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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
FORM 10-K
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(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934.
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FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003
OR
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|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934.
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COMMISSION FILE NO. 1-11980
ANNTAYLOR, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0297083
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 WEST 57TH STREET, NEW YORK, NY 10019
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(Address of principal executive offices) (Zip Code)
(212) 541-3300
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(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None.
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Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes No X .
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As of February 28, 2003, 1 share of the registrant's common
stock was outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
The registrant meets the conditions set forth in General
Instruction I(1)(a) and (b) of Form 10-K and is therefore filing
this form with the reduced disclosure format.
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1
PART I
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ITEM 1. BUSINESS
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GENERAL
AnnTaylor, Inc. (the "Company" or "Ann Taylor"), through its
wholly owned subsidiaries, is a leading national specialty
retailer of better quality women's apparel, shoes and accessories
sold primarily under the "Ann Taylor" and "Ann Taylor Loft" brand
names. The Company believes that "Ann Taylor" is a highly
recognized national brand that defines a distinct fashion point
of view. Ann Taylor merchandise represents classic styles,
updated to reflect current fashion trends. The Company's stores
offer a full range of career and casual separates, dresses, tops,
weekend wear, shoes and accessories, coordinated as part of a
total wardrobing strategy. This total wardrobing strategy is
reinforced by an emphasis on client service. Ann Taylor sales
associates are trained to assist clients in merchandise selection
and wardrobe coordination, helping them achieve the "Ann Taylor
look" while reflecting the clients' personal styles. Unless the
context indicates otherwise, all references herein to the Company
include the Company and its wholly owned subsidiaries.
As of February 1, 2003, the Company operated 584 retail
stores in 42 states, the District of Columbia and Puerto Rico
under the names Ann Taylor, Ann Taylor Loft and Ann Taylor
Factory Stores. The Company's 350 Ann Taylor stores compete in
the "better"-priced market. Approximately 62% of these stores
are located in regional malls, 26% are located in village shops,
and 12% are located in downtown areas. The Company believes that
the client 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 clients are professional
women with limited time to shop, who are attracted to Ann Taylor
by its focused merchandising and total wardrobing strategies,
personalized client service, efficient store layouts and
continual flow of new merchandise.
As of February 1, 2003, the Company operated 207 Ann Taylor
Loft stores. Approximately 52% of these stores are located in
regional malls, 33% are located in lifestyle centers, with the
remaining 15% located in downtown and mill locations. Ann Taylor
Loft stores compete in the "upper-moderate"-priced market. Ann
Taylor Loft is designed for women with a more relaxed lifestyle
and work environment, who appreciate the Ann Taylor style but are
more price sensitive. Merchandise is created uniquely for these
stores and is sold under the Ann Taylor Loft label. The first
Ann Taylor Loft stores opened by the Company were located in
factory outlet centers. In 1998, the Company began opening Ann
Taylor Loft stores outside the factory outlet environment, in
regional malls, lifestyle centers and urban and village street
locations. During Fiscal 2002, the Company converted 18 Ann
Taylor Loft stores located in outlet centers to Ann Taylor
Factory stores. Management believes that Ann Taylor Loft
represents a significant opportunity for the Company to compete
in the upper-moderate-priced women's apparel market.
At February 1, 2003, the Company also operated 27 Ann Taylor
Factory stores in factory outlet centers, including the 18 Ann
Taylor Loft stores located in factory outlet centers that were
converted during Fiscal 2002. Ann Taylor Factory stores serve as
a brand-appropriate clearance vehicle for merchandise from both
Ann Taylor and Ann Taylor Loft stores. Additionally, Ann Taylor
Factory stores handle an assortment of current season styles
created uniquely for these stores and sold under the Ann Taylor
Factory store label.
In Fiscal 2000, the Company launched anntaylor.com (the
"Online Store"), making Ann Taylor merchandise available for
direct retail sale to clients 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 collection.
The Company believes that the Online Store further builds the Ann
Taylor brand and enhances the Company's relationships with
clients, as well as creates the opportunity for sales to new and
existing clients.
In January 2003, the Company launched anntaylorloft.com.
The site currently offers clients a search vehicle for locating
stores, as well as the opportunity to sign up to receive catalogs
and other promotional materials via regular mail or email. The
site is scheduled for e-commerce in early 2004.
The Company was incorporated under the laws of the state of
Delaware in 1986. All of the outstanding capital stock of the
Company, consisting of one share of common stock, is owned by
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AnnTaylor Stores Corporation ("ATSC"). The Company was acquired
by ATSC in a leveraged buyout transaction in 1989.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES
Sections of this annual report on Form 10-K contain various
forward-looking statements, made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements may use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar
expressions. These forward-looking statements reflect the
Company's current expectations concerning future events, and
actual results may differ materially from current expectations or
historical results. Any such forward-looking statements are
subject to various risks and uncertainties, including failure by
the Company to predict accurately client fashion preferences;
decline in the demand for merchandise offered by the Company;
competitive influences; changes in levels of store traffic or
consumer spending habits; effectiveness of the Company's brand
awareness and marketing programs; general economic conditions or
a downturn in the retail industry; the inability of the Company
to locate new store sites or negotiate favorable lease terms for
additional stores or for the expansion of existing stores; lack
of sufficient consumer interest in the Company's Online Store; a
significant change in the regulatory environment applicable to
the Company's business; an increase in the rate of import duties
or export quotas with respect to the Company's merchandise;
financial or political instability in any of the countries in
which the Company's goods are manufactured; acts of war or
terrorism in the United States or worldwide; work stoppages,
slowdowns or strikes; and other factors set forth in the
Company's filings with the SEC. The Company does not assume any
obligation to update or revise any forward-looking statements at
any time for any reason. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Statement Regarding Forward-Looking Disclosures".
ITEM 2. PROPERTIES
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As of February 1, 2003, the Company operated 584 stores, all
of which were leased. Store leases typically provide for initial
terms of ten years, although some leases have shorter or longer
initial periods. Some of the leases grant the Company the right
to extend the term for one or two additional five-year periods.
Some leases also contain early termination options, which can be
exercised by the Company under specific conditions. Most of the
store leases require the Company 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 the Company to pay real estate taxes, insurance and
certain common area and maintenance costs.
The Company leases corporate offices at 142 West 57th Street
and 1372 Broadway in New York City. The Company also leases
office space in New Haven, Connecticut.
The Company's wholly owned subsidiary, AnnTaylor
Distribution Services, Inc., owns its 256,000 square foot
distribution center located in Louisville, Kentucky. Nearly all
Ann Taylor merchandise is distributed to the Company's stores
through this facility. The parcel on which the Louisville
distribution center is located comprises approximately 20 acres
and could accommodate possible future expansion of the facility.
ITEM 3. LEGAL PROCEEDINGS
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The Company is a party to routine litigation incident to its
business. Although the amount of any liability that could arise
with respect to these actions cannot be accurately predicted, in
the opinion of the Company, any such liability will not have a
material adverse effect on the consolidated financial position,
consolidated results of operations, or liquidity of the Company.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
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STOCKHOLDER MATTERS
There is no public market for the common stock of the
Company. All of the outstanding stock of the Company, consisting
of one share of common stock, is owned by ATSC.
The payment of dividends by Ann Taylor to ATSC is subject to
certain restrictions under the Company's Credit Facility
described below under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and
Capital Resources". From time to time, the Company pays
dividends to ATSC in amounts sufficient to fund ATSC's operating
expenses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
SALES
The following table sets forth certain sales and store data
for the periods indicated:
FISCAL YEAR
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2002 2001 2000
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(52 weeks) (52 weeks) (53 weeks)
Net sales ($000) ...................... $1,380,966 $1,299,573 $1,232,776
Total net sales increase
percentage (52-week basis) ......... 6.3% 6.8% 12.2%
Total comparable store sales decrease
decrease percentage
(52-week basis) ..................... (3.9)% (6.1)% (0.5)%
Net sales per average
gross square foot .................. $ 434 $ 452 $ 496
Total store square footage
at end of period.................... 3,305,000 3,057,000 2,695,000
Number of:
New stores ......................... 49 67 81
Expanded stores .................... --- 6 4
Closed stores ...................... 3 7 8
Total stores open at end of period .... 584 538 478
The Company's net sales do not show significant seasonal
variation, although net sales in the fourth quarter have
historically been higher than in the other quarters. As a
result, the Company has not had significant overhead and other
costs generally associated with large seasonal variations.
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RESULTS OF OPERATIONS
The following table sets forth consolidated income statement
data expressed as a percentage of net sales for the periods
indicated:
FISCAL YEAR
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2002 2001 2000
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Net sales ................. 100.0% 100.0% 100.0%
Cost of sales ............. 45.9 50.2 50.5
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Gross margin .......... 54.1 49.8 49.5
Selling, general and
administrative expenses 44.3 44.4 40.7
Amortization of goodwill .. --- 0.8 0.9
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Operating income ...... 9.8 4.6 7.9
Interest income ........... 0.2 0.1 0.2
Interest expense .......... 0.5 0.5 0.6
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Income before income taxes 9.5 4.2 7.5
Income tax provision ...... 3.7 2.0 3.3
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Net income ................ 5.8% 2.2% 4.2%
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FISCAL 2002 COMPARED TO FISCAL 2001
The Company's net sales increased to $1,380,966,000 from
$1,299,573,000 in Fiscal 2001, an increase of $81,393,000, or
6.3%. Comparable store sales for Fiscal 2002 decreased 3.9%,
compared to a comparable store sales decrease of 6.1% in Fiscal
2001. By division, Fiscal 2002 comparable store sales decreased
5.3% for Ann Taylor and 1.0% for Ann Taylor Loft. The increase
in net sales was primarily attributable to the opening of new
stores, partially offset by the decrease in comparable store
sales in Fiscal 2002. Management believes that the decrease in
comparable store sales was, in part, the result of client
dissatisfaction with certain of the Company's product offerings
and merchandise assortment available in Ann Taylor stores in the
Fall 2002 season. Sales were also impacted by an overall
reduction in client spending caused by the current economic
environment.
Gross margin as a percentage of net sales increased to 54.1%
in Fiscal 2002 from 49.8% in Fiscal 2001. The increase in gross
margin is the combined result of higher full price sales and
higher margin rates achieved on full price and non-full price
sales at both divisions. Fiscal 2001 gross margin was impacted
by approximately $4,100,000 in pre-tax nonrecurring charges,
which related to the inventory write-off associated with the
discontinuation of the Ann Taylor cosmetics line, and inventory
costs associated with canceling certain Fall 2001 and Spring 2002
merchandise orders.
Selling, general and administrative expenses were
$612,479,000, or 44.3% of net sales in Fiscal 2002, compared to
$576,584,000, or 44.4% of net sales, in Fiscal 2001. Lower
internet costs and reduced marketing spending were offset by an
increase in the provision for management performance bonus and
higher tenancy expenses. Fiscal 2001 selling, general and
administrative expenses included approximately $12,900,000 in
pre-tax nonrecurring charges. Approximately $7,200,000 of this
amount related to the write-down of certain anntaylor.com assets,
based upon projected cash flows, which were not deemed adequate
to support the carrying value of the assets associated with this
ongoing business. An additional $3,300,000 related to the cost,
net of insurance proceeds, of settling a class action lawsuit.
The remaining $2,400,000 represented the write-off of certain
fixed assets related to the discontinuation of the Ann Taylor
cosmetics line, and severance costs associated with reductions
made in the Company's store and home office workforce.
Operating income increased to $135,014,000, or 9.8% of net
sales in Fiscal 2002, from $60,141,000, or 4.6% of net sales, in
Fiscal 2001. There was no goodwill amortization recorded in
Fiscal 2002, in accordance with SFAS No. 142, which the Company
adopted in February 2002. The Company recorded goodwill
amortization of $11,040,000, or 0.8% of net sales, during Fiscal
2001.
Interest income was $3,279,000 in Fiscal 2002, compared to
$1,390,000 in Fiscal 2001. The increase was primarily
attributable to higher cash on hand during Fiscal 2002 compared
to Fiscal 2001, partially offset by lower interest rates.
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Interest expense was $6,886,000 in Fiscal 2002, compared to
$6,869,000 in Fiscal 2001. The weighted average interest rate on
the Company's outstanding indebtedness at February 1, 2003 was
3.75%.
The income tax provision was $51,249,000, or 39.0% of income
before income taxes in Fiscal 2002, compared to $25,557,000, or
46.8% of income before income taxes in Fiscal 2001. The decrease
in the effective income tax rate is primarily the result of
non-deductible goodwill expense incurred in Fiscal 2001, which,
as previously discussed, was not recorded in Fiscal 2002.
As a result of the foregoing factors, the Company had net
income of $80,158,000, or 5.8% of net sales for Fiscal 2002,
compared to net income of $29,105,000, or 2.2% of net sales, for
Fiscal 2001.
CHANGES IN FINANCIAL POSITION
Accounts receivable decreased to $10,367,000 at the end of
Fiscal 2002 from $65,598,000 at the end of Fiscal 2001, a
decrease of $55,231,000, or 84.2%. This decrease was primarily
attributable to the sale of the Company's proprietary credit card
accounts receivable.
Merchandise inventories increased to $185,484,000 at
February 1, 2003 from $180,117,000 at February 2, 2002, an
increase of $5,367,000 or 3.0%. Merchandise inventories at
February 1, 2003 and February 2, 2002 included approximately
$41,771,000 and $37,558,000, 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 new stores opened since the beginning of the year.
Total store square footage increased to approximately 3,305,000
square feet at February 1, 2003 from approximately 3,057,000
square feet at February 2, 2002. Merchandise inventory on a
per-square-foot basis, excluding inventory associated with the
Company's sourcing division, was approximately $43 at the end of
Fiscal 2002, compared to $47 at the end of Fiscal 2001.
Inventory turned 4.4 times in Fiscal 2002, compared to 4.7 times
in Fiscal 2001, excluding inventory associated with the Company's
sourcing division. Inventory turnover is determined by dividing
cost of sales by the average of the cost of inventory at the
beginning and end of the period (excluding inventory associated
with the sourcing division).
Accounts payable increased to $57,058,000 at the end of
Fiscal 2002 from $52,011,000 at the end of Fiscal 2001, an
increase of $5,047,000, or 9.7%. The increase in accounts payable
is primarily due to the timing of payments to vendors.
Accrued liabilities increased to $94,137,000 at the end of
Fiscal 2002 from $82,007,000 at the end of Fiscal 2001, an
increase of $12,130,000, or 14.8%. The increase in accrued
liabilities is primarily attributable to an increase in the
provision for management performance bonus.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital is cash flow
from operations. The following table sets forth material measures
of the Company's liquidity:
FISCAL YEAR
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2002 2001 2000
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(DOLLARS IN THOUSANDS)
Cash provided by operating activities. $155,499 $ 77,598 $ 76,625
Working capital....................... $304,076 $ 190,798 $172,767
Current ratio......................... 3.01:1 2.41:1 2.22:1
Debt to equity ratio.................. .17:1 .20:1 .20:1
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Cash provided by operating activities in Fiscal 2002, as
presented on the consolidated statements of cash flows, primarily
resulted from earnings, non-cash charges and increases in
accounts payable and accrued liabilities, partially offset by an
increase in merchandise inventories.
On April 30, 2001, the Company entered into an Amended and
Restated $175,000,000 senior secured revolving Credit Facility
(the "Credit Facility") with Bank of America N.A. and a syndicate
of lenders. This Credit Facility was amended on December 20,
2001 and on August 29, 2002 to adjust certain ratio provisions,
and amend certain definitions used in the calculation of ratios
required in the Credit Facility. The Credit Facility matures on
April 29, 2004.
Maximum availability for loans and letters of credit under
the Credit Facility is governed by a monthly borrowing base,
determined by the application of specified advance rates against
certain eligible assets. Based on this calculation, the maximum
amount available for loans and letters of credit under the Credit
Facility at February 1, 2003 was $175,000,000. Commercial and
standby letters of credit outstanding under the Credit Facility
as of February 1, 2003 were approximately $97,114,000. Loans
outstanding under the Credit Facility at any time may not exceed
$75,000,000. In addition, the Credit Facility requires that the
outstanding loan balance be reduced to zero for a 30-day period
each calendar year. There were no loans outstanding at any time
during Fiscal 2002.
Amounts outstanding under the Credit Facility bear interest
at a rate equal to, at the Company's option, the Bank of America
Base Rate, defined as the higher of (a) the Federal Funds Rate
plus one-half of 1% and (b) the Prime Rate for such day, or
Eurodollar Rate; plus, in either case, a margin ranging from
0.25% to 2.00%. The Company is also required to pay the lenders
a quarterly commitment fee on the unused revolving loan
commitment amount at a rate ranging from 0.30% to 0.50% per
annum. Fees for outstanding commercial and standby letters of
credit range from 0.50% to 0.875% and from 1.25% to 2.00%,
respectively. Premiums ranging from 0.125% to 0.50% may apply to
all interest and commitment fees, depending on the calculated
Leverage ratio.
The Credit Facility contains financial and other covenants,
including limitations on indebtedness, liens and investments,
restrictions on dividends or other distributions to stockholders
and maintenance of certain financial ratios including specified
levels of tangible net worth.
The lenders have been granted a pledge of the common stock
of ATSC and certain of its subsidiaries, and a security interest
in substantially all other tangible and intangible assets,
including trademarks, inventory, store furniture and fixtures, of
the Company and its subsidiaries, as collateral for the Company's
obligations under the Credit Facility.
During Fiscal 1999, the Company issued a promissory note, as
amended, to ATSC, in an aggregate of $199,072,000 principal
amount at maturity (the "Note Payable to ATSC"). The Note
Payable to ATSC was issued by the Company for value received and
has interest and payment terms substantially similar to the terms
of the Convertible Debentures Due 2019 ("Convertible Debentures")
that were issued in 1999 by ATSC. ATSC has pledged the Note
Payable to ATSC to the lenders under the Company's Credit
Facility as collateral for ATSC's guarantee of the Company's
performance of its obligations under the Credit Facility.
During Fiscal 2002 the seven-year mortgage loan related to
the Company's distribution center land and building in
Louisville, Kentucky was paid in full. Ann Taylor and its wholly
owned subsidiary, AnnTaylor Distribution Services, Inc., were
parties to the $7,000,000 seven-year mortgage loan.
The Company's capital expenditures totaled $45,450,000,
$83,693,000 and $83,310,000 in Fiscal 2002, 2001 and 2000,
respectively. Capital expenditures were primarily attributable
to the Company's store expansion, renovation and refurbishment
programs, as well as the investment the Company made in certain
information systems and the Company's corporate offices. These
expenditures also include, in Fiscal 2001 and Fiscal 2000,
capital expenditures related to the Company's Internet e-commerce
Web site, and related enhancements to the material handling
system at the Company's distribution center. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Fiscal 2001 Compared to Fiscal 2000" for information
regarding the asset write-off associated with the Company's
Online Store. The Company expects its total capital expenditure
requirements in Fiscal 2003 will be approximately $85,000,000,
including capital for new store construction for a planned square
footage increase of approximately 400,000 square feet, or 12%, as
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7
well as capital to support continued investments in information
systems and a refurbishment program for its existing store base.
The actual amount of the Company's capital expenditures will
depend in part on the number of stores opened, expanded and
refurbished and on the amount of construction allowances the
Company receives from the landlords of its new or expanded stores.
The Company occupies its retail stores and administrative
facilities under operating leases, most of which are
non-cancelable. Some leases contain renewal options for periods
ranging from one to ten years under substantially the same terms
and conditions as the original leases. Some leases also contain
early termination options, which can be exercised by the Company
under specific conditions. Most of the store leases require
payment of a specified minimum rent, plus a contingent rent based
on a percentage of the store's net sales in excess of a specified
threshold. In addition, most of the leases require payment of
real estate taxes, insurance and certain common area and
maintenance costs in addition to the future minimum lease
payments shown below.
Future minimum lease payments under non-cancelable operating
leases as of February 1, 2003 are as follows:
FISCAL YEAR (IN THOUSANDS)
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2003..................................$ 145,759
2004.................................. 144,982
2005.................................. 136,510
2006.................................. 115,689
2007.................................. 106,621
2008 and thereafter................... 386,832
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Total.................................$ 1,036,393
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On January 26, 2000, the Company declared a cash dividend,
authorized by its Board of Directors, to ATSC in the amount of
$89,944,612 to facilitate the repurchase, by ATSC, of up to
$90,000,000 of its common stock and/or Convertible Debentures
through open market purchases and privately negotiated
transactions. As of January 29, 2000, 3,012,500 shares of
ATSC's common stock had been repurchased for an aggregate purchase
price of $89,900,900 (exclusive of brokerage commissions),
completing ATSC's repurchase program. All of the repurchased
shares became treasury shares of ATSC and may be used for general
corporate and other purposes. No Convertible Debentures were
purchased.
In order to finance its operations and capital requirements,
the Company expects to use internally generated funds and trade
credit and funds available to it under the Credit Facility. The
Company believes that cash flow from operations and funds
available under the Credit Facility are sufficient to enable it
to meet its ongoing cash needs for its business, as presently
conducted, for the foreseeable future.
On February 4, 2002, the Company sold its proprietary credit
card portfolio to World Financial Network National Bank (the
"Bank"). The associated gain of $2,095,000 is reported in selling,
general and administrative expenses in the Consolidated
Statements of Income for Fiscal 2002. In connection with the
sale, the Company contracted with Alliance Data Systems
Corporation ("ADS"), the Bank's affiliated servicer, to provide
private label credit card services to proprietary Ann Taylor
credit card clients. Under the terms of the transaction, ADS will
manage the Ann Taylor credit card program, and pay the Company a
percentage of all collected finance charges.
The Company is party to a 3-year contract for services to
provide training to store associates, and maintenance and support
for related software. Payments under this contract total
$6,500,000 in each of Fiscal 2003 and Fiscal 2004, and $5,000,000
in Fiscal 2005.
Substantially all full-time employees of the Company are
covered under a noncontributory defined benefit pension plan.
The Company's funding obligations and liability under the terms
of the plan are determined using certain actuarial assumptions,
including a discount rate of 6.75% and an expected long-term rate
of return on plan assets of 8.5%. The discount rate selected was
determined based on the change in the Moody's Aa corporate bond
yields, which have decreased by 59 basis points over the course
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of Fiscal 2002. On this basis, the discount rate utilized was
adjusted from 7.50% at February 2, 2002 to 6.75% at February 1,
2003. The market-related value of plan assets for determining
pension expense is equal to the fair value of plan assets,
recognizing gains or losses as they occur. Plan assets as of
February 1, 2003 are allocated 50% in equities, 33% in bond
related funds and 17% in short-term investments. For purposes of
developing long-term rates of return, it was assumed that the
short-term investments were reallocated to equities, yielding
assumed long-term rates of return of 10% and 6% for equities and
bond-related funds, respectively. In selecting an expected
long-term rate of return on plan assets, consideration was given
to the Company's historical annual rate of return over a 7-year
period, which averaged 8.8% per year. In light of this, and in
view of current market conditions, the expected long-term rate of
return on plan assets utilized was reduced from 9.0% for the
fiscal year ended February 1, 2003 to 8.5% for the fiscal year
ending January 31, 2004.
The Company is self-insured for expenses related to its
employee point of service medical and dental plans, and its
worker's compensation plan, up to certain thresholds. Claims
filed, as well as claims incurred but not reported, are accrued
based on management's estimates, using information received from
plan administrators, historical analysis, and other relevant
data. Management believes that it has taken reasonable steps to
ensure that the Company is adequately accrued for costs incurred
related to these programs at February 1, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective February 3, 2002 the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 requires
that ratable amortization of goodwill be replaced by periodic
tests for impairment within six months of the date of adoption,
and then on a periodic basis thereafter. Based on the impairment
testing performed in February 2003, management determined that
there was no impairment loss related to the net carrying value of
the Company's recorded goodwill.
In July 2001, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which provides accounting requirements for
retirement obligations associated with tangible long-lived
assets. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 has not had a
significant impact on the Company's consolidated financial
statements.
In August 2001, The FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". This
statement addresses accounting and reporting for the impairment
or disposal of long-lived assets, other than goodwill, including
discontinued operations. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The adoption of SFAS
No. 144 has had no impact on the Company's consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". SFAS No. 145 primarily
affects the reporting requirements and classification of gains
and losses from the extinguishment of debt, rescinds the
transitional accounting requirements for intangible assets of
motor carriers, and requires that certain lease modifications
with economic effects similar to sale-leaseback transactions be
accounted for in the same manner as sale-leaseback transactions.
SFAS No. 145 is effective for financial statements issued after
April 2002, with the exception of the provisions affecting the
accounting for lease transactions, which should be applied for
transactions entered into after May 15, 2002, and the provisions
affecting classification of gains and losses from the
extinguishment of debt, which should be applied in fiscal years
beginning after May 15, 2002. Management has determined that the
adoption of SFAS No. 145 will have no immediate impact on the
Company's consolidated financial statements, but will evaluate in
future periods the classification of any debt extinguishment
costs in accordance with APB Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions".
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS No. 146
requires companies to recognize costs associated with exit or
disposal activities when they are incurred, rather than at the
date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and
8
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9
certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other
exit or disposal activity. Previous accounting guidance was
provided by Emerging Issues Task Force ("EITF") No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 replaces EITF No.
94-3, and is required to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The
Company adopted SFAS No. 146 during the fourth quarter of Fiscal
2002 with no material impact on the Company's consolidated
financial statements.
In November 2002, the FASB issued FASB Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN No. 45 clarifies and expands on
existing disclosure requirements for guarantees, and clarifies
that a guarantor is required to recognize, at the inception of
the guarantee, a liability equal to the fair value of the
obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of FIN No. 45 are
applicable on a prospective basis for guarantees issued or
modified after December 31, 2002. The disclosure requirements of
FIN No. 45 are effective for financial statements issued after
December 15, 2002. The Company adopted FIN No. 45 during the
fourth quarter of Fiscal 2002 with no material impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation
of Variable Interest Entities - an Interpretation of Accounting
Research Bulletin No. 51". FIN No. 46 requires unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse the
risks and rewards of ownership among their owners and other
parties involved. The provisions of FIN No. 46 are applicable
immediately to all variable interest entities created after
January 31, 2003 and variable interest entities in which a
company obtains an interest after that date. For variable
interest entities created before January 31, 2003, the provisions
of this interpretation are effective July 1, 2003. Management is
currently evaluating the provisions of this interpretation, and
does not believe that it will have a significant impact on the
Company's consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
On December 12, 2001, the United States Securities and
Exchange Commission (the "SEC") issued Financial Reporting
Release ("FRR") No. 60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies", which encourages the
identification and disclosure of the most critical accounting
policies applied in the preparation of a company's financial
statements. In response to FRR No. 60, management has determined
that the Company's most critical accounting policies are those
related to merchandise inventory valuation, intangible asset
impairment, and income taxes. These policies are further
described in the Notes to the Consolidated Financial Statements,
and in relevant sections of this discussion and analysis.
Inventory is valued at the lower of average cost or market,
at the individual item level. Market is determined based on the
estimated net realizable value, which is generally the
merchandise selling price. Inventory levels are monitored to
identify slow-moving merchandise and broken assortments (items no
longer in stock in a sufficient range of sizes) and markdowns are
used to clear such merchandise. Inventory value is reduced
immediately when the selling price is marked below cost.
Physical inventory counts are performed annually each January,
and estimates are made for shortage during the period between the
last physical inventory count and the balance sheet date.
Pursuant to the adoption of SFAS No. 142 in February 2002,
management performed impairment testing which considered the
Company's net discounted future cash flows in determining whether
an impairment charge related to the carrying value of the
Company's recorded goodwill was necessary, and concluded that
there was no such impairment loss. This will be reevaluated
annually, or more frequently if necessary, using similar
testing. In the case of long-lived tangible assets, if the
undiscounted future cash flows related to the long-lived assets
are less than the assets' carrying value, a similar impairment
charge would be considered. Management's estimate of future cash
flows is based on historical experience, knowledge, and market
data. These estimates can be affected by factors such as those
outlined in the Statement Regarding Forward-Looking Disclosures.
9
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10
The Company follows SFAS No. 109 "Accounting for Income
Taxes," which requires the use of the liability method. Deferred
tax assets and liabilities are recognized based on the
differences between the financial statement carrying value of
existing assets and liabilities and their respective tax bases.
Inherent in the measurement of these deferred balances are
certain judgments and interpretations of existing tax law and
other published guidance as applied to the Company's operations.
No valuation allowance has been provided for deferred tax assets,
since management anticipates that the full amount of these assets
should be realized in the future. The Company's effective tax
rate considers management's judgment of expected tax liabilities
in the various taxing jurisdictions within which it is subject to
tax. The Company has also been involved in both foreign and
domestic tax audits. At any given time, many tax years are
subject to audit by various taxing authorities.
Management believes these critical accounting policies
represent the more significant judgments and estimates used in
the preparation of the Company's consolidated 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, made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements may use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar
expressions. These forward-looking statements reflect the
Company's current expectations concerning future events, and
actual results may differ materially from current expectations or
historical results. Any such forward-looking statements are
subject to various risks and uncertainties, including failure by
the Company to predict accurately client fashion preferences;
decline in the demand for merchandise offered by the Company;
competitive influences; changes in levels of store traffic or
consumer spending habits; effectiveness of the Company's brand
awareness and marketing programs; general economic conditions or
a downturn in the retail industry; the inability of the Company
to locate new store sites or negotiate favorable lease terms for
additional stores or for the expansion of existing stores; lack
of sufficient consumer interest in the Company's Online Store; a
significant change in the regulatory environment applicable to
the Company's business; an increase in the rate of import duties
or export quotas with respect to the Company's merchandise;
financial or political instability in any of the countries in
which the Company's goods are manufactured; acts of war or
terrorism in the United States or worldwide; work stoppages,
slowdowns or strikes; and other factors set forth in the
Company's filings with the SEC. The Company does not assume any
obligation to update or revise any forward-looking statements at
any time for any reason.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------
The Company maintains the majority of its cash and cash
equivalents in financial instruments with original maturity dates
of three months or less. These financial instruments are subject
to interest rate risk and will decline in value if interest rates
increase. Due to the short duration of these financial
instruments, a change of 100 basis points in interest rates would
not have a material effect on the Company's financial condition.
The Company's outstanding long-term debt as of February 1,
2003 bears interest at fixed rates; therefore, the Company's
consolidated results of operations would only be affected by
interest rate changes to the extent that fluctuating rate loans
are outstanding under the Credit Facility. As of February 1,
2003, the Company has no such amounts outstanding. The effect of
interest rate changes on the Company would depend on the amount
of indebtedness outstanding at the time and the amount of such
change.
10
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------
The following consolidated financial statements of the
Company for the years ended February 1, 2003, February 2, 2002
and February 3, 2001 are included as a part of this Report (See
Item 15):
Consolidated Statements of Income for the fiscal years ended
February 1, 2003, February 2, 2002 and February 3, 2001.
Consolidated Balance Sheets as of February 1, 2003 and
February 2, 2002.
Consolidated Statements of Stockholder's Equity for the
fiscal years ended February 1, 2003, February 2, 2002 and
February 3, 2001.
Consolidated Statements of Cash Flows for the fiscal years
ended February 1, 2003, February 2, 2002 and February 3,
2001.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------
FINANCIAL DISCLOSURES
None.
11
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12
PART III
--------
ITEM 14. CONTROLS AND PROCEDURES
- -------
Under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and
Chief Financial Officer, the Company has conducted an evaluation
of the effectiveness of the design and operation of its
disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) as of a date within 90
days of the filing of this annual report (the "Evaluation
Date"). There are inherent limitations to the effectiveness of
any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based on such
evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating
to the Company (including its consolidated subsidiaries) required
to be included in the Company's reports filed or submitted under
the Exchange Act. There were no significant changes in the
Company's internal controls or in other factors that could
significantly affect such controls subsequent to the Evaluation
Date, including any corrective actions with regard to significant
deficiencies and material weaknesses.
12
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13
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------
(a) List of documents filed as part of this Annual Report:
1. The following consolidated financial statements of the
Company are filed as part of this Annual Report:
Independent Auditors' Report; Consolidated Statements of
Income for the fiscal years ended February 1, 2003,
February 2, 2002 and February 3, 2001; Consolidated
Balance Sheets as of February 1, 2003 and February 2,
2002; Consolidated Statements of Stockholder's Equity
for the fiscal years ended February 1, 2003, February 2,
2002 and February 3, 2001; Consolidated Statements of
Cash Flows for the fiscal years ended February 1, 2003,
February 2, 2002 and February 3, 2001; Notes to
Consolidated Financial Statements.
2. 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.
3. The exhibits filed as a part of this Annual Report are
listed in the exhibit index below.
(b) Reports on Form 8-K:
The Company filed the following report on Form 8-K during
the quarter ended February 1, 2003:
Date of Report Item(s) Reported
-------------- ----------------
1/23/03 Item 5 and Item 7
(c) Exhibit Index.
EXHIBIT NUMBER
- --------------
3.1 Certificate of Incorporation of the Company, as amended.
Incorporated by reference to Exhibit 3.3 to the
Registration Statement of ATSC and Ann Taylor filed on
May 3, 1989 (Registration No. 33-28522).
3.2 By-Laws of the Company. Incorporated by reference to Exhibit
3.4 to the Registration Statement of ATSC and Ann
Taylor filed on May 3, 1989 (Registration No.
33-28522).
4.1 Indenture, dated as of June 18, 1999, between the Company,
ATSC, and the Bank of New York, as Trustee.
Incorporated by reference to Exhibit 4.01 to the
Registration Statement of ATSC filed on September 13,
1999 (Registration No. 333-86955).
4.2 Rights Agreement, dated as of May 18, 2000, between ATSC and
Continental Stock Transfer & Trust Company.
Incorporated by reference to Exhibit 4 of Form 8-K of
ATSC filed on May 23, 2000.
10.1 Lease, dated as of March 17, 1989, between Carven Associates
and Ann Taylor concerning the West 57th Street
headquarters. Incorporated by reference to Exhibit
10.21 to the Registration Statement of ATSC and Ann
Taylor filed on May 3, 1989 (Registration No.
33-28522).
13
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14
EXHIBIT NUMBER
- --------------
10.1.1 First Amendment to Lease, dated as of November 14, 1990,
between Carven Associates and Ann Taylor. Incorporated
by reference to Exhibit 10.17.1 to the Registration
Statement of ATSC filed on April 11, 1991 (Registration
No. 33-39905).
10.1.2 Second Amendment to Lease, dated as of February 28, 1993,
between Carven Associates and Ann Taylor. Incorporated
by reference to Exhibit 10.17.2 to the Annual Report on
Form 10-K of ATSC filed on April 29, 1993.
10.1.3 Extension and Amendment to Lease dated as of October 1,
1993, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.11 to the Form
10-Q of the Company for the Quarter ended October 30,
1993 filed on November 26, 1993.
10.1.4 Modification of Amendment and Extension to Lease, dated
as of April 14, 1994 between Carven Associates and Ann
Taylor. Incorporated by reference to Exhibit 10.15.4
to the Annual Report on Form 10-K of ATSC filed on
April 28, 1995.
10.1.5 Fifth Amendment to Lease, dated as of March 14, 1995,
between Carven Associates and Ann Taylor. Incorporated
by reference to Exhibit 10.15.5 to the Annual Report on
Form 10-K of ATSC filed on April 28, 1995.
10.1.6 Sixth Amendment to Lease, dated as of January 5, 1996,
between Pacific Metropolitan Corporation and Ann
Taylor. Incorporated by reference to Exhibit 10.8.6 to
the Annual Report on Form 10-K of ATSC filed on April
30, 1998.
10.1.7 Seventh Amendment to Lease, dated as of June 5, 1996,
between Pacific Metropolitan Corporation and Ann
Taylor. Incorporated by reference to Exhibit 10.8.7 to
the Annual Report on Form 10-K of ATSC filed on April
30, 1998.
10.1.8 Eighth Amendment to Lease, undated, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated
by reference to Exhibit 10.8.8 to the Annual Report on
Form 10-K of ATSC filed on April 30, 1998.
10.1.9 Ninth Amendment to Lease, dated as of May 13, 1997,
between Pacific Metropolitan Corporation and Ann
Taylor. Incorporated by reference to Exhibit 10.8.9 to
the Annual Report on Form 10-K of ATSC filed on April
30, 1998.
10.1.10 Tenth Amendment to Lease, dated as of May 21, 1997,
between Pacific Metropolitan Corporation and Ann
Taylor. Incorporated by reference to Exhibit 10.8.10
to the Annual Report on Form 10-K of ATSC filed on
April 30, 1998.
10.1.11 Eleventh Amendment to Lease, dated as of May 15, 1998,
between Pacific Metropolitan Corporation and Ann
Taylor. Incorporated by reference to Exhibit 10.3.11
to the Annual Report on Form 10-K of ATSC filed on
March 29, 1999.
10.1.12 Sublease Agreement, dated as of February 23, 1999,
between Societe Air France (formerly known as Compagnie
Nationale Air France) and the Company. Incorporated by
reference to Exhibit 10.2.12 to the Annual Report on
Form 10-K of ATSC filed on April 18, 2000.
10.2 Tax Sharing Agreement, dated as of July 13, 1989, between
ATSC and Ann Taylor. Incorporated by reference to
Exhibit 10.24 to Amendment No. 2 to the Registration
Statement of ATSC and Ann Taylor filed on July 13, 1989
(Registration No. 33-28522).
14
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15
EXHIBIT NUMBER
--------------
+10.3 The AnnTaylor Stores Corporation 1992 Stock Option and
Restricted Stock and Unit Award Plan, Amended and
Restated as of February 23, 1994 (the "1992 Plan").
Incorporated by reference to Exhibit 10.15 to the
Annual Report on Form 10-K of ATSC filed on May 1,
1997.
+10.3.1 Amendment to the AnnTaylor Stores Corporation 1992
Plan, as approved by stockholders on June 18, 1997.
Incorporated by reference to Exhibit 10.15.1 to the
Form 10-Q of ATSC for the Quarter ended August 2, 1997
filed on September 12, 1997.
+10.3.2 Amendment to the AnnTaylor Stores Corporation 1992 Plan
dated as of January 16, 1998. Incorporated by
reference to Exhibit 10 of Form 8-K of ATSC filed on
March 12, 1998.
+10.3.3 Amendment to the AnnTaylor Stores Corporation 1992 Plan
dated as of May 12, 1998. Incorporated by reference to
Exhibit 10.16.3 to the Form 10-Q of ATSC for the
Quarter ended April 2, 1998 filed on June 16, 1998.
+10.3.4 Amendment to the AnnTaylor Stores Corporation 1992 Plan
dated as of March 10, 2000. Incorporated by reference
to Exhibit 10.8.4 to the Annual Report on Form 10-K of
ATSC filed on April 18, 2000.
+10.4 The AnnTaylor Stores Corporation 2000 Stock Option and
Restricted Stock Award Plan (the "2000 Plan").
Incorporated by reference to Exhibit 10.4 to the Annual
Report on Form 10-K of ATSC filed on April 1, 2003.
+10.4.1 First Amendment to the 2000 Plan, adopted January 29,
2002. Incorporated by reference to Exhibit 10.18.1 to
the Annual Report on Form 10-K of ATSC filed on April
4, 2002.
+10.5 AnnTaylor Stores Corporation 2002 Stock Option and
Restricted Stock and Unit Award Plan. Incorporated by
reference to Exhibit 10.9 to the Annual Report on Form
10-K of ATSC filed on April 4, 2002.
+10.6 AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan, as approved
by stockholders on June 18, 1997. Incorporated by
reference to Exhibit 10.16 to the Form 10-Q of ATSC for
the Quarter ended August 2, 1997 filed on September 12,
1997.
+10.6.1 Amendment to the AnnTaylor Stores Corporation Amended
and Restated Management Performance Compensation Plan
dated as of March 12, 1998. Incorporated by reference
to Exhibit 10.17.1 to the Annual Report on Form 10-K of
ATSC filed on April 30, 1998.
+10.6.2 Amendment to the AnnTaylor Stores Corporation Amended
and Restated Management Performance Compensation Plan,
dated as of March 10, 2000. Incorporated by reference
to Exhibit 10.9.2 to the Annual Report on Form 10-K of
ATSC filed on April 18, 2000.
+10.7 AnnTaylor Stores Corporation Deferred Compensation Plan
("Deferred Compensation Plan"). Incorporated by
reference to Exhibit 10.33 to the Annual Report on Form
10-K of ATSC filed on April 28, 1995.
+10.7.1 Amendment to the Deferred Compensation Plan as approved
by the Board of Directors on August 11, 1995.
Incorporated by reference to Exhibit 10.33.1 to the
Form 10-Q of ATSC for the Quarter ended July 29, 1995
filed on September 11, 1995.
+10.7.2 Amendment to the Deferred Compensation Plan, effective as
of January 1, 2002. Incorporated by reference to
Exhibit 10.11.2 to the Annual Report on Form 10-K of
ATSC filed on April 4, 2002.
15
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16
EXHIBIT NUMBER
- --------------
10.8 Amended and Restated Credit Agreement ("Credit
Agreement"), dated as of April 30, 2001, among
AnnTaylor, Inc., as Borrower, Bank of America, N.A., as
Administrative Agent, The CIT Group/Business Credit,
Inc., Firstar Bank, N.A., and Transamerica Business
Capital Corporation, as Co-Agents, The Chase Manhattan
Bank and First Union National Bank, as Syndication
Agents, Fleet National Bank, as Documentation Agent,
and Bank of America, N.A., The Chase Manhattan Bank,
and First Union National Bank, as Issuing Banks and the
Lenders from time to time party thereto. Incorporated
by reference to Exhibit 10.18 to the Form 10-Q of ATSC
for the Quarter ended May 5, 2001 filed on June 18,
2001.
10.8.1 Amendment No. 1 to Credit Agreement, dated as of December
20, 2001, by and among AnnTaylor, Inc., the Guarantors
and Bank of America, N.A., as Administrative Agent for
each of the Lenders pursuant to the Credit Agreement.
Incorporated by reference to Exhibit 10.1 on Form 8-K
of the Company filed on January 10, 2002.
10.8.2 Amendment No. 2 to the Credit Agreement, dated as of
August 29, 2002, by and among AnnTaylor, Inc., the
Guarantors and Bank of America, N.A., as Administrative
Agent for each of the Lenders pursuant to the Credit
Agreement. Incorporated by reference to Exhibit 10.1 on
Form 8-K of the Company filed on September 4, 2002.
+10.9 AnnTaylor Stores Corporation Long-Term Cash Incentive
Compensation Plan, as approved by stockholders on June
17, 1998. Incorporated by reference to Exhibit A to
the Proxy Statement of ATSC dated May 1, 1998 filed on
May 6, 1998.
+10.9.1 Amendment to the AnnTaylor Stores Corporation Long-Term
Cash Incentive Compensation Plan, dated as of March 10,
2000. Incorporated by reference to Exhibit 10.16.1 to
the Annual Report on Form 10-K of ATSC filed on April
18, 2000.
+10.10 AnnTaylor Stores Corporation Special Severance Plan, dated
as of March 10, 2000. Incorporated by reference to
Exhibit 10.18 to the Annual Report on Form 10-K of ATSC
filed on April 18, 2000.
+10.11 Employment Agreement dated as of February 1, 1994
between ATSC and Sally Frame Kasaks. Incorporated by
reference to Exhibit 10.8 to the Form 10-Q of ATSC for
the Quarter ended October 29, 1994 filed on December
12, 1994.
+10.12 Employment Agreement, dated as of January 29, 2002,
between ATSC and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.5 to the Annual Report on Form
10-K of ATSC filed on April 4, 2002.
+10.13 Employment Agreement, dated as of March 7, 2001,
between ATSC and Barry Erdos ("Erdos Agreement").
Incorporated by reference to Exhibit 10.17 to the
Annual Report on Form 10-K of ATSC filed on April 5,
2001.
+10.13.1 Amendment, dated as of June 1, 2001, to the Erdos
Agreement. Incorporated by reference to Exhibit
10.17.1 to the Form 10-Q of ATSC for the Quarter ended
May 5, 2001 filed on June 18, 2001.
+10.13.2 Amendment No. 2, dated as of November 25, 2001, to the
Erdos Agreement. Incorporated by reference Exhibit
10.19.2 to the Annual Report on Form 10-K of ATSC filed
on April 4, 2002.
+10.14 Employment Agreement, dated as of April 24, 2001, between
ATSC and Kim Roy ("Roy Agreement"). Incorporated by
reference to Exhibit 10.19 to the Form 10-Q of ATSC for
the Quarter ended May 5, 2001 filed on June 18, 2001.
16
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17
EXHIBIT NUMBER
- --------------
+10.14.1 Amendment No. 1, dated as of November 25, 2001, to the
Roy Agreement. Incorporated by reference to Exhibit
10.20.1 to the Annual Report on Form 10-K of ATSC filed
on April 4, 2002.
+10.15 Employment Agreement, dated as of May 3, 2001, between
ATSC and Katherine Lawther Krill ("Krill Agreement").
Incorporated by reference to Exhibit 10.20 to the Form
10-Q of ATSC for the Quarter ended May 5, 2001 filed on
June 18, 2001.
+10.15.1 Amendment No. 1, dated as of November 25, 2001, to the
Krill Agreement. Incorporated by reference to Exhibit
10.21.1 to the Annual Report on Form 10-K of ATSC filed
on April 4, 2002.
14 Business Conduct Guidelines. Incorporated by reference to
Exhibit 14 to the Annual Report on Form 10-K of ATSC
filed on April 1, 2003.
*23 Consent of Deloitte & Touche LLP.
*99.1 Certification of chief executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification of chief financial officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed electronically herewith.
+ Management contract or compensatory plan or arrangement.
17
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18
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ANNTAYLOR, INC.
By: /s/J. Patrick Spainhour
-------------------------
J. Patrick Spainhour
Chairman and Chief
Executive Officer
Date: March 14, 2003
----------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ J. Patrick Spainhour Chairman and Chief Executive March 14, 2003
- ------------------------ Officer --------------
J. Patrick Spainhour Date
/s/ Barry Erdos Senior Executive Vice March 14, 2003
- ------------------------ President, Chief Operating --------------
Barry Erdos Officer and Director Date
/s/ James M. Smith Senior Vice President, March 14, 2003
- ------------------------ Chief Financial Officer --------------
James M. Smith Treasurer and Director Date
/s/ Barbara K. Eisenberg Senior Vice President, March 14, 2003
- ------------------------ General Counsel, Secretary --------------
Barbara K. Eisenberg and Director Date
/s/ Sallie A. DeMarsilis Vice President and Controller March 14, 2003
- ------------------------ --------------
Sallie A. DeMarsilis Date
18
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19
CERTIFICATION
-------------
I, J. Patrick Spainhour, certify that:
1. I have reviewed this annual report on Form 10-K of AnnTaylor,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 14, 2003 /s/J. Patrick Spainhour
--------------------- -------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
19
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20
CERTIFICATION
-------------
I, James M. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of AnnTaylor,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 14, 2003 /s/ James M. Smith
---------------- --------------------
James M. Smith
Senior Vice President,
Chief Financial Officer and
Treasurer
20
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21
ANNTAYLOR, INC.
---------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE NO.
--------
Independent Auditors' Report........................................ 22
Consolidated Financial Statements:
Consolidated Statements of Income for the fiscal years ended
February 1, 2003, February 2, 2002 and February 3, 2001...... 23
Consolidated Balance Sheets as of February 1, 2003 and
February 2, 2002............................................. 24
Consolidated Statements of Stockholder's Equity for the
fiscal years ended February 1, 2003, February 2, 2002
and February 3, 2001......................................... 25
Consolidated Statements of Cash Flows for the fiscal years
ended February 1, 2003, February 2, 2002 and
February 3, 2001............................................. 26
Notes to Consolidated Financial Statements..................... 27
21
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22
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholder of
ANNTAYLOR, INC.:
We have audited the accompanying consolidated financial
statements of AnnTaylor, Inc. and its subsidiaries, listed in the
accompanying index. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of the Company and its subsidiaries at February 1, 2003 and
February 2, 2002 and the results of their operations and their
cash flows for each of the three fiscal years in the period ended
February 1, 2003 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
goodwill to conform to Statement of Financial Accounting
Standards No. 142.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
New York, New York
February 28, 2003
22
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23
ANNTAYLOR, INC.
---------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 2003, FEBRUARY 2, 2002 AND
FEBRUARY 3, 2001
FISCAL YEARS ENDED
-------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ................ $1,380,966 $1,299,573 $1,232,776
Cost of sales ............ 633,473 651,808 622,036
------- ------- -------
Gross margin ............. 747,493 647,765 610,740
Selling, general and
administrative expenses 612,479 576,584 501,460
Amortization of goodwill . -- 11,040 11,040
------- ------- -------
Operating income ......... 135,014 60,141 98,240
Interest income .......... 3,279 1,390 2,473
Interest expense ......... 6,886 6,869 7,315
------- ------- -------
Income before income taxes 131,407 54,662 93,398
Income tax provision ..... 51,249 25,557 41,035
------- ------- -------
Net income ........... $ 80,158 $ 29,105 $ 52,363
======= ======= =======
See accompanying notes to consolidated financial statements.
23
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24
ANNTAYLOR, INC.
---------------
CONSOLIDATED BALANCE SHEETS
---------------------------
FEBRUARY 1, 2003 AND FEBRUARY 2, 2002
FEBRUARY 1, FEBRUARY 2,
2003 2002
---------- ----------
ASSETS (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Current assets
Cash and cash equivalents .................... $ 212,821 $ 30,037
Accounts receivable, net ..................... 10,367 65,598
Merchandise inventories ...................... 185,484 180,117
Prepaid expenses and other current assets .... 46,599 50,314
---------- ----------
Total current assets ..................... 455,271 326,066
Property and equipment, net .................... 247,115 250,735
Goodwill, net .................................. 286,579 286,579
Deferred financing costs, net .................. 4,170 5,044
Other assets ................................... 17,691 14,742
---------- ----------
Total assets ............................. $1,010,826 $ 883,166
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable ............................. $ 57,058 $ 52,011
Accrued salaries and bonus ................... 27,567 12,121
Accrued tenancy .............................. 10,808 10,151
Gift certificates and merchandise
credits redeemable ....................... 25,637 21,828
Accrued expenses ............................. 30,125 37,907
Current portion of long-term debt ............ -- 1,250
---------- ----------
Total current liabilities ................ 151,195 135,268
Long-term debt, net ............................ 121,652 118,280
Deferred lease costs and other liabilities ..... 23,561 17,489
Stockholder's equity
Common stock, $1.00 par value;
1,000 shares authorized
1 share issued and outstanding ........... 1 1
Additional paid-in capital ................... 417,568 392,683
Retained earnings ............................ 296,849 219,445
---------- ----------
Total stockholder's equity ............... 714,418 612,129
---------- ----------
Total liabilities and stockholder's equity $1,010,826 $ 883,166
========== ==========
See accompanying notes to consolidated financial statements.
24
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25
ANNTAYLOR, INC.
---------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
-----------------------------------------------
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 2003, FEBRUARY 2, 2002 AND
FEBRUARY 3, 2001
(IN THOUSANDS)
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
---- --------- --------- ---------
(IN THOUSANDS)
Balance at January 29, 2000 ............. $ 1 $ 377,155 $ 138,466 $ 515,622
Net income ........................... -- -- 52,363 52,363
Parent company contributions ......... -- 6,044 --- 6,044
---- --------- --------- ---------
Balance at February 3, 2001 ............. 1 383,199 190,829 574,029
Net income ........................... -- -- 29,105 29,105
Parent company contributions (charges) -- 9,484 (489) 8,995
---- --------- --------- ---------
Balance at February 2, 2002 ............. 1 392,683 219,445 612,129
Net income ........................... -- -- 80,158 80,158
Parent company contributions (charges) -- 24,885 (2,754) 22,131
---- --------- --------- ---------
Balance at February 1, 2003 ............. $ 1 $ 417,568 $ 296,849 $ 714,418
==== ========= ========= =========
See accompanying notes to consolidated financial statements.
25
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26
ANNTAYLOR, INC.
---------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 2003, FEBRUARY 2, 2002 AND
FEBRUARY 3, 2001
FISCAL YEARS ENDED
-------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------- ------ ------
(IN THOUSANDS)
Operating activities:
Net income .......................... $ 80,158 $ 29,105 $ 52,363
Adjustments to reconcile net
income to net cash provided
by operating activities
Amortization of deferred
compensation................. 5,931 1,841 1,133
Amortization of goodwill ........ -- 11,040 11,040
Deferred income taxes ........... 12,008 (5,115) (3,864)
Depreciation and amortization ... 47,687 43,529 35,033
Gain on sale of proprietary
credit card ................. (2,095) -- --
Loss on disposal and write-down
of property
and equipment ............... 1,384 9,483 1,884
Non-cash interest ............... 4,261 4,140 4,247
Provision for loss on accounts
receivable .................. -- 1,443 1,154
Changes in assets and liabilities:
Accounts receivable ........... (475) (8,750) (457)
Merchandise inventories ....... (5,367) (9,486) (30,605)
Prepaid expenses and other
current assets ............. (898) 6,948 (12,106)
Other non-current assets and
liabilities, net ........... (4,272) (2,303) (3,918)
Accounts payable and accrued
expenses ................... 17,177 (4,277) 20,721
------- ------ ------
Net cash provided by
operating activities .......... 155,499 77,598 76,625
------- ------ ------
Investing activities:
Proceeds from sale of proprietary
credit card ................... 57,800 --- ---
Purchases of property and equipment . (45,450) (83,693) (83,310)
------- ------ ------
Net cash provided (used) by
investing activities .......... 12,350 (83,693) (83,310)
------- ------ ------
Financing activities:
Parent company activity ............. 16,200 7,154 4,911
Payment of financing costs .......... (15) (1,583) (45)
Payments on mortgage ................ (1,250) (1,401) (1,300)
------- ------ ------
Net cash provided by financing
activities .................... 14,935 4,170 3,566
------- ------ ------
Net increase (decrease) in cash ........ 182,784 (1,925) (3,119)
Cash, beginning of year ................ 30,037 31,962 35,081
------- ------ ------
Cash, end of year ...................... $ 212,821 $ 30,037 $ 31,962
======= ====== ======
Supplemental disclosures
of cash flow information:
Cash paid during the year
for interest .................. $ 1,307 $ 2,504 $ 2,418
======= ====== ======
Cash paid during the year
for income taxes .............. $ 40,088 $ 19,170 $ 43,393
======= ====== ======
See accompanying notes to consolidated financial statements.
26
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27
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading
national specialty retailer of better quality women's apparel,
shoes and accessories sold principally under the Ann Taylor and
Ann Taylor Loft brand names. Its principal market consists of
the United States. The Company sells its products through
traditional retail stores and over the Internet through its
Online Store.
All of the outstanding capital stock of the Company,
consisting of one share of common stock, is owned by AnnTaylor
Stores Corporation ("ATSC").
BASIS OF PRESENTATION
The consolidated financial statements include the accounts
of the Company and its subsidiaries. All intercompany accounts
have been eliminated in consolidation.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires Management to make estimates and assumptions
that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from these estimates.
REVENUE RECOGNITION
The Company records revenue as merchandise is sold to
clients. 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. Amounts related to shipping and
handling billed to clients in a sales transaction are classified
as revenue and the costs related to shipping product to clients
(billed and unbilled) are classified as cost of goods sold.
Reserves for estimated discounts, returns and allowances are
provided when sales are recorded.
CASH AND CASH EQUIVALENTS
Cash and short-term highly liquid investments with original
maturity dates of three months or less are considered cash or
cash equivalents.
MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of average
cost or market, at the individual item level.
27
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28
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF SALES
Cost of sales is comprised of direct inventory costs for
merchandise sold, including all costs to transport merchandise
from third party suppliers to the Company's distribution center.
STORE PRE-OPENING COSTS
Non-capital expenditures, such as advertising and payroll
costs incurred prior to the opening of a new store are charged to
expense in the period they are incurred.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation
and amortization are computed on a straight-line basis over the
following estimated useful lives:
Building...........................40 years
Leasehold improvements.............3-10 years or term of
lease, if shorter
Furniture, fixtures and equipment..2-10 years
Software...........................5 years
DEFERRED RENT OBLIGATIONS
Rent expense under non-cancelable operating leases with
scheduled rent increases and landlord incentives is accounted for
on a straight-line basis over the lease term. The excess of
straight-line rent expense over scheduled payment amounts and
landlord incentives is recorded as a deferred liability.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the
interest method over the term of the related debt. Accumulated
amortization at February 1, 2003 and February 2, 2002 was
$4,458,000 and $3,569,000, 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 $1,820,000, $9,354,000 and
$8,614,000 in Fiscal 2002, Fiscal 2001, and Fiscal 2000,
respectively.
On February 4, 2002, the Company sold its proprietary credit
card portfolio to World Financial Network National Bank. The
associated gain of $2,095,000 is reported in selling, general and
administrative expenses in the Consolidated Statements of
Income. In connection with the sale, the Company contracted with
Alliance Data Systems ("ADS") to provide private label credit
card services to proprietary Ann Taylor credit card clients. ADS
pays the Company a percentage of all collected finance charges.
28
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29
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER LONG-LIVED ASSETS
ATSC 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 Ann
Taylor's net assets, was recorded as goodwill and has been
amortized on a straight-line basis through the end of Fiscal 2001
using an assumed 40 year life. In addition, as a result of the
September 1996 acquisition of the operations that became the
Company's sourcing division, $38,430,000 of goodwill was recorded
and has been amortized on a straight-line basis through the end
of Fiscal 2001 using an assumed 25 year life. The Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets" on February 3, 2002. SFAS No.142 requires
that ratable amortization of goodwill be replaced with periodic
tests of the goodwill's impairment. The Company performed impairment
testing which considered the Company's net discounted future cash
flows to determine whether an impairment charge related to the
carrying value of the Company's recorded goodwill was necessary,
and concluded that there was no such impairment loss at February 1, 2003.
This will be reevaluated annually, or more frequently if necessary,
using similar testing. In the case of long-lived tangible assets,
if the undiscounted future cash flows related to the long-lived
assets are less than the assets' carrying value, a similar
impairment charge would be considered. Management's estimate of
future cash flows is based on historical experience, knowledge,
and market data.
Net Income, adjusted to exclude the after-tax effect of
goodwill amortization, was $39,750,000 and $63,005,000, for Fiscal
2001 and Fiscal 2000, respectively.
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 clients' homes.
Advertising costs were $30,600,000, $34,000,000 and $32,000,000
in Fiscal 2002, 2001 and 2000, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes", which requires the
use of the liability method. Deferred tax assets and liabilities
are recognized based on the differences between the financial
statement carrying value of existing assets and liabilities and
their respective tax bases. No valuation allowance has been
provided for deferred tax assets, since management anticipates
that the full amount of these assets will be realized in the
future. 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.
29
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30
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
Pursuant to a Tax Sharing Agreement, ATSC and the Company
have agreed to elect to file consolidated income tax returns for
federal income tax purposes and may elect to file such returns in
states and other relevant jurisdictions that permit such an
election, for income tax purposes. With respect to such
consolidated income tax returns, the Tax Sharing Agreement
generally requires the Company to pay to ATSC the entire tax
shown to be due on such consolidated returns, provided that the
amount paid by the Company shall not exceed the amount of taxes
that would have been owed by the Company on a stand-alone basis.
SEGMENTS
The Company's brands have been aggregated into one
reportable segment, given the similarity of the economic
characteristics between the operations represented by its brands.
COMPREHENSIVE INCOME
SFAS No. 130, "Comprehensive Income", requires the
presentation of comprehensive income, in addition to the existing
income statement. Comprehensive income is defined as the change
in equity during a period from transactions and other events,
excluding changes resulting from investments by owners and
distributions to owners. For all years presented, there are no
material items requiring separate disclosure in accordance with
this statement.
RECLASSIFICATION
Certain Fiscal 2001 and Fiscal 2000 amounts have been
reclassified to conform to the Fiscal 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective February 3, 2002 the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 requires
that ratable amortization of goodwill be replaced by periodic
tests for impairment within six months of the date of adoption,
and then on a periodic basis thereafter. Based on the impairment
testing performed in February 2003, management determined that
there was no impairment loss related to the net carrying value of
the Company's recorded goodwill.
In July 2001, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which provides accounting requirements for
retirement obligations associated with tangible long-lived
assets. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 has not had a
significant impact on the Company's consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". This
statement addresses accounting and reporting for the impairment
or disposal of long-lived assets, other than goodwill, including
discontinued operations. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. Management has
determined that the adoption of SFAS No. 144 has had no impact on
the Company's consolidated financial statements.
30
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31
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". SFAS No. 145 primarily
affects the reporting requirements and classification of gains
and losses from the extinguishment of debt, rescinds the
transitional accounting requirements for intangible assets of
motor carriers, and requires that certain lease modifications
with economic effects similar to sale-leaseback transactions be
accounted for in the same manner as sale-leaseback transactions.
SFAS No. 145 is effective for financial statements issued after
April 2002, with the exception of the provisions affecting the
accounting for lease transactions, which should be applied for
transactions entered into after May 15, 2002, and the provisions
affecting classification of gains and losses from the
extinguishment of debt, which should be applied in fiscal years
beginning after May 15, 2002. Management has determined that the
adoption of SFAS No. 145 will have no immediate impact on the
Company's consolidated financial statements, but will evaluate in
future periods the classification of any debt extinguishment
costs in accordance with APB Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions".
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS No. 146
requires companies to recognize costs associated with exit or
disposal activities when they are incurred, rather than at the
date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other
exit or disposal activity. Previous accounting guidance was
provided by Emerging Issues Task Force ("EITF") No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 replaces EITF No.
94-3, and is required to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The
Company adopted SFAS No. 146 during the fourth quarter of Fiscal
2002 with no material impact on the Company's consolidated
financial statements.
In November 2002, the FASB issued FASB Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN No. 45 clarifies and expands on
existing disclosure requirements for guarantees, and clarifies
that a guarantor is required to recognize, at the inception of
the guarantee, a liability equal to the fair value of the
obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of FIN No. 45 are
applicable on a prospective basis for guarantees issued or
modified after December 31, 2002. The disclosure requirements of
FIN No. 45 are effective for financial statements issued after
December 15, 2002. The Company adopted FIN No. 45 during the
fourth quarter of Fiscal 2002 with no material impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation
of Variable Interest Entities - an Interpretation of Accounting
Research Bulletin No. 51". FIN No. 46 requires unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse the
risks and rewards of ownership among their owners and other
parties involved. The provisions of FIN No. 46 are applicable
immediately to all variable interest entities created after
January 31, 2003 and variable interest entities in which a
company obtains an interest after that date. For variable
interest entities created before January 31, 2003, the provisions
of this interpretation are effective July 1, 2003. Management is
currently evaluating the provisions of this interpretation, and
does not believe that it will have a significant impact on the
Company's consolidated financial statements.
31
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32
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
2. LONG-TERM DEBT
The following table summarizes long-term debt outstanding at
February 1, 2003 and February 2, 2002:
FEBRUARY 1, 2003 FEBRUARY 2, 2002
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------- ------- ------- -------
(IN THOUSANDS)
Mortgage .................. $ --- $ --- $ 1,250 $ 1,250
Note Payable to ATSC, net . 121,652 121,652 118,280 118,280
------- ------- ------- -------
Total debt ......... 121,652 121,652 119,530 119,530
Less current portion ...... --- --- 1,250 1,250
------- ------- ------- -------
Total long-term debt $121,652 $121,652 $118,280 $118,280
======== ======== ======== ========
In accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", the
Company determined the estimated fair value of its financial
instruments using quoted market information, as available. As
judgment is involved, the estimates are not necessarily
indicative of the amounts the Company could realize in a current
market exchange.
On April 30, 2001, the Company entered into an Amended and
Restated $175,000,000 senior secured revolving Credit Facility
(the "Credit Facility") with Bank of America N.A. and a syndicate
of lenders. This Credit Facility was amended on December 20,
2001 and on August 29, 2002 to adjust certain ratio provisions,
and amend certain definitions used in the calculation of ratios
required in the Credit Facility. The Credit Facility matures on
April 29, 2004.
Maximum availability for loans and letters of credit under
the Credit Facility is governed by a monthly borrowing base,
determined by the application of specified advance rates against
certain eligible assets. Based on this calculation, the maximum
amount available for loans and letters of credit under the Credit
Facility at February 1, 2003 was $175,000,000. Commercial and
standby letters of credit outstanding under the Credit Facility
as of February 1, 2003 were approximately $97,114,000. Loans
outstanding under the Credit Facility at any time may not exceed
$75,000,000. In addition, the Credit Facility requires that the
outstanding loan balance be reduced to zero for a 30-day period
each calendar year. There were no loans outstanding at any time
during fiscal 2002.
Amounts outstanding under the Credit Facility bear interest
at a rate equal to, at the Company's option, the Bank of America
Base Rate, defined as the higher of (a) the Federal Funds Rate
plus one-half of 1% and (b) the Prime Rate for such day, or
Eurodollar Rate; plus, in either case, a margin ranging from
0.25% to 2.00%. The Company is also required to pay the lenders
a quarterly commitment fee on the unused revolving loan
commitment amount at a rate ranging from 0.30% to 0.50% per
annum. Fees for outstanding commercial and standby letters of
credit range from 0.50% to 0.875% and from 1.25% to 2.00%,
respectively. Premiums ranging from 0.125% to 0.50% may apply to
all interest and commitment fees, depending on the calculated
Leverage ratio.
The Credit Facility contains financial and other covenants,
including limitations on indebtedness, liens and investments,
restrictions on dividends or other distributions to stockholders
and maintenance of certain financial ratios including specified
levels of tangible net worth.
The lenders have been granted a pledge of the common stock
of ATSC and certain of its subsidiaries, and a security interest
in substantially all other tangible and intangible assets,
including accounts receivable, trademarks, inventory, store
furniture and fixtures, of the Company and its subsidiaries, as
collateral for the Company's obligations under the Credit
Facility.
32
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33
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
2. LONG-TERM DEBT (CONTINUED)
During Fiscal 1999, the Company issued a promissory note, as
amended, to ATSC, in an aggregate of $199,072,000 principal
amount at maturity (the "Note Payable to ATSC"). The Note
Payable to ATSC was issued by the Company for value received and
has interest and payment terms substantially similar to the terms
of the Convertible Debentures Due 2019 ("Convertible Debentures")
that were issued in 1999 by ATSC. ATSC has pledged the Note
Payable to ATSC to the lenders under the Company's Credit
Facility as collateral for ATSC's guarantee of the Company's
performance of its obligations under the Credit Facility.
During Fiscal 2002, the seven year mortgage loan related to
the Company's distribution center land and building in
Louisville, Kentucky was paid in full. The Company and its
wholly owned subsidiary, AnnTaylor Distribution Services, Inc.,
were parties to the $7,000,000 seven-year mortgage loan.
3. PREFERRED SECURITIES
In April and May of Fiscal 1996, ATSC completed the sale of
an aggregate of $100,625,000 of 8-1/2% Company-Obligated Mandatorily
Redeemable Convertible Preferred Securities (the "preferred
securities") issued by its financing vehicle, AnnTaylor Finance
Trust, a Delaware business trust (the "Trust"). On June 29,
1999, the Trust redeemed all of the outstanding preferred
securities. All but $100,000 of the liquidation amount of the
preferred securities was tendered for conversion into an
aggregate of 7,675,076 shares of ATSC common stock prior to the
redemption date, at a conversion price of $13.10 per share of
ATSC common stock, or 3.817 shares of ATSC common stock per $50
liquidation amount of the security. Holders of preferred
securities that were not tendered for conversion received 105.95%
of the liquidation amount of the preferred securities redeemed,
plus accrued distributions.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
As a result of the February 2002 sale of the Company's
proprietary credit card portfolio, as further described in Note
1, the Company no longer maintains an allowance for doubtful
accounts, since the balance in accounts receivable at February 1,
2003 represents credit card accounts receivable due from
third-party processors. A summary of activity in the allowance
for doubtful accounts for the fiscal years ended February 2, 2002
and February 3, 2001 is as follows:
FISCAL YEARS ENDED
-------------------------
FEBRUARY 2, FEBRUARY 3,
2002 2001
------ ------
(IN THOUSANDS)
Balance at beginning of year............. $ 621 $ 666
Provision for loss on accounts receivable 1,443 1,154
Accounts written off..................... (1,501) (1,199)
------ ------
Balance at end of year................... $ 563 $ 621
====== ======
33
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34
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES
LEASES
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. Some leases also contain
early termination options, which can be exercised by the Company
under specific conditions. 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 as of February 1, 2003 are as follows:
FISCAL YEAR (IN THOUSANDS)
-----------
2003..................................$ 145,759
2004.................................. 144,982
2005.................................. 136,510
2006.................................. 115,689
2007.................................. 106,621
2008 and thereafter................... 386,832
-----------
Total.................................$ 1,036,393
===========
Rent expense for the fiscal years ended February 1, 2003,
February 2, 2002 and February 3, 2001 was as follows:
FISCAL YEARS ENDED
----------------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2002
-------- -------- --------
(IN THOUSANDS)
Minimum rent .............. $123,322 $107,858 $ 91,482
Percentage rent............ 1,617 2,006 3,534
-------- -------- --------
Total ................ $124,939 $109,864 $ 95,016
======== ======== ========
OTHER
The Company is party to a 3-year contract for services to
provide training to store associates, and maintenance and support
for related software. Payments under this contract total
$6,500,000 in each of Fiscal 2003 and Fiscal 2004, and $5,000,000
in Fiscal 2005.
The Company has been named as a defendant in several legal
actions arising from its normal business activities. Although
the amount of any liability that could arise with respect to
these actions cannot be accurately predicted, in the opinion of
the Company, any such liability will not have a material adverse
effect on the consolidated financial position, consolidated
results of operations, or liquidity of the Company.
34
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35
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
FISCAL YEARS ENDED
----------------------------------
FEBRUARY 1, 2003 FEBRUARY 2, 2002
---------------- ----------------
(IN THOUSANDS)
Land and building .................. $ 10,040 $ 9,415
Leasehold improvements ............. 171,404 161,210
Furniture and fixtures ............. 277,917 246,731
Construction in progress ........... 19,134 20,181
------- -------
478,495 437,537
Less accumulated depreciation
and amortization ............... 231,380 186,802
------- -------
Net property and equipment...... $247,115 $250,735
======== ========
7. INCOME TAXES
The provision for income taxes for the fiscal years ended
February 1, 2003, February 2, 2002 and February 3, 2001 consists
of the following:
FISCAL YEARS ENDED
-----------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------ ------ ------
(IN THOUSANDS)
Federal:
Current....................... $32,959 $27,492 $38,082
Deferred...................... 10,467 (4,359) (3,047)
------ ------ ------
Total federal............... 43,426 23,133 35,035
------ ------ ------
State and local:
Current....................... 5,726 2,589 6,476
Deferred...................... 1,569 (756) (817)
------ ------ ------
Total state and local....... 7,295 1,833 5,659
------ ------ ------
Foreign:
Current....................... 577 591 471
Deferred...................... (49) --- (130)
------ ------ ------
Total foreign............... 528 591 341
------ ------ ------
Total......................... $51,249 $25,557 $41,035
====== ====== ======
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 1, 2003, February 2, 2002 and
February 3, 2001 is as follows:
FISCAL YEARS ENDED
-------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
--------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Income before income taxes ............ $ 131,407 $ 54,662 $ 93,398
Federal statutory rate ................ 35% 35% 35%
--------- --------- ---------
Provision for income
taxes at federal statutory rate .... $ 45,993 $ 19,132 $ 32,689
State and local income taxes,
net of federal income tax benefit .. 5,364 2,916 4,751
Non-deductible amortization of goodwill --- 3,500 3,500
Earnings of foreign subsidiaries ...... (89) 29 78
Other ................................. (19) (20) 17
--------- --------- ---------
Provision for income taxes ............ $ 51,249 $ 25,557 $ 41,035
========= ========= =========
35
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36
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
7. INCOME TAXES (CONTINUED)
The tax effects of significant items comprising the
Company's deferred tax assets as of February 1, 2003 and February
2, 2002 are as follows:
FEBRUARY 1, 2003 FEBRUARY 2, 2002
---------------- ---------------
(IN THOUSANDS)
Current:
Inventory............................ $ 5,585 $ 5,929
Accrued expenses..................... 2,540 6,666
Real estate.......................... (2,928) (2,819)
------- ------
Total current......................... $ 5,197 $ 9,776
======= ======
Noncurrent:
Accrued expenses..................... $ 1,108 $ ---
Depreciation and amortization........ (10,282) (1,970)
Rent expense......................... 6,950 6,057
Other................................ (332) 765
------- ------
Total noncurrent...................... $ (2,556) $ 4,852
======= ======
Income taxes provided reflect the current and deferred tax
consequences of events that have been recognized in the Company's
consolidated financial statements or tax returns. U.S. federal
income taxes are provided on unremitted foreign earnings, except
those that are considered permanently reinvested, which at
February 1, 2003 amounted to approximately $7,008,000. However,
if these earnings were not considered permanently reinvested,
under current law, the incremental tax on such undistributed
earnings would be approximately $2,161,000.
8. RETIREMENT PLANS
SAVINGS PLAN
The Company maintains a defined contribution 401(k) savings
plan for substantially all full-time employees of the Company and
its subsidiaries. Participants may contribute to the plan an
aggregate of up to 10% of their annual earnings. The Company
makes a matching contribution of 50% with respect to the first 3%
of each participant's annual earnings contributed to the plan.
The Company's contributions to the plan for Fiscal 2002, Fiscal
2001 and Fiscal 2000 were $972,000, $950,000 and $792,000,
respectively.
PENSION PLAN
Substantially all full-time employees of the Company are
covered under a noncontributory defined benefit pension plan,
which calculates benefits based on a career average formula. The
Company's funding policy for the plan is to contribute annually
the amount necessary to provide for benefits based on accrued
service and projected pay increases. Plan assets consist
primarily of cash, equity and fixed income securities.
The Company's funding obligations and liability under the
terms of the plan are determined using certain actuarial
assumptions, including a discount rate of 6.75% and an expected
long-term rate of return on plan assets of 8.5%. The discount
rate selected was determined based on the change in the Moody's
Aa corporate bond yields, which have decreased by 59 basis points
over the course of Fiscal 2002. On this basis, the discount rate
utilized was adjusted from 7.50% at February 2, 2002 to 6.75% at
February 1, 2003. The market-related value of plan assets for
determining pension expense is equal to the fair value of plan
assets, recognizing gains or losses as they occur. Plan assets
36
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37
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
8. RETIREMENT PLANS
PENSION PLAN (CONTINUED)
as of February 1, 2003 are allocated 50% in equities, 33% in bond
related funds and 17% in short-term investments. For purposes
of developing long-term rates of return, it was assumed that the
short-term investments were reallocated to equities, yielding assumed
long-term rates of return of 10% and 6% for equities
and bond-related funds, respectively. In selecting an expected
long-term rate of return on plan assets, consideration was given
to the Company's historical annual rate of return over a 7-year
period, which averaged 8.8% per year. In light of this, and in view
of current market conditions, the expected long-term rate of return
on plan assets utilized was reduced from 9.0% for the fiscal year ended
February 1, 2003 to 8.5% for the fiscal year ending January 31,
2004.
The following table provides information for the pension
plan at February 1, 2003, February 2, 2002 and February 3, 2001:
FISCAL YEARS ENDED
--------------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation,
beginning of year .................. $ 9,023 $ 6,782 $ 4,954
Service cost ......................... 2,116 1,524 1,206
Interest ............................. 735 523 442
Actuarial loss ....................... 2,458 1,458 879
Benefits paid ........................ (1,422) (1,264) (699)
-------- -------- --------
Benefit obligation,
end of year ........................ $ 12,910 $ 9,023 $ 6,782
======== ======== ========
Change in plan assets:
Fair value of plan assets,
beginning of year .................. $ 9,127 $ 9,644 $ 9,489
Actual return on plan assets ......... (1,339) (1,091) 854
Employer contribution ................ 9,522 1,838 --
Benefits paid ........................ (1,422) (1,264) (699)
-------- -------- --------
Fair value of plan assets,
end of year ....................... $ 15,888 $ 9,127 $ 9,644
======== ======== ========
Funded status (fair value
of plan assets less
benefit obligation) ................ $ 2,978 $ 104 $ 2,862
Unrecognized net actuarial
(gain) loss ........................ 7,268 2,710 (763)
Unrecognized prior service
cost ............................... 44 51 57
-------- -------- --------
Prepaid benefit cost ................. $ 10,290 $ 2,865 $ 2,156
======== ======== ========
Net pension cost includes the following components:
FISCAL YEARS ENDED
-----------------------------------
FEBRUARY 1, FEBRUARY 2, FEBRUARY 3,
2003 2002 2001
------- ------- -------
(IN THOUSANDS)
Service cost ............................... $ 2,116 $ 1,524 $ 1,206
Interest cost .............................. 735 523 442
Expected return on assets .................. (1,021) (924) (831)
Amortization of prior losses (gains) ....... 261 -- (1)
Amortization of prior service cost ......... 6 6 6
------- ------- -------
Net periodic pension cost .................. $ 2,097 $ 1,129 $ 822
======= ======= =======
37
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38
ANNTAYLOR, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------
8. RETIREMENT PLANS (CONTINUED)
PENSION PLAN (CONTINUED)
For the fiscal years ended February 1, 2003, February 2, 2002
and February 3, 2001, the following actuarial assumptions were
used:
FISCAL YEARS ENDED
----------------------------------
FEBRUARY 1, FEBRUARY 2,FEBRUARY 3,
2003 2002 2001
---- ---- ----
Discount rate............................... 7.50% 7.75% 8.25%
Long-term rate of return on assets.......... 9.00% 9.00% 9.00%
Rate of increase in future compensation..... 4.00% 4.00% 4.00%