCTION
Substantially all merchandise offered by the Company's stores is developed
by the Company's in-house product design and development teams, which design
merchandise exclusively for the Company. The Company's merchandising groups
determine inventory needs for the upcoming season, edit the assortments
developed by the design teams, plan monthly merchandise flows, and arrange for
the production of merchandise by independent manufacturers, either through the
Company's sourcing division, or through private label specialists.
The Company's production management and quality assurance departments
establish the technical specifications for all Company merchandise, inspect
factories in which the merchandise is produced, including periodic in-line
inspections while goods are in production to identify potential problems prior
to shipment, and, upon receipt, inspect merchandise on a test basis for
uniformity of size and color, as well as for conformity with specifications and
overall quality of manufacturing.
The Company sources merchandise from approximately 232 manufacturers and
vendors, none of which accounted for more than 5% of the Company's merchandise
purchases in Fiscal 2000. The Company's merchandise is manufactured in over 22
countries, with approximately 33% of the Company's merchandise manufactured in
China, 17% in Korea, 11% in the Philippines and 10% in Hong Kong. Any event
causing a sudden disruption of manufacturing or imports from China, Korea, the
Philippines or Hong Kong, including the imposition of additional import
restrictions, could have a material adverse effect on the Company's operations.
Substantially all of the Company's foreign purchases are negotiated and paid for
in U.S. dollars.
The Company cannot predict whether any of the foreign countries in which
its products are currently manufactured or any of the countries in which the
Company may manufacture its products in the future will be subject to future or
increased import restrictions by the U.S. government, including the likelihood,
type or effect of any trade restriction. Trade restrictions, including increased
tariffs or quotas, against apparel, footwear or other items sold by the Company
could affect the importation of such merchandise generally and could increase
the cost or reduce the supply of merchandise available to the Company and
adversely affect the Company's business, financial condition, results of
operations and liquidity. The Company's merchandise flow may also be adversely
affected by financial or political instability in any of the countries in which
its goods are manufactured, if it affects the production or export of
merchandise from such countries. Merchandise flow may also be adversely affected
by significant fluctuation in the value of the U.S. dollar against foreign
currencies or restrictions on the transfer of funds.
The Company does not maintain any long-term or exclusive commitments or
arrangements to purchase merchandise from any single supplier. The Company
believes it has a good relationship with its suppliers and that, as the number
of the Company's stores increases, subject to the discussion above, there will
continue to be adequate sources to produce a sufficient supply of quality goods
in a timely manner and on satisfactory economic terms.
INVENTORY CONTROL AND MERCHANDISE ALLOCATION
The Company's planning departments analyze each store's size, location,
demographics, and sales and inventory history to determine the quantity of
merchandise to be purchased for and the allocation of merchandise to the
Company's stores. Upon receipt, merchandise is allocated in order to achieve an
emphasis that is suited to each store's customer base.
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3
Merchandise typically is sold at its original marked price for several
weeks, with the length of time varying by item. The Company reviews its
inventory levels on an on-going basis in order to identify slow-moving
merchandise styles and broken assortments (items no longer in stock in a
sufficient range of sizes) and uses markdowns to clear this merchandise.
Markdowns may be used if inventory exceeds customer demand for reasons of
design, seasonal adaptation or changes in customer preference, or if it is
determined that the inventory will not sell at its currently marked price.
Marked-down items remaining unsold are moved periodically to the Company's
factory outlet stores, where additional markdowns may be taken.
In Fiscal 2000, inventory turned 4.9 times compared to 4.8 times in Fiscal
1999 and 5.0 times in Fiscal 1998. Inventory turnover is determined by dividing
cost of sales by the average of the cost of inventory at the beginning and the
end of the period, excluding inventory associated with the Company's sourcing
division. Sourcing division inventory consists principally of finished goods in
transit from factories.
In Spring 2000, the Company implemented a new comprehensive merchandising
information system to provide improved systems support for the Company's
merchandising functions. This new system serves as the Company's central source
of information regarding merchandise items, inventory management, purchasing,
replenishment, receiving and distribution.
The Company uses a centralized distribution system, under which nearly all
merchandise is distributed to the Company's stores through its distribution
center, located in Louisville, Kentucky. See "Properties". Merchandise is
shipped by the distribution center to the Company's stores several times each
week.
STORES AND EXPANSION
An important aspect of the Company's business strategy is a real estate
expansion program designed to reach new customers through the opening of new
stores. The Company opens new stores in markets that it believes have a
sufficient concentration of its target customers. The Company also adds stores,
or expands the size of existing stores, in markets where the Company already has
a presence, as market conditions warrant and sites become available. Store
locations are determined on the basis of various factors, including geographic
location, demographic studies, anchor tenants in a mall location, other
specialty stores in a mall or specialty center location or in the vicinity of a
village location, and the proximity to professional offices in a downtown or
village location. Stores opened in factory outlet centers are located in factory
outlet malls in which co-tenants generally include a significant number of
outlet or discount stores operated under nationally recognized upscale brand
names. Store size also is determined on the basis of various factors, including
geographic location, demographic studies, and space availability.
As of February 3, 2001, the Company operated 478 stores throughout the
United States, the District of Columbia and Puerto Rico, of which 332 were Ann
Taylor stores, 133 were Ann Taylor Loft stores, and 13 were Ann Taylor Factory
Stores.
The average Ann Taylor store is approximately 5,000 square feet in size.
The Company also has three flagship Ann Taylor stores in New York City, San
Francisco and Chicago, which represent the fullest assortment of Ann Taylor
merchandise. In Fiscal 2000, the Company opened 18 Ann Taylor stores that
averaged approximately 4,500 square feet. In Fiscal 2001, the Company plans to
open approximately 20 Ann Taylor stores, which are expected to average
approximately 4,500 square feet.
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4
Ann Taylor Loft stores that are located in factory outlet centers average
approximately 9,000 square feet. Ann Taylor Loft stores that are located in
regional malls, strip shopping centers and urban and village street locations
average approximately 6,000 square feet. In Fiscal 2000, the Company opened 63
Ann Taylor Loft stores that averaged approximately 6,000 square feet. In Fiscal
2001, the Company expects to open approximately 70 Ann Taylor Loft stores,
primarily in regional malls, shopping centers and street locations. These stores
are also expected to average approximately 6,000 square feet.
The Company's 13 Ann Taylor Factory Stores, located in factory outlet
centers, average 7,000 square feet.
The Company's stores typically have approximately 20% of their total
square footage allocated to stockroom and other non-selling space.
The following table sets forth certain information regarding store
openings, expansions and closings for Ann Taylor stores ("ATS"), Ann Taylor
Factory Stores ("ATFS"), Ann Taylor Loft stores ("ATL") and the Company's former
Ann Taylor Studio shoe stores ("ATA") over the past five years:
Total No. No.
Stores No. Stores Stores Stores
Open at Opened During Expanded Closed No. Stores
Beginning Fiscal Year During During Open at End of Fiscal Year
of Fiscal ---------------- Fiscal Fiscal --------------------------------------
Fiscal Year Year ATS ATFS ATL Year(a) Year(a) ATS ATFS(b) ATL(b) ATA(c) Total
- ----------- ---- ---- ---- --- ------ ------ ---- ------ ----- ----- ------
1996 ....... 306 9 1 1 7 8 259 14 27 9 309
1997 ....... 309 27 -- -- 9 12 283 14 27 -- 324
1998 ....... 324 26 -- 19 8 4 306 13 46 -- 365
1999 ....... 365 18 -- 29 8 7 319 11 75 -- 405
2000 ....... 405 18 -- 63 4 8 332 13 133 -- 478
- ------------
(a) All stores expanded and all stores closed were Ann Taylor stores, except
that in 2000, two stores closed were ATL stores and one store closed was an
ATFS store; in 1998 one store closed was an ATFS store; and in 1997 nine
stores closed were ATA stores. In addition, two stores closed in 2000 and
four stores closed in 1999 were Ann Taylor stores that were replaced in the
same locations with new ATL stores.
(b) In 2000, three Ann Taylor Loft stores that were located in factory outlet
malls were converted to AnnTaylor Factory Stores.
(c) All Ann Taylor Studio stores were closed during Fiscal 1997.
The Company believes that its existing store base is a significant
strategic asset of its business. Ann Taylor stores are located in some of the
most productive retail centers in the United States. In addition, the Company
believes that it is among the tenants most highly desired by real estate
developers because of its strong Ann Taylor brand franchise and its high average
sales per square foot productivity ($496 per square foot in Fiscal 2000)
relative to other specialty apparel retailers.
The Company has invested approximately $137 million in its store base
since the beginning of Fiscal 1996; approximately 52% of its stores are either
new or have been remodeled, as a result of an expansion or relocation, in the
last five years.
The Company's 2000 real estate expansion plan resulted in an increase in
the Company's total store square footage of approximately 415,000 square feet
(net of store closings), or 18.2%, from approximately 2,280,000 square feet at
the end of fiscal 1999 to approximately 2,695,000 square feet at the end of
Fiscal 2000. In Fiscal 2001, the Company intends to increase store square
footage by approximately 500,000 square feet, or 18.5%, representing
approximately 20 new Ann Taylor stores, the expansion or relocation of
approximately 5 existing Ann Taylor stores, and approximately 70 new Ann Taylor
Loft stores.
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5
Capital expenditures for the Company's Fiscal 2000 store expansion
program, net of landlord construction allowances, totaled approximately $48.9
million, including expenditures for store refurbishing and store refixturing.
The Company expects that capital expenditures for its Fiscal 2001 store
expansion program, net of landlord construction allowances, will be
approximately $67.4 million, including expenditures for store refurbishing and
refixturing.
The Company's ability to continue to increase store square footage will be
dependent upon, among other things, general economic and business conditions
affecting consumer confidence and spending, the availability of desirable
locations and the negotiation of acceptable lease terms. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Statement Regarding Forward
Looking Disclosures".
INFORMATION SYSTEMS
During Fiscal 2000, the Company implemented the core merchandising
information system referred to above under "Inventory Control and Merchandise
Allocation". In addition, the Company commenced a renovation project at its
distribution center, located in Louisville, Kentucky, to optimize physical
capacity and decrease the amount of time it takes to get merchandise to the
stores. The Company also upgraded the software of the hanging and flat sortation
equipment to provide for greater operational stability of the equipment and
improved accuracy of product distribution. The integration of the receiving
system with the core merchandising system establishes the platform for future
receiving enhancements.
CUSTOMER CREDIT
Customers may pay for merchandise with cash, personal checks, the Ann
Taylor credit card, or credit cards issued by third parties. Credit card sales
were 80.0% of net sales in Fiscal 2000, 80.5% of net sales in Fiscal 1999 and
80.2% in Fiscal 1998. In Fiscal 2000, 11.7% of net sales were made with the Ann
Taylor credit card, and 68.3% were made with third-party credit cards. As of
February 3, 2001, the Company's Ann Taylor credit card accounts receivable
totaled $50,528,000, net of allowance for doubtful accounts. Accounts written
off in Fiscal 2000 were approximately $1,199,000, or 0.1% of net sales.
The Company has offered customers its proprietary Ann Taylor credit card
since 1976. The Company believes that the Ann Taylor credit card enhances
customer loyalty while providing the customer with additional credit. However,
the percentage of the Company's total sales made with its proprietary credit
card has been declining over the past several years. The Company believes the
declining penetration of its Ann Taylor credit card as a percentage of sales is
attributable to the gain of market share by bank cards throughout the retail
industry generally. In addition, the Company's Ann Taylor Loft and Factory
Stores historically have experienced a significantly lower penetration of sales
with the Ann Taylor card. At February 3, 2001, over 329,000 Ann Taylor credit
card accounts had been used during the past 18 months.
BRAND BUILDING AND MARKETING
The Company believes that its Ann Taylor brand is among its most important
assets. The ability of the Company to evolve its brand continuously to appeal to
the changing needs and priorities of its target customer base is a key source of
competitive advantage. All aspects of brand development, including product
design, store merchandising and shopping environments, channels of distribution,
and marketing and advertising, are controlled by the Company. The Company
continues to invest in the development of its brand through, among other things,
client research, advertising, in-store marketing, direct mail marketing and the
establishment of an online (internet) presence. The Company also makes
investments to enhance the client experience through the opening of new stores,
the expansion and remodeling of existing stores, and a focus on client service.
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6
The Company believes it is strategically important to communicate on a
regular basis directly with its current customer base and with potential
customers, through national and regional advertising, including outdoor media,
as well as through direct mail marketing and in-store presentation. Marketing
expenditures as a percentage of sales were 2.5% in Fiscal 2000, 2.4% in Fiscal
1999 and 2.0% in Fiscal 1998.
TRADEMARKS AND SERVICE MARKS
The "AnnTaylor" trademark, and certain other trademarks and service marks
used by the Company, either are registered or have trademark applications
pending with the United States Patent and Trademark Office ("USPTO") and with
the trademark registries of many foreign countries. The Company's rights in the
"AnnTaylor" mark are a significant part of the Company's business, as the
Company believes its trademark is well known in the women's retail apparel
industry. Accordingly, the Company intends to maintain its "AnnTaylor" mark and
related registrations and vigorously protect its trademarks against
infringement.
In 1994 and 1995, the Company initiated trademark registration
applications with the USPTO for its "AnnTaylor Loft" trademark in the categories
of retail clothing store services and apparel. Registration of the trademark was
issued in the retail clothing store services category in 1997. However, the
Company's application for a trademark registration in the apparel classification
was challenged in the USPTO by a French company, Freche et Fils, which cited its
own "Loft Design By . . ." and design trademark in opposition to the AnnTaylor
Loft mark. In February 2000, the USPTO granted the Company's motion for summary
judgment, dismissing with prejudice Freche et Fils' opposition to the Company's
AnnTaylor Loft trademark application, and granting the counterclaim filed by the
Company to cancel Freche et Fils' U.S. registration of its "Loft Design By . .
." and design mark. The Company's registration for the "AnnTaylor Loft"
trademark in the apparel classification was issued on March 28, 2000.
COMPETITION
The women's retail apparel industry is highly competitive. The Company's
stores compete with certain departments in national or local department stores,
and with other specialty store chains, independent retail stores, and catalog
and internet businesses that offer similar categories of merchandise. The
Company believes that its focused merchandise selection, exclusive fashions,
personalized service and convenience distinguish it from other apparel
retailers. Many of the Company's competitors are considerably larger and have
substantially greater financial, marketing and other resources than the Company
and there is no assurance that the Company will be able to compete successfully
with them in the future. In addition, the Company has only limited experience in
the "upper-moderate" priced category, and existing competitors may have
significantly greater brand recognition among this customer segment than the
Company. Further, certain of the Company's competitors have established presence
on and greater experience with the Internet.
EMPLOYEES
As of February 3, 2001, the Company had approximately 9,000 employees, of
whom 2,100 were full-time salaried employees, 2,300 were full-time hourly
employees and 4,600 were part-time hourly employees working less than 30 hours
per week. None of the Company's employees are represented by a labor union. The
Company believes that its relationship with its employees is good.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES
Sections of this Annual Report on Form 10-K contain various forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, with respect to the financial condition, results of operations and
business of the Company. Examples of forward-looking statements are statements
that use the words "expect", "anticipate", "plan", "intend", "project",
"believe" and similar expressions. These forward-looking statements involve
certain risks and uncertainties, and no assurance can be given that any of such
matters will be realized. Actual results may differ materially from those
contemplated by such forward-looking statements as a result of, among other
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7
things, failure by the Company to predict accurately customer fashion
preferences; a decline in the demand for merchandise offered by the Company;
competitive influences; changes in levels of store traffic or consumer spending
habits; effectiveness of the Company's brand awareness and marketing programs;
lack of sufficient customer acceptance of the Ann Taylor Loft concept in the
upper-moderate-priced women's apparel market; general economic conditions that
are less favorable than expected or a downturn in the retail industry; the
inability of the Company to locate new store sites or negotiate favorable lease
terms for additional stores or for the expansion of existing stores; lack of
sufficient consumer interest in our 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; or an adverse outcome of the litigation
referred to in Note 5 to the Consolidated Financial Statements of the Company as
of February 3, 2001 that materially and adversely affects the Company's
financial condition. The Company assumes no obligation to update or revise any
such forward-looking statements, which speak only as of their date, even if
experience or future events or changes make it clear that any projected
financial or operating results implied by such forward-looking statements will
not be realized. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Statement Regarding Forward Looking
Disclosures".
ITEM 2. PROPERTIES
As of February 3, 2001, the Company operated 478 stores, all of which were
leased. The store leases typically provide for initial terms of ten years,
although some leases have shorter or longer initial periods, and grant the
Company the right to extend the term for one or two additional five-year
periods. Most of the store leases require Ann Taylor to pay a specified minimum
rent, plus a contingent rent based on a percentage of the store's net sales in
excess of a specified threshold. Most of the leases also require Ann Taylor to
pay real estate taxes, insurance and certain common area and maintenance costs.
The current terms of the Company's leases, including renewal options, expire as
follows:
FISCAL YEARS LEASE NUMBER OF
TERMS EXPIRE STORES
------------------ ---------
2001 - 2003.................... 35
2004 - 2006.................... 134
2007 - 2009.................... 179
2010 and later................. 130
Ann Taylor leases corporate offices at 142 West 57th Street in New York
City, containing approximately 143,000 square feet and approximately 93,000
square feet of office space at 1372 Broadway in New York City. The leases for
these premises expire in 2006 and 2010, respectively. The Company also leases
office space in New Haven, Connecticut, containing approximately 39,000 square
feet. This lease expires in October, 2001.
Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution Services,
Inc., owns its 256,000 square foot distribution center located in Louisville,
Kentucky. Nearly all Ann Taylor merchandise is distributed to the Company's
stores through this facility. The parcel on which the Louisville distribution
center is located comprises approximately 20 acres and could accommodate
possible future expansion of the facility.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
On April 26, 1996, certain alleged stockholders of the Company filed a
purported class action lawsuit in the United States District Court Southern
District of New York, against the Company, the Company's wholly owned subsidiary
AnnTaylor, Inc., ("Ann Taylor"), certain officers and directors of the Company
and Ann Taylor, Merrill Lynch & Co. ("ML&Co.") and certain affiliates of ML&Co.
(Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The complaint
alleged causes of action under Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended, by alleging that the Company and the other
defendants engaged in a fraudulent scheme and course of business that operated a
fraud or deceit on purchasers of the Company's common stock during the period
commencing February 3, 1994 through May 4, 1995, due to alleged false and
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8
misleading statements about the Company and Ann Taylor. The complaint sought,
among other things, certification as a class action on behalf of all purchasers
of common stock during the period commencing February 3, 1994 through May 4,
1995, the awarding of compensatory damages to the plaintiffs and purported
members of the class, the awarding of costs, including pre-judgment and
post-judgment interest, reasonable attorneys' fees and expert witness fees to
the plaintiffs and purported members of the class and equitable and/or
injunctive relief. On March 10, 1998, the District Court issued an order
granting the defendants' motion to dismiss the complaint. The Court's order
granted the plaintiffs leave to amend and re-file the complaint, and the
plaintiffs filed an amended complaint on April 9, 1998.
On November 9, 1998, the District Court issued an order granting the
defendants' motion to dismiss the amended complaint with prejudice, for its
failure to plead fraud with particularity. On or about December 15, 1998, the
plaintiffs filed a notice of appeal to the United States Court of Appeals for
the Second Circuit, seeking review of the District Court's order. While this
appeal was pending, ML&Co., its affiliates and the two directors who previously
served on the Company's Board of Directors as representatives of certain
affiliates of ML&Co. (the "settling defendants"), reached a settlement with the
plaintiffs, which provides, among other things, for the establishment by the
settling defendants of a settlement fund in the amount of $3,000,000 plus
interest. On or about December 14, 1999, the District Court entered an Order and
Final Judgment approving this partial settlement, dismissing the amended
complaint with prejudice as to the settling defendants, and barring and
enjoining any future claims by, among others, the remaining defendants against
the settling defendants for contribution.
On June 21, 2000, the United States Court of Appeals for the Second
Circuit vacated the dismissal of the amended complaint. The Court of Appeals
held that the allegations of the amended complaint are sufficient to satisfy the
standard for pleading intent under the federal securities laws, but expressed no
view as to whether the allegations are sufficiently particularized. The Court of
Appeals remanded the case to the District Court with instructions to allow
plaintiffs to replead their complaint, and to reconsider whether plaintiffs'
allegations are pled with sufficient particularity to satisfy the pleading
standards of the Private Securities Litigation Reform Act of 1995. The decision
of the Court of Appeals applies only to plaintiffs' claims against the Company,
Ann Taylor and their former directors and officers.
Following the decision of the Court of Appeals, plaintiffs elected not to
replead their amended complaint. On or about September 29, 2000, the Company,
Ann Taylor and their former directors and officers again moved to dismiss the
amended complaint, arguing that it fails to plead fraud with sufficient
particularity under the standards set forth by the Court of Appeals in its June
21, 2000 decision. The motion has been fully briefed and is pending before the
District Court.
The Company and Ann Taylor continue to believe that the allegations in the
amended complaint are without merit, and intend to continue to defend this
action vigorously. Any liability that may arise from this action cannot be
predicted at this time.
The Company is also a party to routine litigation incident to its
business. Although the amount of any liability that could arise with respect to
these actions cannot be accurately predicted, in the opinion of the Company, any
such liability will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
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9
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
The Company's common stock is listed and traded on the New York Stock
Exchange under the symbol ANN. The number of holders of record of common stock
at March 2, 2001 was 562. The following table sets forth the high and low sale
prices for the common stock on the New York Stock Exchange during Fiscal 2000
and Fiscal 1999.
MARKET PRICE
-------------
HIGH LOW
---- ---
Fiscal Year 2000
Fourth quarter........................$ 39.38 $ 18.25
Third quarter......................... 44.88 24.75
Second quarter........................ 39.38 19.13
First quarter......................... 28.63 15.00
Fiscal Year 1999
Fourth quarter........................$ 48.25 $ 21.00
Third quarter......................... 45.50 31.19
Second quarter........................ 53.00 34.50
First quarter......................... 53.06 32.63
The Company has never paid cash dividends on the common stock and does not
intend to pay cash dividends in the foreseeable future. As a holding company,
the Company's ability to pay dividends is dependent upon the receipt of
dividends or other payments from its subsidiaries, including the Company's
direct wholly owned subsidiary AnnTaylor, Inc. ("Ann Taylor"). The payment of
dividends by Ann Taylor to the Company is subject to certain restrictions under
Ann Taylor's Credit Facility described below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources". The payment of cash dividends on the common stock by the Company is
also subject to certain restrictions contained in the Company's guarantee of Ann
Taylor's obligations under the Credit Facility. Any determination to pay cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, contractual restrictions and other factors deemed relevant
at that time by the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The following historical consolidated income statement and consolidated
balance sheet information has been derived from the audited consolidated
financial statements of the Company. The Company's consolidated statements of
income, stockholders' equity and cash flows for each of the three fiscal years
ended February 3, 2001, January 29, 2000 and January 30, 1999 and consolidated
balance sheets as of February 3, 2001 and January 29, 2000, as audited by
Deloitte & Touche LLP, independent auditors, appear elsewhere in this document.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto of the Company included
elsewhere in this document. All references to years are to the fiscal year of
the Company, which ends on the Saturday nearest January 31 in the following
calendar year. All fiscal years for which financial information is set forth
below had 52 weeks, except the fiscal year ended February 3, 2001 which had 53
weeks.
================================================================================
10
Fiscal Years Ended
-------------------------------------------------------------------------
Feb. 3, Jan. 29, Jan. 30, Jan. 31, Feb. 1,
2001 2000 1999 1998 1997
========= ========= ======== ======== =========
(dollars in thousands, except per square foot data and per share data)
Consolidated Income
Statement Information:
Net sales .................................. $1,232,776 $ 1,084,519 $ 911,939 $ 781,028 $ 798,117
Cost of sales .............................. 622,036 536,014 455,724 411,756 443,443
--------- --------- -------- -------- ---------
Gross profit ............................... 610,740 548,505 456,215 369,272 354,674
Selling, general and administrative
expenses................................. 501,460 414,315 350,522 308,780 292,832
Studio shoe stores closing expense (a) ..... --- -- -- --- 3,600
Employment contract separation expense (b).. --- -- -- --- 3,500
Retirement of assets (c) .................. --- -- 3,633 --- --
Amortization of goodwill (d) ............... 11,040 11,040 11,040 11,040 10,086
--------- --------- -------- -------- ---------
Operating income ........................... 98,240 123,150 91,020 49,452 44,656
Interest income ............................ 2,473 4,378 2,241 1,157 176
Interest expense (e) ....................... 7,315 11,814 20,358 21,146 24,592
Other income ............................... --- -- -- -- (1,402)
--------- --------- -------- -------- ---------
Income before income taxes and
extraordinary loss ......................... 93,398 115,714 72,903 29,463 21,642
Income tax provision ....................... 41,035 50,221 33,579 17,466 12,975
--------- --------- -------- -------- ---------
Income before extraordinary loss ........... 52,363 65,493 39,324 11,997 8,667
Extraordinary loss (f) ..................... --- 962 --- 173 ---
--------- --------- -------- -------- ---------
Net income ................................. $ 52,363 $ 64,531 $ 39,324 $ 11,824 $ 8,667
========= ========= ======== ======== =========
Basic earnings per share before
extraordinary loss.......................... $ 1.83 $ 2.25 $ 1.53 $ 0.47 $ 0.36
Extraordinary loss per share (f) ........... --- 0.03 --- 0.01 ---
--------- --------- -------- -------- ---------
Basic earnings per share.................... $ 1.83 $ 2.22 $ 1.53 $ 0.46 $ 0.36
========= ========= ======== ======== =========
Diluted earnings per share before
extraordinary loss.......................... $ 1.76 $ 2.08 $ 1.44 $ 0.47 $ 0.36
Extraordinary loss per share (f) ........... --- 0.03 --- 0.01 ---
--------- --------- -------- -------- ---------
Diluted earnings per share ................. $ 1.76 $ 2.05 $ 1.44 $ 0.46 $ 0.36
========= ========= ======== ======== =========
Weighted average shares
outstanding (in 000s)..................... 28,608 29,021 25,715 25,628 23,981
Weighted average shares outstanding,
assuming dilution (in 000s) ................ 31,221 32,849 31,006 25,693 24,060
CONSOLIDATED OPERATING INFORMATION:
Percentage increase (decrease) in
comparable store sales (g)................ (0.5)% 8.4% 7.9% (5.5)% 1.8%
Net sales per gross square foot (h) ........ $ 496 $ 502 $ 474 $ 445 $ 476
Number of stores:
Open at beginning of period ................ 405 365 324 309 306
Opened during the period ................... 81 47 45 27 11
Expanded during the period ................. 4 8 8 9 7
Closed during the period ................... 8 7 4 12 8
Open at the end of the period .............. 478 405 365 324 309
Total store square footage at end of period 2,695,000 2,280,000 2,038,000 1,808,000 1,705,000
Capital expenditures..... ................. $ 83,310 $ 53,409 $ 45,131 $ 22,945 $ 16,107
Depreciation and amortization including
goodwill (d)................................ $ 46,073 $ 41,387 $ 39,823 $ 38,843 $ 36,294
Working capital turnover (i) ............... 7.6x 6.8x 6.3x 6.5x 7.8x
Inventory turnover (j) ..................... 4.9x 4.8x 5.0x 5.1x 4.7x
CONSOLIDATED BALANCE SHEET INFORMATION
(AT END OF PERIOD):
Working capital (k)......................... $ 172,767 $ 151,368 $ 168,708 $ 122,181 $ 118,850
Goodwill, net (d) .......................... 297,619 308,659 319,699 330,739 341,779
Total assets ............................... 848,115 765,117 775,417 683,661 688,139
Total debt ................................. 117,610 115,785 105,157 106,276 131,192
Preferred securities ....................... --- --- 96,624 96,391 96,158
Stockholders' equity ....................... 574,029 515,622 432,699 384,107 370,582
(Footnotes on following page)
================================================================================
11
(Footnotes for preceding page. Unless otherwise noted, all per share information
is for diluted earnings per share.)
(a) Relates to the closing of the Company's nine Ann Taylor Studio shoe stores.
The charge of $3,600,000 ($2,052,000, or $0.08 per share, net of income tax
benefit) in Fiscal 1996 was comprised of $2,500,000 related to the
write-off of the net book value of the nine stores and $1,100,000 related
to leases and other related costs for these locations.
(b) In connection with the resignation in August 1996 of a former executive, a
one-time pre-tax charge of $3,500,000 ($1,958,000, or $0.08 per share, net
of related tax benefit) was recorded in Fiscal 1996 relating to the
estimated costs of the Company's obligations under the executive's
employment contract with the Company.
(c) A charge of $3,633,000 ($2,180,000, or $0.07 per share, net of tax benefit)
was recorded in Fiscal 1998 for the retirement of certain assets in
connection with the renovation of the Company's corporate offices.
(d) The Company acquired Ann Taylor in a leveraged buyout in 1989. As a result
of that transaction, $380,250,000, representing the excess of the allocated
purchase price over the fair value of the Company's net assets, was
recorded as goodwill and is being amortized on a straight-line basis over
40 years. In addition, as a result of the September 1996 acquisition of the
operations that became the Company's sourcing division, the Company
recorded goodwill of $38,430,000 that is being amortized on a straight-line
basis over 25 years.
(e) Includes non-cash interest expense of $4,247,000, $3,026,000, $1,290,000,
$1,419,000, and $1,574,000, in Fiscal 2000, 1999, 1998, 1997, and 1996,
respectively, from amortization of deferred financing costs and, in Fiscal
1999 and 2000, accretion of original issue discount.
(f) In Fiscal 1999, Ann Taylor incurred an extraordinary loss of $1,603,000
($962,000, or $0.03 per share, net of income tax benefit) in connection
with the redemption of its outstanding 8 3/4% Subordinated Notes due 2000.
In Fiscal 1997, Ann Taylor incurred an extraordinary loss of $303,000
($173,000, or $0.01 per share, net of income tax benefit), in connection
with the prepayment of the outstanding balance of a term loan.
(g) Comparable store sales are calculated by excluding the net sales of a store
for any month of one period if the store was not also open during the same
month of the prior period. A store that is expanded by more than 15% is
treated as a new store for the first year following the opening of the
expanded store. In addition, in a year with 53 weeks, sales in the last
week of that year are not included in determining comparable store sales;
therefore, comparable store sales for Fiscal 2000 reflect a 52 week period.
(h) Net sales per square foot ("sales per square foot") is determined by
dividing net sales for the period by the average of the gross square feet
at the beginning and end of each period. Unless otherwise indicated,
references herein to square feet are to gross square feet, rather than net
selling space.
(i) Working capital turnover is determined by dividing net sales by the average
of the amount of working capital at the beginning and end of the period.
(j) Inventory turnover is determined by dividing cost of sales by the average
of the cost of inventory at the beginning and end of the period (excluding
inventory associated with the Company's sourcing division). Effective
February 1, 1998, the Company elected to change its method of inventory
valuation to the average cost method. The cumulative effect of this
accounting change on February 1, 1998 was not material. The effect of this
accounting change on Fiscal 1998 net income was an increase of $1,272,000,
or $0.04 per share on a diluted basis. It is not possible to determine the
effect of the change on income in any previously reported fiscal years as
no cost information was available.
(k) Includes current portion of long-term debt of $1,400,000, $1,300,000,
$1,206,000, $1,119,000 and $287,000, in Fiscal 2000, 1999, 1998, 1997 and
1996, respectively.
================================================================================
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SALES
The following table sets forth certain sales and store data for the
periods indicated:
Fiscal Year
----------------------------------
2000 1999 1998
--------- ---------- ---------
(53 weeks) (52 weeks) (52 weeks)
Net sales ($000) .................... $1,232,776 $1,084,519 $ 911,939
Total net sales increase
percentage (52 week basis) ........ 12.2% 18.9% 16.8%
Comparable store sales increase
(decrease) percentage (52 week basis) (0.5)% 8.4% 7.9%
Net sales per average square foot ... $ 496 $ 502 $ 474
Total store square footage at
end of period...................... 2,695,000 2,280,000 2,038,000
Number of:
New stores ........................ 81 47 45
Expanded stores ................... 4 8 8
Closed stores ..................... 8 7 4
Total stores open at end of period .. 478 405 365
The Company's net sales do not show significant seasonal variation,
although net sales in the fourth quarter have historically been moderately
higher than in the other quarters. As a result, the Company has not had
significant overhead and other costs generally associated with large seasonal
variations.
RESULTS OF OPERATIONS
The following table sets forth income statement data expressed as a
percentage of net sales for the periods indicated:
Fiscal Year
----------------------------
2000 1999 1998
---- ---- ----
Net sales.......................... 100.0% 100.0% 100.0%
Cost of sales...................... 50.5 49.4 50.0
---- ----- -----
Gross profit................... 49.5 50.6 50.0
Selling, general and
administrative expenses........ 40.7 38.2 38.4
Retirement of assets............... -- -- 0.4
Amortization of goodwill........... 0.9 1.0 1.2
---- ----- -----
Operating income............... 7.9 11.4 10.0
Interest income.................... 0.2 0.4 0.2
Interest expense................... 0.6 1.1 2.2
---- ----- -----
Income before income taxes
and extraordinary loss........ 7.5 10.7 8.0
Income tax provision............... 3.3 4.6 3.7
---- ----- -----
Income before extraordinary loss... 4.2 6.1 4.3
Extraordinary loss................. -- 0.1 --
---- ----- -----
Net income......................... 4.2% 6.0% 4.3%
=== ==== ====
================================================================================
13
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 fifty-two-week period ended January 27, 2001 were up 12.2%
to $1,216,808,000, compared to the same period for the fiscal year ended 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 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 2000 from
50.6% in 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
2000, compared to the prior year, 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 2000, compared to $414,315,000, or 38.2% of net sales, in 1999. Selling,
general and administrative expenses for 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 one-time 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 one-time 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 2000,
from $123,150,000, or 11.4% of net sales, in 1999. Amortization of goodwill was
$11,040,000, or 0.9% of net sales, in 2000, compared to $11,040,000, or 1.0% of
net sales, in 1999. Operating income without giving effect to such amortization
was $109,280,000, or 8.8% of net sales, in 2000 and $134,190,000, or 12.4% of
net sales, in 1999.
Interest income was $2,473,000 in 2000, compared to $4,378,000 in 1999.
The decrease was primarily attributable to decreased cash on hand in 2000
resulting from the execution by the Company, in the second half of 1999, of the
securities repurchase program described below under "Liquidity and Capital
Resources".
Interest expense was $7,315,000 in 2000, compared to $11,814,000 in 1999.
The decrease in interest expense was primarily 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, AnnTaylor Finance Trust, the Company's
special purpose finance trust, redeemed its 8 1/2% Company Obligated Mandatorily
Redeemable Convertible Preferred Securities ("preferred securities"), and
AnnTaylor, Inc., a wholly owned subsidiary of the Company ("Ann Taylor"),
redeemed its 8 3/4% Subordinated Notes Due 2000 ("8 3/4% Notes"). These
redemptions were completed using, in part, the proceeds from the issuance by the
Company, also during the second quarter of 1999, of its deep discount
Convertible Subordinated Debentures due 2019 ("Convertible Debentures"), which
bear 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%.
================================================================================
14
The income tax provision was $41,035,000, or 43.9% of income before income
taxes in the 2000 period, compared to $50,221,000, or 43.4% of income before
income taxes and extraordinary loss in 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 2000, compared to net income of
$64,531,000, or 6.0% of net sales, for 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net sales increased to $1,084,519,000 over $911,939,000 in
Fiscal 1998, an increase of $172,580,000, or 18.9%. Comparable store sales for
Fiscal 1999 increased 8.4%, compared to an increase of 7.9% in Fiscal 1998. The
sales increase was primarily attributable to the opening of new stores, the
expansion of existing stores and the net increase in comparable store sales in
1999. Management believes that the increase in comparable store sales was the
result of improved customer acceptance of the Company's product offerings and
merchandise assortment.
Gross profit as a percentage of net sales increased to 50.6% in 1999 from
50.0% in 1998. This increase in gross margin reflects a higher initial markup
rate, reflecting ongoing improvements achieved by the Company's sourcing
division, offset in part by a higher markdown rate on goods that were sold below
full price.
Selling, general and administrative expenses were $414,315,000, or 38.2%
of net sales, in 1999, compared to $350,522,000, or 38.4% of net sales, in 1998.
The decrease in selling, general and administrative expenses as a percentage of
net sales was primarily attributable to increased leverage on fixed expenses
resulting from increased comparable store sales and improved operating
efficiencies. The benefits of this leverage were partially offset by an increase
in marketing expenditures in support of the Company's strategic initiatives to
enhance the Ann Taylor brand and increased investment in infrastructure,
including in the Company's stores organization, to support the planned expansion
of the Company's Ann Taylor Loft business.
Operating income increased to $123,150,000, or 11.4% of net sales, in 1999
from $91,020,000, or 10.0% of net sales, in 1998. Amortization of goodwill was
$11,040,000, or 1.0% of net sales, in 1999, compared to $11,040,000, or 1.2% of
net sales, in 1998. Operating income without giving effect to such amortization
was $134,190,000, or 12.4% of net sales, in 1999 and $102,060,000, or 11.2% of
net sales, in 1998.
Interest income was $4,378,000 in 1999, compared to $2,241,000 in 1998.
The increase was primarily attributable to interest income earned on increased
cash on hand for the portion of the fiscal year prior to execution by the
Company, in the second half of 1999, of the securities repurchase program
described below under "Liquidity and Capital Resources".
Interest expense was $11,814,000 in 1999, compared to $20,358,000 in 1998.
The decrease in interest expense was primarily attributable to the redemption
during the second quarter of 1999 of the preferred securities and the 8 3/4%
Notes described below under "Liquidity and Capital Resources." This reduction in
interest expense was offset, in part, by interest expense on the Convertible
Debentures issued by the Company during the second quarter of 1999, also
described below under "Liquidity and Capital Resources". The weighted average
interest rate on the Company's outstanding indebtedness at January 29, 2000 was
3.88%, compared to 8.60% at January 30, 1999.
The income tax provision was $50,221,000, or 43.4% of income before income
taxes and extraordinary loss, in the 1999 period, compared to $33,579,000, or
46.1% of income before income taxes, in 1998. The effective tax rates for both
periods were higher than the statutory rates, primarily as a result of
non-deductible goodwill expense.
================================================================================
15
On July 22, 1999, the Company applied the proceeds received from the
issuance of the Convertible Debentures to the redemption of Ann Taylor's
outstanding 8 3/4% Notes. This resulted in an extraordinary charge to earnings
in Fiscal 1999 of $962,000, net of income tax benefit, or $0.03 per share on a
diluted basis.
As a result of the foregoing factors, the Company had net income of
$64,531,000, or 6.0% of net sales, for 1999, compared to net income of
$39,324,000, or 4.3% of net sales, for 1998.
CHANGES IN FINANCIAL POSITION
Prepaid expenses and other current assets increased to $53,227,000 at the
end of 2000 from $37,796,000 at the end of 1999, an increase of $15,431,000, or
40.8%. This increase was primarily attributable to an increase in construction
allowance receivables and deferred income taxes.
Merchandise inventories increased to $170,631,000 at February 3, 2001 from
$140,026,000 at January 29, 2000, an increase of $30,605,000, or 21.9%.
Merchandise inventories at February 3, 2001 and January 29, 2000 included
approximately $33,469,000 and $22,959,000, 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 81 new stores opened since the beginning of
the year. Total store square footage increased to approximately 2,695,000 at
February 3, 2001 from approximately 2,280,000 square feet at January 29, 2000.
Merchandise inventory on a per-square-foot basis, excluding inventory associated
with the Company's sourcing division, was approximately $51 at the end of 2000,
compared to $51 at the end of 1999. Inventory turned 4.9 times in 2000, compared
to 4.8 times in 1999, excluding inventory associated with the Company's sourcing
division. Inventory turnover is determined by dividing cost of sales by the
average of the cost of inventory at the beginning and end of the period
(excluding inventory associated with the sourcing division).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital is cash flow from
operations. The following table sets forth material measures of the Company's
liquidity:
Fiscal Year
-----------------------------
2000 1999 1998
-------- ------- -------
(dollars in thousands)
Cash provided by operating activities $ 77,422 $101,782 $ 77,478
Working capital ...................... $172,767 $151,368 $168,708
Current ratio ........................ 2.22:1 2.26:1 2.30:1
Debt to equity ratio ................. .20:1 .22:1 .24:1
Cash provided by operating activities in 2000, as presented on the
consolidated statements of cash flows, primarily resulted from earnings, noncash
charges and increases in accounts payable and accrued liabilities, partially
offset by increases in merchandise inventories and receivables.
Ann Taylor's principal credit facility is a bank credit facility that it
entered into in June 1998 with a syndicate of lenders (the "Credit Facility").
Ann Taylor uses the Credit Facility for the issuance of commercial and standby
letters of credit and to provide funds for other general corporate purposes. The
lenders' commitment under the Credit Facility was originally $150,000,000. The
Credit Facility had an original maturity date of June 30, 2000, subject to
extension upon the satisfaction of certain conditions. Effective September 3,
1999, Ann Taylor elected to reduce the commitment of the lenders under the
Credit Facility by $25,000,000 to $125,000,000 and extended the term of the
Credit Facility to June 30, 2001.
================================================================================
16
Loans outstanding under the Credit Facility at any time may not exceed
$50,000,000. The Company did not make any borrowings under the loan provisions
of the Credit Facility during Fiscal 2000, and there were no loans outstanding
at fiscal year end. The outstanding loan balance is required to be reduced to
zero for the thirty-day period commencing January 1 each year. This cleandown
period was achieved for January 2001. 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 3, 2001 was
$125,000,000. Commercial and standby letters of credit outstanding under the
Credit Facility as of February 3, 2001 were approximately $89,894,000.
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at Ann Taylor's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00%, and from 1.25% to 2.00%,
respectively. In addition, Ann Taylor is required to pay the lenders a quarterly
commitment fee on the unused revolving loan commitment amount at a rate ranging
from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby
letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens and investments, restrictions on dividends or
other distributions to stockholders and maintenance of certain financial ratios
including a specified fixed charge ratio and specified levels of net worth.
The lenders have been granted a pledge of the common stock of Ann Taylor
and certain of its subsidiaries, and a security interest in substantially all
other tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of Ann Taylor and its subsidiaries, as
collateral for Ann Taylor's obligations under the Credit Facility.
As noted above, the Credit Facility matures in June 2001. The Company is
currently negotiating to obtain new financing to succeed the Credit Facility,
and anticipates new arrangements will be in place in the Spring of 2001.
During the second quarter of Fiscal 1999, the Company completed the
issuance of an aggregate of $199,072,000 principal amount at maturity of its
Convertible Debentures. The Convertible Debentures were sold at an original
issue price of $552.56 per $1,000 principal amount at maturity of Debenture. The
net proceeds of the sale were applied to the redemption, described below, of the
8 3/4% Notes issued by Ann Taylor. Cash interest is payable on the principal
amount at maturity of the Convertible Debentures at the rate of 0.55% per annum.
This interest rate and the accrual of original issue discount represent a yield
to maturity on the Convertible Debentures of 3.75%. The Convertible Debentures
are convertible at the option of the holders thereof initially into 12.078
shares of the Company's common stock per $1,000 principal amount at maturity of
Debenture. The Convertible Debentures may be redeemed at the Company's option on
or after June 18, 2004. The Company's obligations with respect to the
Convertible Debentures are guaranteed on a subordinated basis by Ann Taylor.
On July 22, 1999, Ann Taylor 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 and
fiscal year 1999 of $962,000, or $0.03 per share on a diluted basis, net of
income tax benefit.
On June 29, 1999, the Company's special purpose financing vehicle,
AnnTaylor Finance Trust, redeemed all of the preferred securities. All but
$100,000 liquidation amount of the preferred securities was tendered for
conversion into an aggregate of 5,116,717 shares of Company common stock prior
to the redemption date, at a conversion price of $19.65 per share of common
stock, or 2.545 shares of common stock per $50 liquidation amount of the
security. The 5,116,717 shares of Company common stock issued represented
approximately 16% of the Company's outstanding common stock as of the date of
issuance. Holders of preferred securities that were not tendered for conversion
received a cash payment equal to 105.95% of the liquidation amount of the
preferred securities redeemed, plus accrued distributions.
================================================================================
17
Ann Taylor and its wholly owned subsidiary, AnnTaylor Distribution
Services, Inc., are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage loan
balance at February 3, 2001 was $2,650,000.
The Company's capital expenditures totaled $83,310,000, $53,409,000, and
$45,131,000 in Fiscal 2000, 1999 and 1998, 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 2000, increased 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. The Company expects its total
capital expenditure requirements in Fiscal 2001 will be approximately
$98,000,000, including capital for new store construction for a planned square
footage increase of approximately 500,000 square feet, or 20%, as well as
capital to support continued investments in information systems. The actual
amount of the Company's capital expenditures will depend in part on the number
of stores opened, expanded and refurbished and on the amount of construction
allowances the Company receives from the landlords of its new or expanded
stores. See "Business--Stores and Expansion".
On September 9, 1999, the Company announced a securities repurchase
program authorized by its Board of Directors, pursuant to which the Company was
authorized to purchase up to $40,000,000 of the Company's common stock and/or
Convertible Debentures, through open market purchases and privately negotiated
transactions. In January 2000, the Board of Directors authorized a $50,000,000
increase in the securities repurchase program, bringing the total amount of
securities that could have been repurchased under the program to $90,000,000. In
the third and fourth quarters of 1999, the Company repurchased an aggregate of
3,012,500 shares of its common stock, for an aggregate repurchase price of
$89,900,000 (exclusive of brokerage commissions), pursuant to this program. All
of the repurchased shares became treasury shares and may be used for general
corporate and other purposes. No Convertible Debentures were purchased.
Dividends and distributions from Ann Taylor to the Company are restricted
by the Credit Facility.
In order to finance its operations and capital requirements, the Company
expects to use internally generated funds, trade credit and funds available to
it under the Credit Facility and replacements thereof that are expected to be
obtained. The Company believes that cash flow from operations and funds
available under the Credit Facility and replacements thereof that are expected
to be obtained are sufficient to enable it to meet its ongoing cash needs for
its business, as presently conducted, for the foreseeable future.
On May 18, 2000, the Board of Directors of the Company adopted a
Stockholder Rights Plan, pursuant to which Rights were distributed as a dividend
at the rate of one Right for each share of common stock of the Company held by
stockholders of record as of the close of business on May 30, 2000. Each Right
entitles stockholders to buy one unit of a share of a new series of preferred
stock for $125. The Rights generally are exercisable only if a person or group
acquires beneficial ownership of 15% or more of the Voting Power of the Company
as represented by the Company's common stock or commences a tender or exchange
offer upon consummation of which such person or group would beneficially own 15%
or more of the Voting Power of the Company as represented by the Company's
common stock. The Rights will expire on May 18, 2010.
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 are effective for the Company's Fiscal 2001
================================================================================
18
financial statements. Management has determined that the adoption of these
standards will have no impact on the Company's financial statements.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES
Sections of this Annual Report on Form 10-K, including the preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain various forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, with respect to the
financial condition, results of operations and business of the Company. Examples
of forward-looking statements are statements that use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar expressions.
These forward-looking statements involve certain risks and uncertainties, and no
assurance can be given that any of such matters will be realized. Actual results
may differ materially from those contemplated by such forward-looking statements
as a result of, among other things, failure by the Company to predict accurately
customer fashion preferences; a decline in the demand for merchandise offered by
the Company; competitive influences; changes in levels of store traffic or
consumer spending habits; effectiveness of the Company's brand awareness and
marketing programs; lack of sufficient customer acceptance of the Ann Taylor
Loft concept in the upper-moderate-priced women's apparel market; general
economic conditions that are less favorable than expected or a downturn in the
retail industry; the inability of the Company to locate new store sites or
negotiate favorable lease terms for additional stores or for the expansion of
existing stores; lack of sufficient consumer interest in our 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; or an adverse outcome
of the litigation referred to in Note 5 to the Consolidated Financial Statements
of the Company as of February 3, 2001, that materially and adversely affects the
Company's financial condition. The Company assumes no obligation to update or
revise any such forward-looking statements, which speak only as of their date,
even if experience or future events or changes make it clear that any projected
financial or operating results implied by such forward-looking statements will
not be realized.
================================================================================
19
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 maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, a change of 100 basis points in interest rates would not have a
material effect on the Company's financial condition.
The Company's outstanding long-term debt as of February 3, 2001 bears
interest at fixed rates; therefore, the Company's results of operations would
only be affected by interest rate changes to the extent that fluctuating rate
loans are outstanding under the Credit Facility. As of February 3, 2001, 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 3, 2001, January 29, 2000 and January 30, 1999 are
included as a part of this Report (See Item 14):
Consolidated Statements of Income for the fiscal years ended February 3,
2001, January 29, 2000 and January 30, 1999.
Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000.
Consolidated Statements of Stockholders' Equity for the fiscal years ended
February 3, 2001, January 29, 2000 and January 30, 1999.
Consolidated Statements of Cash Flows for the fiscal years ended February
3, 2001, January 29, 2000 and January 30, 1999.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
================================================================================
20
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the Section entitled "Election of Class I Directors", "Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement for its 2001 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Sections entitled "Compensation of Directors and Related Matters",
"Compensation Committee Report on Executive Compensation" and "Executive
Compensation" in the Company's Proxy Statement for its 2001 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Section entitled "Beneficial Ownership of Common Stock" in the Company's
Proxy Statement for its 2001 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Section entitled "Compensation Committee Report on Executive
Compensation--Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" in the Company's Proxy Statement for its 2001 Annual
Meeting of Stockholders.
================================================================================
21
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
27 through 48 and are filed as part of this Annual Report:
Independent Auditors' Report; Consolidated Statements of Income for the
fiscal years ended February 3, 2001, January 29, 2000 and January 30,
1999; Consolidated Balance Sheets as of February 3, 2001 and January
29, 2000; Consolidated Statements of Stockholders' Equity for the
fiscal years ended February 3, 2001, January 29, 2000 and January 30,
1999; Consolidated Statements of Cash Flows for the fiscal years ended
February 3, 2001, January 29, 2000 and January 30, 1999; Notes to
Consolidated Financial Statements.
(b) Reports on Form 8-K
The Company filed a report dated January 23, 2001 with the Commission
on Form 8-K with respect to the resignation of a former executive of
the Company.
(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 Restated Certificate of Incorporation of the Company as amended
through May 18, 1999. Incorporated by reference to Exhibit 3.1 to
the Form 10-Q of the Company for the Quarter Ended May 1, 1999
filed on June 1, 1999.
3.2 By-Laws of the Company. Incorporated by reference to Exhibit
3.2 to the Form 10-Q of the Company for the Quarter
Ended November 2, 1991 filed on December 17, 1991
(Registration No. 33-28522).
4.1 Indenture, dated as of June 18, 1999, between the Company, Ann
Taylor, and the Bank of New York, as Trustee relating to the
Company's Convertible Subordinated Debentures due 2019. Incorporated
by reference to Exhibit 4.01 to the Registration Statement of the
Company filed on September 13, 1999.
4.2 Registration Rights Agreement, dated as of June 18, 1999, between the
Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
and Banc America Securities LLC. Incorporated by reference to Exhibit
4.02 to the Registration Statement of the Company filed on September
13, 1999.
10.1 1989 Stock Option Plan. Incorporated by reference to
Exhibit 10.18 to the Registration Statement of the
Company and Ann Taylor filed on May 3, 1989
(Registration No. 33-28522).
10.1.1 Amendment to 1989 Stock Option Plan. Incorporated by
reference to Exhibit 10.15.1 to the Annual Report on
Form 10-K of the Company filed on April 30, 1993.
10.2 Lease, dated as of March 17, 1989, between Carven Associates and Ann
Taylor concerning the West 57th Street headquarters. Incorporated by
reference to Exhibit 10.21 to the Registration Statement of the
Company and Ann Taylor filed on May 3, 1989 (Registration No.
33-28522).
================================================================================
22
EXHIBIT NUMBER
- --------------
10.2.1 First Amendment to Lease, dated as of November 14, 1990, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.1 to the Registration Statement of the Company filed on
April 11, 1991 (Registration No. 33-39905).
10.2.2 Second Amendment to Lease, dated as of February 28, 1993, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.2 to the Annual Report on Form 10-K of the Company
filed on April 29, 1993.
10.2.3 Extension and Amendment to Lease dated as of October 1, 1993, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter ended
October 30, 1993 filed on November 26, 1993.
10.2.4 Modification of Amendment and Extension to Lease, dated as of April
14, 1994 between Carven Associates and Ann Taylor. Incorporated by
reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of the
Company filed on April 28, 1995.
10.2.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven
Associates and Ann Taylor. Incorporated by reference to Exhibit
10.15.5 to the Annual Report on Form 10-K of the Company filed on
April 28, 1995.
10.2.6 Sixth Amendment to Lease, dated as of January 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.6 to the Annual Report on Form 10-K of the
Company filed on April 30, 1998.
10.2.7 Seventh Amendment to Lease, dated as of June 5, 1996, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference to
Exhibit 10.8.7 to the Annual Report on Form 10-K of the Company filed
on April 30, 1998.
10.2.8 Eighth Amendment to Lease, undated, between Pacific Metropolitan
Corporation and Ann Taylor. Incorporated by reference to Exhibit
10.8.8 to the Annual Report on Form 10-K of the Company filed on
April 30, 1998.
10.2.9 Ninth Amendment to Lease, dated as of May 13, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference to
Exhibit 10.8.9 to the Annual Report on Form 10-K of the Company filed
on April 30, 1998.
10.2.10 Tenth Amendment to Lease, dated as of May 21, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference to
Exhibit 10.8.10 to the Annual Report on Form 10-K of the Company
filed on April 30, 1998.
10.2.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.3.11 to the Annual Report on Form 10-K of the
Company filed on March 29, 1999.
10.2.12 Sublease Agreement, dated as of February 23, 1999, between Societe
Air France (formerly known as Compagnie Nationale Air France) and Ann
Taylor. Incorporated by reference to Exhibit 10.2.12 to the Annual
Report on Form 10-K of the Company filed on April 18, 2000.
10.3 Tax Sharing Agreement, dated as of July 13, 1989,
between the Company and Ann Taylor. Incorporated by
reference to Exhibit 10.24 to Amendment No. 2 to the
Registration Statement of the Company and Ann Taylor
filed on July 13, 1989 (Registration No. 33-28522).
10.4 Employment Agreement dated as of February 1, 1994 between the Company
and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.8 to
the Form 10-Q of the Company for the Quarter ended October 29, 1994
filed on December 9, 1994.
10.5 Employment Agreement dated February 16, 1996 between the
Company and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.4 to the Annual Report on Form
10-K of the Company filed on April 8, 1996.
================================================================================
23
EXHIBIT NUMBER
- --------------
10.5.1 Amendment to the Employment Agreement, dated August 23,
1996, between the Company and J. Patrick Spainhour.
Incorporated by reference to Exhibit 10.11.1 to the
Annual Report on Form 10-K of the Company filed on May
1, 1997.
10.5.2 Amendment #2 to the Employment Agreement, dated August 12, 1999,
between the Company and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.6.2 to the Form 10-Q of the Company for the
Quarter ended July 31, 1999 filed on September 14, 1999. Confidential
treatment has been granted with respect to certain portions of this
exhibit.
10.5.3 Amendment #3 to the Employment Agreement, dated March
10, 2000, between the Company and J. Patrick
Spainhour. Incorporated by reference to Exhibit 10.5.3
to the Annual Report on Form 10-K of the Company filed
on April 18, 2000.
10.6 Employment Agreement dated November 25, 1996 between the Company and
Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to Form
10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on
December 17, 1996.
10.6.1 Amendment #1 to the Employment Agreement, dated as of February 16,
2000, between the Company and Patricia DeRosa. Incorporated by
reference to Exhibit 10.6.1 to the Annual Report on Form 10-K of the
Company filed on April 18, 2000. Confidential treatment has been
granted with respect to certain portions of this exhibit.
10.6.2 Separation Agreement, dated as of January 15, 2001,
between the Company and Patricia DeRosa.
10.7 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 the Company filed on May 1, 1997.
10.7.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated 1992
Stock Option and Restricted Stock and Unit Award Plan, as approved by
stockholders on June 18, 1997. Incorporated by reference to Exhibit
10.15.1 to the Form 10-Q of the Company for the Quarter Ended August
2, 1997 filed on September 12, 1997.
10.7.2 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 the Company filed on March 12, 1998.
10.7.3 Amendment to the AnnTaylor Stores Corporation Amended and Restated 1992
Stock Option and Restricted Stock and Unit Award Plan dated as of May
2, 1998. Incorporated by reference to Exhibit 10.16.3 to the Form
10-Q of the Company for the Quarter ended April 2, 1998 filed on June
16, 1998.
10.7.4 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 the Company filed on April 18, 2000.
10.8 AnnTaylor Stores Corporation Amended and Restated Management
Performance Compensation Plan, as approved by stockholders on June
18, 1997. Incorporated by reference to Exhibit 10.16 to the Form 10-Q
of the Company for the Quarter Ended August 2, 1997 filed on
September 12, 1997.
10.8.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan dated as of March 12, 1998.
Incorporated by reference to Exhibit 10.17.1 to the Annual Report on
Form 10-K of the Company filed on April 30, 1998.
================================================================================
24
EXHIBIT NUMBER
--------------
10.8.2 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 the Company filed on April 18, 2000.
10.9 AnnTaylor Stores Corporation Deferred Compensation
Plan. Incorporated by reference to Exhibit 10.33 to
the Annual Report on Form 10-K of the Company filed on
April 28, 1995.
10.9.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation
Plan as approved by the Board of Directors on August 11, 1995.
Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of the
Company for the Quarter Ended July 29, 1995 filed on September 11,
1995.
10.10 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.
10.11 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.
10.12 Commitment Letter dated as of May 7, 1998 among Ann Taylor, Bank of
America National Trust and Savings Association, BancAmerica Robertson
Stephens, Citicorp USA and CoreStates Bank, N.A. Incorporated by
reference to Exhibit 10.27 to the Form 10-Q of the Company for the
Quarter Ended May 2, 1998 filed on June 16, 1998.
10.13 Credit Agreement, dated as of June 30, 1998 among Ann Taylor, Bank of
America, Citicorp USA and First Union National Bank, as Co-Agents,
the financial institutions from time to time party thereto,
BancAmerica Robertson Stephens, as Arranger, and Bank of America, as
Administrative Agent. Incorporated by reference to Exhibit 10.28 to
the Form 10-Q of the Company for the Quarter Ended August 1, 1998
filed on September 14, 1998.
10.13.1 Trademark Security Agreement, dated as of June 30, 1998, made by Ann
Taylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.1 to the Form 10-Q of the
Company for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.13.2 Guaranty, dated as of June 30, 1998, made by the Company in favor of
Bank of America, as Administrative Agent. Incorporated by reference
to Exhibit 10.28.2 to the Form 10-Q of the Company for the Quarter
Ended August 1, 1998 filed on September 14, 1998.
10.13.3 Security and Pledge Agreement, dated as of June 30, 1998, made by the
Company in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.3 to the Form 10-Q of the
Company for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.13.4 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 the
Company for the Quarter Ended August 1, 1998 filed on September 14,
1998.
10.13.5 Subsidiary Guaranty, dated as of June 30, 1998 made by AnnTaylor
Distribution Services in favor of Bank of America, as Administrative
Agent. Incorporated by reference to Exhibit 10.28.5 to the Form 10-Q
of the Company for the Quarter Ended August 1, 1998 filed on
September 14, 1998.
================================================================================
25
EXHIBIT NUMBER
- --------------
10.13.6 First Amendment to the Credit Agreement, dated as of September 7,
1999, among Ann Taylor, 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 the Company for the Quarter
Ended July 31, 1999 filed on September 14, 1999.
10.13.7 Second Amendment to the Credit Agreement, dated December 1999, among
Ann Taylor, 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 the Company
filed on April 18, 2000.
10.14 AnnTaylor Stores Corporation Long-Term Cash Incentive Compensation
Plan, as approved by stockholders on June 17, 1998. Incorporated by
reference to Exhibit A to the Proxy Statement dated May 1, 1998 filed
on May 6, 1998.
10.14.1 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
the Company filed on April 18, 2000.
10.15 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 the Company filed on April 18, 2000.
10.16 The AnnTaylor Stores Corporation 2000 Stock Option and Restricted
Stock Award Plan. Incorporated by reference to the Registration
Statement on Form S-8 of the Company filed on May 31, 2000.
10.17 Employment Agreement, dated as of March 7, 2001, between the
Company and Barry Erdos.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
================================================================================
26
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANNTAYLOR STORES CORPORATION
By: /s/ J. Patrick Spainhour
---------------------------
J. Patrick Spainhour
Chairman and Chief
Executive Officer
Date: April 5, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. Patrick Spainhour Chairman and Chief Executive April 5, 2001
- --------------------------- Officer and Director ------------
J. Patrick Spainhour
/s/ Barry Erdos Senior Executive Vice April 5, 2001
- --------------------------- President and Chief ------------
Barry Erdos Operating Officer
/s/ James M. Smith Senior Vice President and April 5, 2001
- --------------------------- Chief Financial Officer ------------
James M. Smith and Treasurer
/s/ Gerald S. Armstrong Director April 5, 2001
- --------------------------- ------------
Gerald S. Armstrong
/s/ James J. Burke, Jr. Director April 5, 2001
- --------------------------- ------------
James J. Burke, Jr.
/s/ Wesley E. Cantrell Director April 5, 2001
- --------------------------- ------------
Wesley E. Cantrell
/s/ Robert C. Grayson Director April 5, 2001
- --------------------------- ------------
Robert C. Grayson
/s/ Ronald W. Hovsepian Director April 5, 2001
- --------------------------- ------------
Ronald W. Hovsepian
/s/ Rochelle B. Lazarus Director April 5, 2001
- --------------------------- ------------
Rochelle B. Lazarus
/s/ Hanne M. Merriman Director April 5, 2001
- --------------------------- ------------
Hanne M. Merriman
================================================================================
27
ANNTAYLOR STORES CORPORATION
----------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE NO.
--------
Independent Auditors' Report....................................... 28
Consolidated Financial Statements:
Consolidated Statements of Income for the fiscal
years ended February 3, 2001, January 29, 2000
and January 30, 1999........................................... 29
Consolidated Balance Sheets as of February 3, 2001 and
January 29, 2000............................................. 30
Consolidated Statements of Stockholders' Equity for
the fiscal years ended February 3, 2001,
January 29, 2000 and January 30, 1999........................ 31
Consolidated Statements of Cash Flows for the fiscal
years ended February 3, 2001, January 29, 2000
and January 30, 1999......................................... 32
Notes to Consolidated Financial Statements........................ 33
================================================================================
28
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders of
ANNTAYLOR STORES CORPORATION:
We have audited the accompanying consolidated financial statements of
AnnTaylor Stores Corporation and its subsidiaries, listed in the accompanying
index. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 3, 2001 and January 29, 2000 and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended February 3, 2001 in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
March 1, 2001
================================================================================
29
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Fiscal Years Ended February 3, 2001, January 29, 2000 and
January 30, 1999
Fiscal Years Ended
------------------------------------
February 3, January 29, January 30,
2001 2000 1999
---------- ---------- ----------
(in thousands, except per share amounts)
Net sales................................ 1,232,776 $1,084,519 $ 911,939
Cost of sales ........................... 622,036 536,014 455,724
---------- ---------- ----------
Gross profit ............................ 610,740 548,505 456,215
Selling, general and
administrative expenses ............... 501,460 414,315 350,522
Retirement of assets .................... -- -- 3,633
Amortization of goodwill ................ 11,040 11,040 11,040
---------- ---------- ----------
Operating income ........................ 98,240 123,150 91,020
Interest income ......................... 2,473 4,378 2,241
Interest expense ........................ 7,315 11,814 20,358
---------- ---------- ----------
Income before income taxes
and extraordinary loss ............... 93,398 115,714 72,903
Income tax provision .................... 41,035 50,221 33,579
---------- ---------- ----------
Income before extraordinary loss ........ 52,363 65,493 39,324
Extraordinary loss (net of
income tax benefit of
$0, $641,000 and $0,
respectively) ......................... -- 962 --
---------- ---------- ----------
Net income .......................... $ 52,363 $ 64,531 $ 39,324
========== ========== ==========
Basic earnings per share:
Basic earnings per share before
extraordinary loss ................ $ 1.83 $ 2.25 $ 1.53
Extraordinary loss per share ........ -- 0.03 --
---------- ---------- ----------
Basic earnings per share ............ $ 1.83 $ 2.22 $ 1.53
========== ========== ==========
Diluted earnings per share:
Diluted earnings per share before
extraordinary loss ................ $ 1.76 $ 2.08 $ 1.44
Extraordinary loss per share ........ -- 0.03 --
---------- ---------- ----------
Diluted earnings per share .......... $ 1.76 $ 2.05 $ 1.44
========== ========== ==========
See accompanying notes to consolidated financial statements.
================================================================================
30
ANNTAYLOR STORES CORPORATION
CONSOLIDATED BALANCE SHEETS
February 3, 2001 and January 29, 2000
February 3, January 29,
2001 2000
--------- ---------
ASSETS (in thousands)
Current assets
Cash and cash equivalents .......................... $ 31,962 $ 35,081
Accounts receivable, net ........................... 57,989 58,686
Merchandise inventories ............................ 170,631 140,026
Prepaid expenses and other current assets........... 53,227 37,796
--------- ---------
Total current assets ........................... 313,809 271,589
Property and equipment, net .......................... 220,032 173,639
Goodwill, net ........................................ 297,619 308,659
Deferred financing costs, net ........................ 4,281 5,358
Other assets ......................................... 12,374 5,872
--------- ---------
Total assets ................................... $ 848,115 $ 765,117
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................... $ 65,903 $ 56,175
Accrued salaries and bonus ......................... 12,960 23,297
Accrued tenancy .................................... 9,800 7,800
Gift certificates and merchandise
credits redeemable ............................... 20,375 15,618
Accrued expenses ................................... 30,604 16,031
Current portion of long-term debt .................. 1,400 1,300
--------- ---------
Total current liabilities ...................... 141,042 120,221
Long-term debt, net .................................. 116,210 114,485
Deferred lease costs and other liabilities............ 16,834 14,789
Commitments and contingencies
Stockholders' equity
Common stock, $.0068 par value;
120,000,000 shares authorized;
31,834,088 and 31,598,423
shares issued, respectively ...................... 216 215
Additional paid-in capital ......................... 475,393 470,307
Retained earnings .................................. 190,093 137,730
Deferred compensation on restricted stock .......... (1,723) (2,246)
--------- ---------
663,979 606,006
Treasury stock, 3,011,519
and 3,028,448 shares,
respectively, at cost ....................... (89,950) (90,384)
--------- ---------
Total stockholders' equity ..................... 574,029 515,622
--------- ---------
Total liabilities and stockholders' equity ..... $ 848,115 $ 765,117
========= =========
See accompanying notes to consolidated financial statements.
================================================================================
31
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended February 3, 2001, January 29, 2000 and
January 30, 1999
(in thousands)
Addi-
Common Stock tional Warrants Restricted Treasury Stock
---------------- Paid-in -------------- Retained Stock ---------------
Shares Amount Capital Shares Amount Earnings Awards Shares Amount
------ ----- ------- ------ ------ -------- ------ ------ -------
Balance at January 31, 1998 ....... 25,658 $ 174 $350,647 3 $ 46 $ 34,204 $ (737) 13 $ (227)
Net income ........................ --- -- -- -- -- 39,324 -- -- ---
Exercise of stock options and
related tax benefit ............ 373 3 9,061 -- -- -- -- 3 (106)
Amortization of discount on
preferred securities .......... -- -- -- -- -- (233) -- -- --
Activity related to common
stock issued as employee
incentives ..................... 4 -- 97 -- -- -- 465 1 (19)
------ --- ------- ----- --- ------- ---- --- -------
Balance at January 30, 1999 ....... 26,035 177 359,805 3 46 73,295 (272) 17 (352)
Net income ........................ -- -- -- -- -- 64,531 -- -- --
Exercise of stock options and
related tax benefit ............ 352 2 10,039 -- -- -- -- 1 (55)
Amortization of discount on
preferred securities .......... -- -- -- -- -- (96) -- -- --
Activity related to common
stock issued as employee
incentives ..................... 94 1 3,850 -- -- -- (1,974) -- --
Exercise and expiration of warrants -- -- 28 (3) (46) -- --- (3) 18
Repurchase of common stock ........ -- -- -- -- -- -- --- 3,013 (89,995)
Conversion of preferred
securities..................... 5,117 35 96,585 -- -- -- --- -- ---
------ --- ------- ----- --- ------- ---- --- -------
Balance at January 29, 2000 ....... 31,598 215 470,307 -- -- 137,730 (2,246) 3,028 (90,384)
Net income ........................ -- -- -- -- -- 52,363 -- -- --
Exercise of stock options and
related tax benefit ............ 110 1 2,912 -- -- -- -- -- --
Activity related to common
stock issued as employee
incentives ..................... 18 -- 144 -- -- -- 523 (16) 434
Issuance of common stock pursuant
to Associate Discount Stock
Purchase Plan ..................... 108 -- 2,030 -- -- -- -- -- --
------ --- ------- ----- --- ------- ---- ----- -------
Balance at February 3, 2001 ....... 31,834 $216 $475,393 -- $ -- $190,093 $(1,723) 3,012 $(89,950)
====== === ======= ===== === ======= ===== ===== =======
See accompanying notes to consolidated financial statements.
================================================================================
32
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended February 3, 2001, January 29, 2000 and
January 30, 1999
Fiscal Years Ended
--------------------------------------
February 3, January 29, January 30,
2001 2000 1999
--------- --------- ----------
(in thousands)
Operating activities:
Net income ........................................... $ 52,363 $ 64,531 $ 39,324
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss ............................... --- 1,603 ---
Provision for loss on accounts receivable ........ 1,154 1,032 1,476
Depreciation and amortization .................... 35,033 30,347 28,783
Amortization of goodwill ......................... 11,040 11,040 11,040
Amortization of deferred compensation ............ 1,133 1,877 465
Non-cash interest ................................ 4,247 3,026 1,290
Deferred income taxes ............................ (3,864) (3,843) 3,966
Loss on disposal of property and equipment ....... 1,884 1,219 4,175
Tax benefit from exercise of stock options ....... 797 3,483 1,943
Changes in assets and liabilities:
Increase in receivables ....................... (457) (1,154) (5,813)
Increase in merchandise inventories ........... (30,605) (3,278) (39,514)
Increase in prepaid expenses and
other current assets ................... (12,106) (1,601) (12,082)
Decrease (increase) in other non-current assets
and liabilities, net ................... (3,918) 3,131 679
Increase (decrease) in accounts payable and
and accrued liabilities ................ 20,721 (9,631) 41,746
--------- --------- ---------
Net cash provided by operating activities ............ 77,422 101,782 77,478
--------- --------- ---------
Investing activities:
Purchases of property and equipment .................. (83,310) (53,409) (45,131)
--------- --------- ---------
Net cash used by investing activities ................ (83,310) (53,409) (45,131)
--------- --------- ---------
Financing activities:
Payment of financing costs ........................... (45) (4,150) (2,659)
Payments of mortgage ................................. (1,300) (1,206) (1,119)
Proceeds from issuance of Convertible Debentures ..... --- 110,000 ---
Redemption of 8 3/4% Notes ........................... --- (101,375) ---
Redemption of Company Obligated Mandatorily Redeemable
Convertible Preferred Securities ................... --- (100) ---
Issuance of common stock pursuant to Associate
Discount Stock Purchase Plan ........................ 2,030 --- ---
Repurchase of common stock ........................... --- (89,995) ---
Proceeds from exercise of stock options .............. 2,084 6,503 7,093
--------- --------- ---------
Net cash provided by (used by) financing activities .. 2,769 (80,323) 3,315
--------- --------- ---------
Net increase (decrease) in cash ......................... (3,119) (31,950) 35,662
Cash, beginning of year ................................. 35,081 67,031 31,369
--------- --------- ---------
Cash, end of year ....................................... $ 31,962 $ 35,081 $ 67,031
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ............... $ 2,418 $ 9,405 $ 18,582
========= ========= =========
Cash paid during the year for income taxes ........... $ 43,393 $ 51,222 $ 33,934
========= ========= =========
See accompanying notes to consolidated financial statements.
================================================================================
33
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a leading national specialty retailer of better quality
women's apparel, shoes and accessories sold principally under the Ann Taylor
brand name. 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.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AnnTaylor
Stores Corporation (the "Company") and its subsidiaries, including AnnTaylor,
Inc. ("Ann Taylor"). The Company has no material assets other than the common
stock of Ann Taylor and conducts no business other than the management of Ann
Taylor. All intercompany accounts have been eliminated in consolidation.
Certain Fiscal 1999 and 1998 amounts have been reclassified to conform to
the Fiscal 2000 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 maturities of
three months or less are considered cash or cash equivalents.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of average cost or market.
Effective February 1, 1998, the Company elected to change its method of
inventory valuation from the retail method to the average cost method. The
majority of the Company's inventory represents finished goods available for
sale.
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.
================================================================================
34
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the interest method
over the term of the related debt. Accumulated amortization at February 3, 2001
and January 29, 2000 was $2,750,000 and $1,628,000, respectively.
FINANCE SERVICE CHARGE INCOME
Income from finance service charges relating to customer receivables,
which is deducted from selling, general and administrative expenses, amounted to
$8,614,000 for Fiscal 2000, $8,650,000 for Fiscal 1999 and $8,422,000 for Fiscal
1998.
GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill relating to the 1989 acquisition of Ann Taylor by the Company is
being amortized on a straight-line basis over 40 years. Goodwill relating to the
acquisition, in 1996, of the operations comprising the Company's sourcing
division, is being amortized on a straight-line basis over 25 years. Accumulated
amortization at February 3, 2001 and January 29, 2000 was $120,971,000 and
$109,931,000, respectively.
The Company evaluates its long-lived assets for impairment annually or
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. The Company compares the carrying value of its long-lived
assets to an estimate of their expected future cash flows (undiscounted and
without interest charges) to evaluate the reasonableness of the carrying value
and remaining depreciation or amortization period. If the sum of the expected
future cash flows is less than the carrying amount of the asset, an impairment
loss is recognized.
ADVERTISING
Costs associated with the production of advertising, such as printing and
other costs, are expensed as incurred. Costs associated with communicating
advertising that has been produced, such as magazine ads, are expensed when the
advertising first takes place. Costs of direct mail catalogs and postcards are
expensed when the advertising arrives in customers' homes. Advertising costs
were $30,900,000, $25,700,000 and $17,800,000 in Fiscal 2000, 1999 and 1998,
respectively.
STOCK-BASED AWARDS
The Company accounts for stock-based awards using the intrinsic
value-based method of accounting, under which no compensation cost is recognized
for stock option awards granted at fair market value and employees' purchase
rights under the Associate Discount Stock Purchase Plan (see Note 8). Restricted
stock awards result in the recognition of deferred compensation. Deferred
compensation is shown as a reduction of shareholders' equity and is amortized to
operating expenses over the vesting period of the stock award.
================================================================================
35
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("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.
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 reported period. Actual results could differ from these
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board (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 are effective for the Company's
Fiscal 2001 financial statements. Management has determined that the adoption of
these standards will have no impact on the Company's financial statements.
2. LONG-TERM DEBT
The following table summarizes long-term debt outstanding at February 3,
2001 and January 29, 2000:
February 3, 2001 January 29, 2000
-------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands)
Mortgage .................. $ 2,650 $ 2,650 $ 3,950 $ 3,950
Convertible Debentures, net 114,960 97,048 111,835 84,606
-------- -------- -------- --------
Total debt ......... 117,610 99,698 115,785 88,556
Less current portion ...... 1,400 1,400 1,300 1,300
-------- -------- -------- --------
Total long-term debt $116,210 $ 98,298 $114,485 $ 87,256
======== ======== ======== ========
================================================================================
36
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
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.
Ann Taylor's principal credit facility is a bank credit facility that it
entered into in June 1998 with a syndicate of lenders (the "Credit Facility").
Ann Taylor uses the Credit Facility for the issuance of commercial and standby
letters of credit and to provide funds for other general corporate purposes.
The lenders' commitment under the Credit Facility was originally $150,000,000.
The Credit Facility had an original maturity date of June 30, 2000, subject to
extension upon the satisfaction of certain conditions. Effective September 3,
1999, Ann Taylor elected to reduce the commitment of the lenders under the
Credit Facility by $25,000,000 to $125,000,000 and extended the term of the
credit agreement to June 30, 2001.
Loans outstanding under the Credit Facility at any time may not exceed
$50,000,000. The Company did not make any borrowings under the loan provisions
of the Credit Facility during Fiscal 2000, and there were no loans outstanding
at fiscal year end. The outstanding loan balance is required to be reduced to
zero for the thirty-day period commencing January 1 each year. This cleandown
period was achieved for January 2001. 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 3, 2001 was
$125,000,000. Commercial and standby letters of credit outstanding under the
Credit Facility as of February 3, 2001 were approximately $89,894,000.
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at Ann Taylor's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%,
respectively. In addition, Ann Taylor is required to pay the lenders a quarterly
commitment fee on the unused revolving loan commitment amount at a rate ranging
from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby
letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens and investments, restrictions on dividends or
other distributions to stockholders and maintenance of certain financial ratios
including a specified fixed charge coverage ratio and specified levels of net
worth.
The lenders have been granted a pledge of the common stock of Ann Taylor
and certain of its subsidiaries, and a security interest in substantially all
other tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of Ann Taylor and its subsidiaries, as
collateral for Ann Taylor's obligations under the Credit Facility.
As noted above, the Credit Facility matures in June 2001. The Company is
currently negotiating to obtain new financing to succeed the Credit Facility and
anticipates new arrangements will be in place in the Spring of 2001.
During the second quarter of Fiscal 1999, the Company completed the
issuance of an aggregate of $199,072,000 principal amount at maturity of its
Convertible Subordinated Debentures due 2019 ("Convertible Debentures"). The
Convertible Debentures were sold at an original issue price of $552.56 per
$1,000 principal amount at maturity of Debenture. The net proceeds of the sale
================================================================================
37
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
were applied to the redemption, described below, of the $100,000,000 outstanding
8 3/4% Subordinated Notes due 2000 (the "8 3/4% Notes") issued by Ann Taylor.
Cash interest is payable on the principal amount at maturity of the Convertible
Debentures at the rate of 0.55% per annum. This interest rate and the accrual of
original issue discount represent a yield to maturity on the Convertible
Debentures of 3.75%. The Convertible Debentures are convertible at the option of
the holders thereof initially into 12.078 shares of the Company's common stock
per $1,000 principal amount at maturity of Debenture. The Convertible Debentures
may be redeemed at the Company's option on or after June 18, 2004. The Company's
obligations with respect to the Convertible Debentures are guaranteed on a
subordinated basis by Ann Taylor.
On July 22, 1999, Ann Taylor 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 1999 and fiscal
year of 1999 of $962,000, or $0.03 per share on a diluted basis, net of income
tax benefit.
Ann Taylor and its wholly owned subsidiary AnnTaylor Distribution
Services, Inc. are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage loan
balance at February 3, 2001 was $2,650,000.
The aggregate principal payments for the next five years of all long-term
obligations at February 3, 2001 are as follows:
Fiscal Year (in thousands)
-----------
2001..................................... $ 1,400
2002..................................... 1,250
2003..................................... ---
2004..................................... ---
2005..................................... ---
-----
Total.................................... $ 2,650
=====
3. PREFERRED SECURITIES
In April and May of Fiscal 1996, the Company completed the sale of an
aggregate of $100,625,000 of 8 1/2% Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities (the "preferred securities") issued by its
financing vehicle, AnnTaylor Finance Trust, a Delaware business trust (the
"Trust"). On June 29, 1999, AnnTaylor Finance 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 Company common stock prior to the redemption date, at a
conversion price of $19.65 per share of common stock, or 2.545 shares of 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.
================================================================================
38
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the allowance for doubtful accounts for the
fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999 is as
follows:
Fiscal Years Ended
-----------------------------
Feb. 3, Jan. 29, Jan. 30,
2001 2000 1999
------- ------- -------
(in thousands)
Balance at beginning of year ............ $ 666 $ 820 $ 812
Provision for loss on accounts receivable 1,154 1,032 1,476
Accounts written off .................... (1,199) (1,186) (1,468)
------- ------- -------
Balance at end of year .................. $ 621 $ 666 $ 820
======= ======= =======
5. COMMITMENTS AND CONTINGENCIES
RENTAL COMMITMENTS
The Company occupies its retail stores and administrative facilities under
operating leases, most of which are non-cancelable. Some leases contain renewal
options for periods ranging from one to ten years under substantially the same
terms and conditions as the original leases. Most of the store leases require
payment of a specified minimum rent, plus a contingent rent based on a
percentage of the store's net sales in excess of a specified threshold. In
addition, most of the leases require payment of real estate taxes, insurance and
certain common area and maintenance costs in addition to the future minimum
lease payments shown below.
Future minimum lease payments under non-cancelable operating leases at
February 3, 2001 are as follows:
Fiscal Year (in thousands)
-----------
2001 .............. $117,419
2002 .............. 118,108
2003 .............. 113,145
2004 .............. 108,743
2005 .............. 100,034
2006 and thereafter 353,493
--------
Total ............. $910,942
========
Rent expense for the fiscal years ended February 3, 2001, January 29, 2000
and January 30, 1999 was as follows:
Fiscal Years Ended
---------------------------
Feb. 3, Jan. 29, Jan. 30,
2001 2000 1999
------- ------- -------
(in thousands)
Minimum rent ........................ $91,482 $73,363 $66,916
Percentage rent ..................... 3,534 3,131 2,414
------- ------- -------
Total .......................... $95,016 $76,494 $69,330
======= ======= =======
================================================================================
39
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company has been named as a defendant in several legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to these actions cannot be accurately predicted, in the
opinion of the Company, any such liability will not have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
In addition, the Company, Ann Taylor, certain directors and former
officers and directors of the Company and Ann Taylor, Merrill Lynch & Co.
("ML&Co.") and certain affiliates of ML&Co. are defendants in a purported class
action lawsuit originally filed in April 1996 by certain alleged stockholders,
alleging that the Company and the other defendants engaged in a fraudulent
scheme and course of business that operated a fraud or deceit on purchasers of
the Company's common stock during the period from February 3, 1994 through May
4, 1995. On November 9, 1998, the District Court issued an order granting the
defendants' motion to dismiss the amended complaint with prejudice for its
failure to plead fraud with particularity. On or about December 15, 1998, the
plaintiffs filed a notice of appeal to the United States Court of Appeals for
the Second Circuit, seeking review of the District Court's order. The Court
heard oral argument on this appeal on September 15, 1999. ML&Co., its affiliates
and the two directors who previously served on the Company's Board of Directors
as representatives of certain affiliates of ML&Co. (the "settling defendants")
reached a settlement with the plaintiffs, which provides, among other things,
for the establishment of a settlement fund in the amount of $3,000,000, plus
interest. On or about December 14, 1999, the District Court entered an Order and
Final Judgment approving this partial settlement, dismissing the amended
complaint with prejudice as to the settling defendants, and barring and
enjoining any future claims by, among others, the remaining defendants against
the settling defendants for contribution.
On June 21, 2000, the United States Court of Appeals for the Second
Circuit vacated the dismissal of the amended complaint. The Court of Appeals
held that the allegations of the amended complaint are sufficient to satisfy the
standard for pleading intent under the federal securities laws, but expressed no
view as to whether the allegations are sufficiently particularized. Accordingly,
the Court of Appeals remanded the case to the District Court with instructions
to allow plaintiffs to replead their complaint, and to reconsider whether
plaintiffs' allegations are pled with sufficient particularity to satisfy the
pleading standards of the Private Securities Litigation Reform Act of 1995. The
decision of the Court of Appeals applies only to plaintiffs' claims against the
Company, Ann Taylor and their former directors and officers. As a result, any
liability that may arise from this action cannot be predicted at this time.
ML&Co. and its affiliates entered into a settlement with the plaintiffs, and
plaintiffs withdrew their appeal of the dismissal of the amended complaint with
respect to those defendants.
On or about September 19, 2000, the Company, Ann Taylor and their former
directors and officers filed a petition for a writ of certiorari in the United
States Supreme Court seeking review and reversal of the decision of the Court of
Appeals. This petition was denied on or about November 27, 2000.
Following the decision of the Court of Appeals, plaintiffs elected not to
replead their amended complaint. On or about September 29, 2000, the Company,
Ann Taylor and their former directors and officers again moved to dismiss the
amended complaint, arguing that it fails to plead fraud with sufficient
particularity under the standards set forth by the Court of Appeals in its June
21, 2000 decision. The motion has been fully briefed and is pending before the
District Court.
The Company believes that the amended complaint is without merit and
intends to continue to defend the action vigorously.
================================================================================
40
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. NET INCOME PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share assumes the issuance of additional shares of common stock,
that are issuable by the Company upon the conversion of all outstanding
warrants, stock options, restricted stock and convertible securities if the
effect is dilutive. Basic and diluted earnings per share calculations follow:
Fiscal Years Ended
--------------------------------------------------------------------------------
February 3, 2001 January 29, 2000 January 30, 1999
------------------------ ------------------------- -------------------------
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------- ------ ------ ------- ------- ------
(in thousands, except per share amounts)
BASIC EARNINGS PER SHARE
- ------------------------
Income available
to common stockholders
before extraordinary loss $52,363 28,608 $1.83 $65,493 29,021 $2.25 $39,324 25,715 $1.53
==== ==== ====
EFFECT OF DILUTIVE
SECURITIES
- ----------
Warrants ................... --- --- --- 1 --- 3
Stock options and
restricted stock ........ --- 209 --- 269 --- 166
Preferred securities ....... --- --- 1,123 2,083 5,189 5,122
Convertible Debentures ..... 2,644 2,404 1,570 1,475 --- ---
------ ------ ------ ------ ------ ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available
to common stockholders
before extraordinary loss $55,007 31,221 $1.76 $68,186 32,849 $2.08 $44,513 31,006 $1.44
====== ====== ==== ====== ====== ==== ====== ====== ====
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Fiscal Years Ended
------------------------------------
February 3, 2001 January 29, 2000
---------------- ----------------
(in thousands)
Land and building................... $ 8,774 $ 8,774
Leasehold improvements.............. 132,537 110,573
Furniture and fixtures.............. 213,195 169,521
Construction in progress............ 25,279 23,518
------- -------
379,785 312,386
Less accumulated depreciation
and amortization................. 159,753 138,747
------- -------
Net property and equipment...... $220,032 $173,639
======= =======
================================================================================
41
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. OTHER EQUITY AND STOCK OPTION PLANS
COMMON STOCK
During Fiscal 1999, the number of authorized shares of common stock was
increased from 40,000,000 to 120,000,000.
PREFERRED STOCK
At February 3, 2001, January 29, 2000 and January 30, 1999, there were
2,000,000 shares of preferred stock, par value $0.01, authorized and unissued.
REPURCHASE PROGRAM
During the third quarter of Fiscal 1999, the Company's Board of Directors
authorized a program under which the Company was authorized to purchase up to
$40,000,000 of the Company's common stock and/or Convertible Debentures through
open market purchases and/or in privately negotiated transactions. On January
10, 2000, the Board of Directors increased the amount of securities that could
be purchased under the program to $90,000,000. As of January 29, 2000, 3,012,500
shares of the Company's common stock had been repurchased for an aggregate
purchase price of $89,900,000 (exclusive of brokerage commissions), completing
the securities repurchase program. All of the repurchased shares became treasury
shares and may be used for general corporate or other purposes. No Convertible
Debentures were purchased.
ASSOCIATE DISCOUNT STOCK PURCHASE PLAN
In Fiscal 1999, the Company established an Associate Discount Stock
Purchase Plan (the "Stock Purchase Plan") through which participating eligible
employees may purchase shares of the Company's common stock semiannually, at a
price equal to the lower of 85% of the closing price of the Company's common
stock on the grant date or the purchase date of each semiannual stock purchase
period. Participating employees pay for their stock purchases under the Stock
Purchase Plan by authorizing limited payroll deductions of up to a maximum of
15% of their compensation. During Fiscal 2000, 107,938 shares were issued
pursuant to the Stock Purchase Plan at an average price per share of $18.80. No
shares of common stock were previously issued pursuant to the Stock Purchase
Plan. At February 3, 2001, there were 142,062 shares available for future
issuance under this Stock Purchase Plan.
STOCK OPTION PLANS
In 1989 and 1992, the Company established stock option plans. In 2000, the
Company established a stock option and restricted award plan (the "Plan"). Under
the Plan, the number of shares of common stock as to which options and
restricted stock may be granted from time to time may not exceed 1,000,000, of
which no more than 250,000 may be granted as restricted stock. The Plan also
includes an acceleration clause by which all options not exercisable by their
terms will, upon the occurrence of certain events, become exercisable. At
February 3, 2001, 22,547 shares of common stock were reserved for issuance under
the 1989 plan, 2,189,246 shares of common stock were reserved for issuance under
the 1992 plan and 1,000,000 shares were reserved under the 2000 plan. Under the
terms of all plans, the exercise price of any option may not be less than 100%
of the fair market value of the common stock on the date of grant.
================================================================================
42
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. OTHER EQUITY AND STOCK OPTIONS PLANS (CONTINUED)
Stock options granted prior to 1994 generally vest over a five year
period, with 20% becoming exercisable immediately upon grant of the option and
20% per year for the next four years. Stock options granted since 1994 generally
vest either (i) over a four year period, with 25% becoming exercisable on each
of the first four anniversaries of the grant, or (ii) in seven or nine years
with accelerated vesting upon the achievement of specified earnings or stock
price targets within a five-year period. All stock options granted under the
1989 plan, the 1992 plan and the 2000 plan expire ten years from the date of
grant. At February 3, 2001, there were no shares under the 1989 plan, 452,187
shares under the 1992 plan and 462,700 shares under the 2000 plan available for
future grant.
The following table summarizes stock option transactions for the fiscal
years ended February 3, 2001, January 29, 2000 and January 30, 1999:
Weighted Number
Option Prices Average Price of Shares
--------------- ------------- ---------
Outstanding Options January 31, 1998 $6.80 - $44.13 $21.20 1,621,092
Granted .......................... $14.00 - $36.25 17.52 306,574
Exercised ........................ $6.80 - $36.25 19.09 (373,544)
Canceled ......................... $6.80 - $42.50 23.68 (162,224)
---------
Outstanding Options January 30, 1999 $6.80 - $44.13 $20.67 1,391,898
Granted .......................... $22.81 - $47.69 43.56 882,500
Exercised ........................ $6.80 - $42.50 18.65 (351,737)
Canceled ......................... $11.00 - $44.25 25.41 (123,980)
---------
Outstanding Options January 29, 2000 $11.50 - $47.69 $31.98 1,798,681
Granted .......................... $16.88 - $38.63 23.72 870,900
Exercised ........................ $14.19 - $36.25 19.22 (110,059)
Canceled ......................... $14.19 - $44.81 26.11 (303,193)
---------
Outstanding Options February 3, 2001 $11.50 - $47.69 $30.21 2,256,329
=========
Options for 631,787, 558,321 and 696,596 shares were exercisable as of
February 3, 2001, January 29, 2000 and January 30, 1999, respectively, and had a
weighted average exercise price of $24.54, $20.74 and $19.76 per share,
respectively.
The following table summarizes information concerning options outstanding
and exercisable at February 3, 2001:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Price Outstanding (years) Price Exercisable Price
- --------------- ---------- ----------- --------- ----------- ---------
$11.50 - $19.08 330,254 6.2 $16.04 240,053 $16.29
$19.09 - $23.84 393,767 7.2 $21.49 219,574 $21.15
$23.85 - $28.61 571,968 8.6 $24.24 10,207 $25.28
$28.62 - $42.92 227,840 6.9 $35.32 54,786 $34.87
$42.93 - $47.69 732,500 8.1 $44.32 107,167 $44.53
------------------------------------------------------------
$11.50-$47.69 2,256,329 7.7 $30.21 631,787 $24.54
============================================================
================================================================================
44
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. OTHER EQUITY AND STOCK OPTIONS PLANS (CONTINUED)
The Company accounts for the stock options and the employees' purchase
rights under the Stock Purchase Plan using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, under which no
compensation costs have been recognized for stock option awards and shares
purchased under the Stock Purchase Plan. Had compensation costs of option awards
and employees' purchase rights been determined under a fair value alternative
method as stated in SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company would have been required to prepare a fair value model for such options
and employees' purchase rights, and record such amount in the financial
statements as compensation expense. Pro forma net income before extraordinary
loss and net income per share before extraordinary loss, on a diluted basis,
after taking into account such expense, would have been as follows:
Fiscal Years Ended
------------------------------
Feb. 3, Jan. 29, Jan. 30,
2001 2000 1999
-------- ------- --------
(in thousands, except per share amounts)
Net income:
As reported......... $52,363 $64,531 $39,324
Pro forma........... $49,964 $63,917 $38,394
Basic earnings per share:
As reported......... $ 1.83 $ 2.25 $ 1.53
Pro forma........... $ 1.75 $ 2.20 $ 1.49
Diluted earnings per share:
As reported......... $ 1.76 $ 2.08 $ 1.44
Pro forma........... $ 1.69 $ 2.03 $ 1.41
The fair value of each option grant is estimated at the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Fiscal Years Ended
----------------------------------------------------
February 3, 2001 January 29, 2000 January 30, 1999
---------------- ---------------- ----------------
Expected volatility.... 69.7% 49.1% 59.4%
Risk-free interest rate 5.9% 4.9% 5.4%
Expected life (years).. 4.0 4.0 4.0
Dividend yield......... --- --- ---
In 1994, the Company's 1992 stock option plan was amended and restated to
include restricted stock and unit awards. A unit represents the right to receive
the cash value of a share of common stock on the date the restrictions on the
unit lapse. The restrictions on grants generally lapse over a four year period
from the date of the grant. In the event a grantee terminates employment with
the Company, any restricted stock or restricted units remaining subject to
restrictions are forfeited. During 1998, 1999 and 2000, certain executives were
awarded restricted common stock and, in some cases, restricted units. The
resulting unearned compensation expense, based upon the market value on the date
of grants, was charged to stockholders' equity and is being amortized over the
restricted period.
================================================================================
45
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. OTHER EQUITY AND STOCK OPTIONS PLANS (CONTINUED)
STOCKHOLDER RIGHTS PLAN
On May 18, 2000, the Board of Directors of the Company adopted a
Stockholder Rights Plan, pursuant to which Rights were distributed as a dividend
at the rate of one Right for each share of common stock of the Company held by
stockholders of record as of the close of business on May 30, 2000. Each Right
entitles stockholders to buy one unit of a share of a new series of preferred
stock for $125. The Rights generally will be exercisable only if a person or
group acquires beneficial ownership of 15% or more of the Voting Power of the
Company as represented by the Company's common stock or commences a tender or
exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Voting Power of the Company, as represented
by the Company's common stock. The Rights will expire on May 18, 2010.
9. EXECUTIVE COMPENSATION
In 1996, J. Patrick Spainhour, the Chairman and Chief Executive Officer of
Ann Taylor, was granted 75,000 shares of restricted common stock. The resulting
unearned compensation expense of $1,171,875, based upon the market value on the
date of the grant, was charged to stockholders' equity and was amortized over
the restricted period applicable to these shares. In 1999, Mr. Spainhour was
granted an additional 25,000 shares of restricted stock which vested on March 8,
2000, and in 2000, an additional 50,000 shares of restricted stock were awarded.
Of these restricted shares, which are performance-vesting, 25,000 restricted
shares would have vested on March 8, 2001 but were cancelled on that date
because the Company failed to achieve specified earnings goals. The remaining
25,000 restricted shares will vest on March 8, 2002, provided the Company
achieves specified earnings goals for Fiscal 2001. Mr. Spainhour's restricted
stock awards resulted in unearned compensation expense of $500,000 and $829,688,
in Fiscal 2000 and Fiscal 1999, respectively, based on the market value of the
common stock on the date of the grants. The unearned compensation expense was
charged to stockholders' equity and is being amortized over the restricted
period applicable to these shares. In addition to the restricted stock, Mr.
Spainhour was awarded a non-qualified stock option award to purchase 250,000
shares of common stock at the current market price, which will be exercisable in
March 2002, as well as "super-incentive" non-qualified performance-vesting stock
options to purchase 100,000 shares of common stock. The "super-incentive"
non-qualified performance vesting stock options will become exercisable upon
achievement of various earnings per share targets between March 2000 and March
2002. An additional "super-incentive" nonqualified performance-vesting stock
option, which is exercisable in March 2002, to purchase 100,000 shares was
granted in Fiscal 2000. Any "super-incentive" options that do not vest by March
2002 will be cancelled on that date. Additionally, as of December 9, 1996, a
former executive of the Company received a grant of 30,000 restricted shares of
common stock and 20,000 restricted units. The resulting unearned compensation
expense of $592,500, based on the market value of the common stock on the date
of the grant, was charged to stockholders' equity and was amortized over the
restricted period applicable to these shares. In Fiscal 2000, an award for an
additional 50,000 restricted shares was granted. The former executive's right to
these shares was canceled upon her resignation. In addition, the former
executive was awarded "super-incentive" non-qualified performance vesting stock
options to purchase 100,000 shares of common stock at the then current market
price. These unvested options were cancelled upon the executive's resignation
from the Company.
10. EXTRAORDINARY ITEM
On July 22, 1999, the Company applied the proceeds received from the
issuance of its Convertible Debentures 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.
================================================================================
46
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. NONRECURRING CHARGES
In the fourth quarter of Fiscal 1998, the Company recorded a $3,633,000
non-cash pre-tax charge for the retirement of certain assets. This charge
related to the write-off of the net book value of assets relinquished during the
renovation of the Company's corporate offices.
12. INCOME TAXES
The provision for income taxes for the fiscal years ended February 3,
2001, January 29, 2000 and January 30, 1999 consists of the following:
Fiscal Years Ended
------------------------------------
February 3, January 29, January 30,
2001 2000 1999
---------- ----------- ----------
(in thousands)
Federal:
Current............................ $ 38,082 $ 41,682 $ 21,589
Deferred .......................... (3,047) (3,033) 2,748
-------- -------- --------
Total federal.................. 35,035 38,649 24,337
-------- -------- --------
State and local:
Current ........................... 6,476 11,856 7,869
Deferred .......................... (817) (809) 1,217
-------- -------- --------
Total state and local ......... 5,659 11,047 9,086
-------- -------- --------
Foreign:
Current ........................... 471 525 156
Deferred .......................... (130) -- --
-------- -------- --------
Total foreign.................. 341 525 156
-------- -------- --------
Total.............................. $ 41,035 $ 50,221 $ 33,579
======== ======== ========
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 3, 2001, January 29, 2000 and January 30, 1999 is as follows:
Fiscal Years Ended
---------------------------
Feb. 3, Jan. 29, Jan. 30,
2001 2000 1999
------- -------- --------
(in thousands, except percentages)
Income before income taxes and
extraordinary loss............................ $93,398 $115,714 $72,903
====== ======= ======
Federal statutory rate........................... 35% 35% 35%
====== ====== ======
Provision for income taxes at
federal statutory rate........................ $ 32,689 $40,500 $25,516
State and local income taxes, net
of federal income tax benefit................. 4,751 6,278 4,660
Non-deductible amortization of goodwill.......... 3,500 3,500 3,500
Earnings of foreign subsidiaries................. 78 79 (188)
Other............................................ 17 (136) 91
------ ------ ------
Provision for income taxes....................... $41,035 $50,221 $33,579
====== ====== ======
================================================================================
47
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. INCOME TAXES (CONTINUED)
The tax effects of significant items comprising the Company's deferred tax
assets as of February 3, 2001 and January 29, 2000 are as follows:
February 3, 2001 January 29, 2000
---------------- ----------------
(in thousands)
Current:
Inventory............................ $ 4,375 $ 2,071
Accrued expenses..................... 3,364 2,306
Real estate.......................... (2,087) (2,050)
------ ------
Total current......................... $ 5,652 $ 2,327
====== ======
Noncurrent:
Accrued expenses..................... $ 983 $ 763
Depreciation and amortization........ (2,616) (2,936)
Rent expense......................... 5,510 5,168
Other................................ (16) 327
------ ------
Total noncurrent...................... $ 3,861 $ 3,322
====== ======
Income taxes provided reflect the current and deferred tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. U.S. federal income taxes are provided on unremitted foreign earnings,
except those that are considered permanently reinvested, which at February 3,
2001 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 $2,137,000.
13.RETIREMENT PLANS
Savings Plan. Ann Taylor maintains a defined contribution 401(k) savings
plan for substantially all full-time employees of Ann Taylor and its
subsidiaries. Participants may contribute to the plan an aggregate of up to 10%
of their annual earnings. Ann Taylor makes a matching contribution of 50% with
respect to the first 3% of each participant's annual earnings contributed to the
plan. Ann Taylor's contributions to the plan for Fiscal 2000, Fiscal 1999 and
Fiscal 1998 were $792,000, $697,000, and $592,000, respectively.
Pension Plan. Substantially all full-time employees of Ann Taylor and its
subsidiaries are covered under a noncontributory defined benefit pension plan.
Through December 31, 1997, the pension plan was a "cash balance pension plan",
under which each participant accrued a benefit based on compensation and years
of service with Ann Taylor. As of January 1, 1998, the plan was amended and the
formula to calculate benefits was changed to a career average formula. The new
career average formula was used to determine the funding status of the plan
beginning in Fiscal 1997. Ann Taylor's funding policy for the plan is to
contribute annually the amount necessary to provide for benefits based on
accrued service and projected pay increases. Plan assets consist primarily of
cash, equity and fixed income securities.
================================================================================
48
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13.RETIREMENT PLANS (CONTINUED)
The following table provides information for the pension plan at February
3, 2001, January 29, 2000 and January 30, 1999:
Fiscal Years Ended
-----------------------------
Feb. 3, Jan. 29, Jan. 30,
2001 2000 1999
------- ------- -------
(in thousands)
Change in benefit obligation:
Benefit obligation, beginning of year ....... $ 4,954 $ 4,642 $ 3,820
Service cost ................................ 1,206 1,129 669
Interest .................................... 442 340 292
Actuarial loss .............................. 912 19 348
Benefits paid ............................... (732) (1,176) (487)
------- ------- -------
Benefit obligation, end of year ............. 6,782 4,954 4,642
------- ------- -------
Change in plan assets:
Fair value of plan assets, beginning of year 9,489 7,486 5,128
Actual return on plan assets ................ 887 763 1,205
Employer contribution ....................... -- 2,416 1,640
Benefits paid ............................... (732) (1,176) (487)
------- ------- -------
Fair value of plan assets, end of year ...... 9,644 9,489 7,486
------- ------- -------
Funded status (fair value of plan assets less
benefit obligation) ...................... 2,862 4,535 2,844
Unrecognized net actuarial gain ............. (763) (1,621) (1,675)
Unrecognized prior service cost ............. 57 63 69
------- ------- -------
Prepaid benefit cost ........................ $ 2,156 $ 2,977 $ 1,238
======= ======= =======
Net pension cost includes the following components:
Fiscal Years Ended
-------------------------------
Feb. 3, Jan. 29, Jan. 30,
2001 2000 1999
---- ---- ----
(in thousands)
Service cost........................ $ 1,206 $ 1,129 $ 669
Interest cost....................... 442 340 292
Expected return on assets........... (831) (776) (481)
Amortization of prior gains......... (1) (22) (61)
Amortization of prior service cost.. 6 6 6
------ ------- ------
Net periodic pension cost........... $ 822 $ 677 $ 425
====== ======= ======
For the fiscal years ended February 3, 2001, January 29, 2000 and January
30, 1999, the following actuarial assumptions were used:
Fiscal Years Ended
-------------------------------
Feb. 3, Jan. 29, Jan. 30,
2001 2000 1999
---- ---- ----
Discount rate....................... 7.75% 8.25% 6.75%
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%
================================================================================
49
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Quarterly Financial Data (Unaudited)
Quarter
--------------------------------------------
First Second Third Fourth
------- ------- ------- --------
(in thousands, except per share amounts)
FISCAL 2000
Net sales....................... $277,068 $306,252 $305,876 $ 343,580
Gross profit ................... 148,596 143,808 170,438 147,898
Net income...................... $ 11,282 $ 13,426 $ 23,877 $ 3,778
======= ======= ======= ========
Basic earnings per share ....... $ 0.39 $ 0.47 $ 0.83 $ 0.13
======= ======= ======= ========
Diluted earnings per share ..... $ 0.38 $ 0.45 $ 0.78 $ 0.13
======= ======= ======= ========
FISCAL 1999
Net sales ...................... $249,400 $265,747 $272,289 $ 297,083
Gross profit ................... 131,337 125,905 149,875 141,388
Income before extraordinary loss 14,755 13,373 21,448 15,917
Extraordinary loss ............. -- 962 -- --
------- ------- ------- --------
Net income ..................... $ 14,755 $ 12,411 $ 21,448 $ 15,917
======= ======= ======= ========
Basic earnings per share before
extraordinary loss .......... $ 0.56 $ 0.47 $ 0.68 $ 0.53
Extraordinary loss per share ... --- 0.03 --- ---
------- ------- ------- --------
Basic earnings per share ....... $ 0.56 $ 0.44 $ 0.68 $ 0.53
======= ======= ======= ========
Diluted earnings per share
before extraordinary loss.... $ 0.51 $ 0.42 $ 0.65 $ 0.50
Extraordinary loss per share ... --- 0.03 --- ---
------- ------- ------- --------
Diluted earnings per share ..... $ 0.51 $ 0.39 $ 0.65 $ 0.50
======= ======= ======= ========
The sum of the quarterly per share data may not equal the annual amounts
due to changes in the weighted average shares and share equivalents outstanding.
Conversion of the Convertible Debentures into common stock is not included in
the computation of diluted earnings per share for the fourth quarter of Fiscal
2000 due to the antidilutive effect of the conversion.