Interest income was $448,000 in the third quarter of 2000 compared to $1,118,000 in the third quarter of 1999. The decrease was primarily attributable to lower cash on hand as a result of the Company's use of cash to repurchase shares of its common stock during the third and fourth quarters of Fiscal 1999.
Interest expense was $1,883,000 in the third quarter of 2000 and $1,984,000 in the third quarter of 1999.
The income tax provision was $17,223,000, or 41.9% of income before income taxes, in the third quarter of 2000, compared to $16,138,000, or 42.9% of income before income taxes, in the third quarter of 1999. The effective income tax rate for both periods was higher than the statutory rate primarily as a result of non-deductible goodwill amortization.
As a result of the foregoing factors, the Company had net income of $23,877,000, or 7.8% of net sales, for the third quarter of 2000, compared to net income of $21,448,000, or 7.9% of net sales, for the third quarter of 1999.
AnnTaylor Stores Corporation conducts no business other than the management of Ann Taylor.
The Company's net sales in the first nine months of 2000 increased to $889,196,000 from $787,436,000 in the first nine months of 1999, an increase of $101,760,000, or 12.9%. The increase is attributable to the opening of new stores, the expansion of existing stores and an increase in comparable store sales of 1.0%.
Gross profit as a percentage of net sales increased to 52.0% in the first nine months of 2000 from 51.7% in the first nine months of 1999.
Selling, general and administrative expenses, excluding certain nonrecurring expenses described below, were 40.1% of net sales in the first nine months of 2000, compared to 38.6% of net sales in the first nine months of 1999. Selling, general
and administrative expenses for the first nine months of 2000 included approximately $5,700,000 of expenses relating to the development of the Company's Online Store. Selling, general and administrative expenses as a percentage of net sales also reflected increases in tenancy expenses, and increases in Ann Taylor Loft store operations expenses, offset in part by leverage achieved on certain other expenses as a result of increased sales. The Company incurred a pre-tax nonrecurring charge of approximately $8,500,000 during the first quarter of fiscal 2000, in connection with an extensive review conducted with the Company's financial and legal advisors of various strategic approaches to enhance shareholder value.
As a result of the foregoing, the Company had operating income, after taking into account the nonrecurring charge, of $89,254,000, or 10.0% of net sales, in the first nine months of 2000, compared to operating income of $94,774,000, or 12.0% of net sales, in the first nine months of 1999. Amortization of goodwill was $8,280,000 in each of the first nine months of 2000 and 1999. Operating income, without giving effect to goodwill amortization, was $97,534,000, or 11.0% of net sales, in the 2000 period and $103,054,000, or 13.1% of net sales, in the 1999 period.
Interest income was $1,718,000 in the first nine months of 2000 compared to $3,236,000 in the first nine months of Fiscal 1999. The decrease was primarily attributable to lower cash on hand as a result of the Company's use of cash to repurchase shares of its common stock during the third and fourth quarters of Fiscal 1999.
Interest expense was $5,509,000 in the first nine months of 2000 and $9,686,000 in the first nine months of 1999. The decrease in interest expense is attributable to the net reduction in the Company's outstanding long term debt and other obligations and a decrease in the interest rate borne by the Company's remaining outstanding long term debt. During the second quarter of 1999, AnnTaylor Finance Trust redeemed its preferred securities, and AnnTaylor, Inc. redeemed its 8-3/4% Notes. These redemptions were completed using, in part, the proceeds from the issuance by the Company, also during the second quarter of 1999, of its Convertible Debentures, which bear interest at a rate of 3.75% per annum.
The income tax provision was $36,878,000, or 43.2% of income before income taxes, in the 2000 period, compared to $38,570,000, or 43.8% of income before income taxes and extraordinary loss in the 1999 period. The effective income tax rate for both periods differed from the statutory rate primarily because of non-deductible goodwill amortization.
The redemption of the outstanding 8-3/4% Notes in the second quarter of Fiscal 1999 resulted in an extraordinary charge to earnings in the first nine months of Fiscal 1999 of $962,000, net of income tax benefit, or $0.03 per share on a diluted basis.
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As a result of the foregoing factors, the Company had net income of $48,585,000, or 5.5% of net sales, for the first nine months of 2000, compared to net income of $48,614,000, or 6.2% of net sales, for the first nine months of 1999.
Financial Condition
For the first nine months of 2000, net cash provided by operating activities totaled $47,736,000, primarily as a result of earnings, non-cash charges, and increases in accounts payable and accrued liabilities, partially offset by increases in merchandise inventories and accounts receivable. Cash used for investing activities during the first nine months of 2000 amounted to $64,810,000, for the purchase of property and equipment. Cash provided by financing activities during the first nine months of 2000 amounted to $1,222,000, primarily as a result of the issuance of Company common stock pursuant to employee benefits plans, offset in part by payments on the mortgage on the Company's distribution center.
Merchandise inventories were $214,919,000 at October 28, 2000, compared to inventories of $140,026,000 at January 29, 2000. Merchandise inventories at October 28, 2000 and January 29, 2000 included approximately $20,960,000 and $22,959,000, respectively, of inventory associated with the Company's sourcing division, which is primarily finished goods in transit from factories. The increase in inventories resulted principally from inventory to support 67 new stores opened since the beginning of the year and increased inventory in anticipation of fourth quarter selling. The increase also reflects lower sales than originally anticipated during the third quarter, as well as an increase in inventories in preparation for the launch of the Company's Online Store, and to support 14 new store openings planned for the fourth quarter of 2000.
At October 28, 2000, there were no borrowings outstanding under AnnTaylor's $125,000,000 senior secured revolving credit facility (the "Credit Facility"). Loans outstanding under the Credit Facility at any time may not exceed $50,000,000. 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 rates against certain eligible assets.
For Fiscal 2000, the Company's capital expenditures, which are primarily attributable to the Company's store expansion, renovation and refurbishment programs, and the investment in information systems, are expected to total approximately $83,000,000. For the nine months ended October 28, 2000, capital expenditures of $64,810,000 were incurred. During the first nine months of fiscal 2000, the Company opened 15 new Ann Taylor stores and 52 Ann Taylor Loft stores, including 2 locations that were converted from Ann Taylor stores. In addition, the Company completed the expansion of 3 Ann Taylor stores. The Company expects to open a total of 18 new Ann Taylor stores and 63 Ann Taylor Loft stores
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(including 2 Ann Taylor stores being converted to Ann Taylor Loft stores), and to expand or relocate a total of 4 Ann Taylor stores in Fiscal 2000.
In order to finance its operations and capital requirements, the Company expects to use internally generated funds, trade credit and funds available to it under the Credit Facility. The Company believes that cash flow from operations and funds available under the Credit Facility are sufficient to enable it to meet its on-going cash needs for its business, as presently conducted, for the foreseeable future.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements", effective in the fourth quarter of fiscal year 2000. SAB 101 sets forth the basic principles of revenue recognition and does not supersede any existing authoritative literature. Management does not expect adoption of this statement to have a material impact on its consolidated financial position or results of operations.
Statement Regarding Forward Looking Disclosures
Sections of this Quarterly Report on Form 10-Q, including the preceding Management's Discussion and Analysis of Financial Condition and Results of Operations, contain various forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations and business of the Company. Examples of forward-looking statements are statements that use the words "expect", "anticipate", "plan", "intend", "project", "believe" and similar expressions. These forward-looking statements involve certain risks and uncertainties, and no assurance can be given that any of such matters will be realized. Actual results may differ materially from those contemplated by such forward looking statements as a result of, among other things, failure by the Company to predict accurately customer fashion preferences; a decline in the demand for merchandise offered by the Company; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of the Company's brand awareness and marketing programs; lack of sufficient customer acceptance of the Ann Taylor Loft concept in the upper-moderate-priced women's apparel market; general economic conditions that are less favorable than expected or a downturn in the retail industry; the inability of the Company to locate new store sites or negotiate favorable lease terms for additional stores or for the expansion of existing stores; lack of sufficient consumer interest in 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; or an adverse outcome of the litigation referred to in Note 5 to the Consolidated Financial Statements of the Company as of January 29, 2000, that materially and adversely affects the Company's financial condition. The Company assumes no obligation to
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update or revise any such forward looking statements, which speak only as of their date, even if experience or future events or changes make it clear that any projected financial or operating results implied by such forward-looking statements will not be realized.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2000 filed with the Securities and Exchange Commission on April 18, 2000, the Company, Ann Taylor, certain current and former officers and directors of the Company and Ann Taylor, and Merrill Lynch & Co. ("Merrill Lynch") and certain of its affiliates, are defendants in a purported class action lawsuit, originally filed on April 26, 1996, by certain alleged stockholders of the Company in the United States District Court for the Southern District of New York. (Novak v. Kasaks, et al., No. 96 CIV 3073 (S.D.N.Y. 1996)). On November 9, 1998, the District Court issued an order granting the defendants' motion to dismiss with prejudice the amended complaint in this action, which was filed in April 1998, for its failure to plead fraud with particularity. On June 21, 2000, the United States Court of Appeals for the Second Circuit vacated the dismissal of the amended complaint. The amended complaint relates to the period from February 3, 1994 through May 4, 1995 and asserts causes of action under Section 10(b) and Section 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The Court of Appeals held that the allegations of the amended complaint are sufficient to satisfy the standard for pleading intent under the federal securities laws, but expressed no view as to whether the allegations are sufficiently particularized. The Court of Appeals remanded the case to the District Court with instructions to allow plaintiffs to replead their complaint, and to reconsider whether plaintiffs' allegations are pled with sufficient particularity to satisfy the pleading standards of the Private Securities Litigation Reform Act of 1995. The decision of the Court of Appeals applies only to plaintiffs' claims against the Company, Ann Taylor and their former directors and officers. Merrill Lynch and its affiliates entered into a settlement with the plaintiffs, and plaintiffs withdrew their appeal of the dismissal of the amended complaint with respect to those defendants.
On or about September 19, 2000, the Company, Ann Taylor and their former directors and officers filed a petition for a writ of certiorari in the United States Supreme Court seeking review and reversal of the decision of the Court of Appeals. This petition was denied on or about November 27, 2000.
Following the decision of the Court of Appeals, plaintiffs elected not to replead their amended complaint. On or about September 29, 2000, the Company, Ann Taylor and their former directors and officers again moved to dismiss the amended complaint, arguing that it fails to plead fraud with sufficient particularity under the standards set forth by the Court of Appeals in its June 21, 2000 decision. The motion has been fully briefed and is pending before the District Court.
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The Company continues to believe that the allegations in the amended complaint are without merit, and intends to continue to defend this action vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements 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.
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AnnTaylor Stores Corporation |
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Dated: December 11, 2000 |
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By: /s/ J. Patrick Spainhour |
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| | | | | J. Patrick Spainhour
Chairman and Chief Executive Officer |
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Dated: December 11, 2000 |
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By: /s/ Barry Erdos |
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| | | | | Barry Erdos
Executive Vice President -
Chief Financial Officer and
Treasurer |
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