SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended January 29, 2000
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 1-10738
ANNTAYLOR STORES CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3499319
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
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(Address of principal executive offices) (Zip Code)
(212) 541-3300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock, The New York Stock Exchange
$.0068 Par Value
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |_|No |X| .
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 31, 2000 was $654,895,854.
The number of shares of the registrant's Common Stock outstanding as of
March 31, 2000 was 28,722,617.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the Registrant's 2000
Annual Meeting of Stockholders to be held on May 18, 2000 are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
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GENERAL
AnnTaylor Stores Corporation (the "Company"), through its wholly owned
subsidiaries, is a leading national specialty retailer of better quality women's
apparel, shoes and accessories sold primarily under the Ann Taylor brand name.
The Company believes that "Ann Taylor" is a highly recognized national brand
that defines a distinct fashion point of view. Ann Taylor merchandise represents
classic styles, updated to reflect current fashion trends. The Company's stores
offer a full range of career and casual separates, dresses, tops, weekend wear,
shoes and accessories, coordinated as part of a total wardrobing strategy. This
total wardrobing strategy is reinforced by an emphasis on customer service. Ann
Taylor sales associates are trained to assist customers in merchandise selection
and wardrobe coordination, helping them achieve the "Ann Taylor look" while
reflecting the customers' personal styles.
As of January 29, 2000, the Company operated 405 retail stores in 42
states, the District of Columbia and Puerto Rico under the names Ann Taylor, Ann
Taylor Loft and Ann Taylor Factory Store. The Company's 319 Ann Taylor stores
compete in the "better"-priced market. These stores represent the Company's core
merchandise line. Approximately three-quarters of these stores are located in
regional malls and upscale specialty retail centers, with the balance located in
downtown and village locations. The Company believes that the customer base for
its Ann Taylor stores consists primarily of relatively affluent,
fashion-conscious women from the ages of 25 to 55, and that the majority of its
customers are working women with limited time to shop, who are attracted to Ann
Taylor by its focused merchandising and total wardrobing strategies,
personalized customer service, efficient store layouts and continual flow of new
merchandise.
As of January 29, 2000, the Company operated 75 Ann Taylor Loft stores.
Ann Taylor Loft stores compete in the "upper-moderate"-priced market. Ann Taylor
Loft is designed for women with a more relaxed lifestyle, who appreciate the Ann
Taylor style but are more price sensitive. Merchandise is created uniquely for
these stores and is sold under the Ann Taylor Loft label. The first Ann Taylor
Loft stores opened by the Company were located in factory outlet centers,
including some Ann Taylor Factory Stores that, in 1996, were converted to Loft
stores after the introduction of the Loft concept. In 1998, the Company began
opening Ann Taylor Loft stores outside the factory outlet environment, in
regional malls and strip shopping centers. At January 29, 2000, over 40 Ann
Taylor Loft stores were located in these venues. Management believes that Ann
Taylor Loft represents a significant opportunity for the Company to compete in
the upper-moderate-priced women's apparel market. See "Stores and Expansion",
"Competition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Statement Regarding Forward Looking Disclosures"
below.
At January 29, 2000, the Company also operated 11 Ann Taylor Factory
stores in factory outlet centers. These stores serve primarily as a clearance
vehicle for merchandise from Ann Taylor stores. Many of these stores also offer
a limited selection of original priced Ann Taylor Loft merchandise.
From time to time, the Company introduces new product categories to its
merchandise assortment. The Company believes that product extensions support the
Company's total wardrobing strategy and provide existing and new customers with
additional reasons to shop at the Company's stores. Product extensions
introduced over the last several years include petite sizes in the Company's
apparel offerings, and fragrance and personal care products in both Ann Taylor
and Ann Taylor Loft stores. In Fall of 2000, the Company intends to test market
its own line of color cosmetics in a select group of Ann Taylor stores.
The Company was incorporated under the laws of the state of Delaware in
1988 under the name AnnTaylor Holdings, Inc. The Company changed its name to
AnnTaylor Stores Corporation in April 1991. The Company completed an initial
public offering of its common stock in May 1991. Unless the context indicates
otherwise, all references herein to the Company include the Company and its
wholly owned subsidiaries.
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MERCHANDISE DESIGN AND PRODUCTION
Substantially all merchandise offered by the Company's stores is developed
by the Company's in-house product design and development teams, which design
merchandise exclusively for the Company. The Company's merchandising groups
determine inventory needs for the upcoming season, edit the assortments
developed by the design teams, plan monthly merchandise flows, and arrange for
the production of merchandise by independent manufacturers, either through the
Company's sourcing division, or through private label specialists.
The Company's production management and quality assurance departments
establish the technical specifications for all Company merchandise, inspect
factories in which the merchandise is produced, including periodic in-line
inspections while goods are in production to identify potential problems prior
to shipment and, upon receipt, inspect merchandise on a test basis for
uniformity of size and color, as well as for conformity with specifications and
overall quality of manufacturing.
The Company sources merchandise from approximately 236 manufacturers and
vendors, none of which accounted for more than 4% of the Company's merchandise
purchases in Fiscal 1999. The Company's merchandise is manufactured in over 20
countries, with approximately 35% of the Company's merchandise manufactured in
China, 14% in Korea, and 12% in Hong Kong. Any event causing a sudden disruption
of manufacturing or imports from China, Korea or Hong Kong, including the
imposition of additional import restrictions, could have a material adverse
effect on the Company's operations. Substantially all of the Company's foreign
purchases are negotiated and paid for in U.S. dollars.
The Company cannot predict whether any of the foreign countries in which
its products are currently manufactured or any of the countries in which the
Company may manufacture its products in the future will be subject to future or
increased import restrictions by the U.S. government, including the likelihood,
type or effect of any trade restriction. Trade restrictions, including increased
tariffs or quotas, against apparel, footwear or other items sold by the Company
could affect the importation of such merchandise generally and could increase
the cost or reduce the supply of merchandise available to the Company and
adversely affect the Company's business, financial condition, results of
operations and liquidity. The Company's merchandise flow may also be adversely
affected by financial or political instability in any of the countries in which
its goods are manufactured, if it affects the production or export of
merchandise from such countries. Merchandise flow may also be adversely affected
by significant fluctuation in the value of the U.S. dollar against foreign
currencies or restrictions on the transfer of funds.
The Company does not maintain any long-term or exclusive commitments or
arrangements to purchase merchandise from any single supplier. The Company
believes it has a good relationship with its suppliers and that, as the number
of the Company's stores increases, subject to the discussion above, there will
continue to be adequate sources to produce a sufficient supply of quality goods
in a timely manner and on satisfactory economic terms.
INVENTORY CONTROL AND MERCHANDISE ALLOCATION
The Company's planning departments analyze each store's size, location,
demographics, and sales and inventory history to determine the quantity of
merchandise to be purchased for and the allocation of merchandise to the
Company's stores. Upon receipt, merchandise is allocated in order to achieve an
emphasis that is suited to each store's customer base.
Merchandise typically is sold at its original marked price for several
weeks, with the length of time varying by item. The Company reviews its
inventory levels on an on-going basis in order to identify slow-moving
merchandise styles and broken assortments (items no longer in stock in a
sufficient range of sizes) and uses markdowns to clear this merchandise.
Markdowns may be used if inventory exceeds customer demand for reasons of
design, seasonal adaptation or changes in customer preference or if it is
determined that the inventory will not sell at its currently marked price.
Marked-down items remaining unsold are moved periodically to the Company's
factory outlet stores, where additional markdowns may be taken.
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In Fiscal 1999, inventory turned 4.8 times compared to 5.0 times in Fiscal
1998 and 5.1 times in Fiscal 1997. Inventory turnover is determined by dividing
cost of sales by the average of the cost of inventory at the beginning and the
end of the period, excluding inventory associated with the Company's sourcing
division. Sourcing division inventory consists principally of finished goods in
transit from factories. Effective February 1, 1998 the Company elected to change
its method of inventory valuation to the average cost method as discussed in
Note 1 to the Consolidated Financial Statements of the Company.
In Fiscal 1998, the Company selected a new comprehensive merchandising
information system to provide improved systems support for the Company's
merchandising functions. Since selection of the system, the Company has been
conducting a methodical, detailed review of both the new system's functionality
and the Company's internal merchandising processes, in order to design
adaptations to the new system and, in some cases, changes to the Company's
processes, so that the Company may make best use of the new system. The Company
began piloting the new system for four merchandise categories in December 1999,
and plans to introduce the system to all merchandising departments in the Spring
of 2000. When fully operational, this new system will serve as the Company's
central source of information regarding merchandise items, inventory management,
purchasing, allocation, replenishment, receiving and distribution.
The Company uses a centralized distribution system, under which nearly all
merchandise is distributed to the Company's stores through its distribution
center, located in Louisville, Kentucky. See "Properties". Merchandise is
shipped by the distribution center to the Company's stores several times each
week.
STORES AND EXPANSION
An important aspect of the Company's business strategy is a real estate
expansion program designed to reach new customers through the opening of new
stores. The Company opens new stores in markets that it believes have a
sufficient concentration of its target customers. The Company also adds stores,
or expands the size of existing stores, in markets where the Company already has
a presence, as market conditions warrant and sites become available. Store
locations are determined on the basis of various factors, including geographic
location, demographic studies, anchor tenants in a mall location, other
specialty stores in a mall or specialty center location or in the vicinity of a
village location, and the proximity to professional offices in a downtown or
village location. Stores opened in factory outlet centers are located in factory
outlet malls in which co-tenants generally include a significant number of
outlet or discount stores operated under nationally recognized upscale brand
names. Store size also is determined on the basis of various factors, including
geographic location, demographic studies, and space availability.
As of January 29, 2000, the Company operated 405 stores throughout the
United States, the District of Columbia and Puerto Rico, of which 319 were Ann
Taylor stores, 75 were Ann Taylor Loft stores, and 11 were Ann Taylor Factory
Stores.
The average Ann Taylor store is approximately 5,000 square feet in size.
The Company also has two flagship Ann Taylor stores in New York City and San
Francisco, that are in excess of 20,000 square feet. These flagship stores
represent the fullest assortment of Ann Taylor merchandise, and include
amenities unique to these stores. In Fiscal 1999, the Company opened 18 Ann
Taylor stores that averaged approximately 5,000 square feet. In Fiscal 2000, the
Company plans to open approximately 15 Ann Taylor stores, which are expected to
average approximately 4,500 square feet.
Ann Taylor Loft stores that are located in factory outlet centers average
approximately 9,000 square feet. Ann Taylor Loft stores that are located in
regional malls and strip shopping centers average approximately 6,000 square
feet. In Fiscal 1999, the Company opened 29 Ann Taylor Loft stores that averaged
approximately 6,000 square feet. In Fiscal 2000, the Company expects to open
approximately 70 Ann Taylor Loft stores, primarily in regional malls and strip
shopping centers. These stores are also expected to average approximately 6,000
square feet.
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The Company's 11 Ann Taylor Factory Stores, located in factory outlet
centers, average 7,000 square feet.
The Company's stores typically have approximately 20% of their total
square footage allocated to stockroom and other non-selling space.
The following table sets forth certain information regarding store
openings, expansions and closings for Ann Taylor stores ("ATS"), Ann Taylor
Factory Stores ("ATFS"), Ann Taylor Loft stores ("ATL") and the Company's former
Ann Taylor Studio shoe stores ("ATA") over the past five years:
No. No.
Total Stores No. Stores Stores Stores No. Stores Open
Open at Opened During Expanded Closed at End of
Beginning Fiscal Year During During Fiscal Year
of Fiscal --------------------- Fiscal Fiscal -----------------------------------
Fiscal Year Year ATS ATFS ATL ATA(a) Year(b) Year(b) ATS ATFS ATL ATA(a) Total
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1995................. 262 26 4 14 4 30 4 258 22 17 9 306
1996................. 306 9 1 1 --- 7 8 259 14(c) 27(c) 9 309
1997................. 309 27 --- --- --- 9 12 283 14 27 --- 324
1998................. 324 26 --- 19 --- 8 4 306 13 46 --- 365
1999................. 365 18 --- 29 --- 8 7 319 11 75 --- 405
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(a) Ann Taylor Studio was a free-standing shoe and accessory store concept
tested by the Company in 1994 and 1995. All Ann Taylor Studio stores were
closed during Fiscal 1997.
(b) All stores expanded and all stores closed were Ann Taylor stores, except
that one store expanded in 1995 was an ATL store, one store closed in 1998
was an ATFS store and nine stores closed in 1997 were ATA stores. Four
stores closed in 1999 were Ann Taylor stores that were replaced in the
same locations with new ATL stores.
(c) In 1995, certain ATFS and ATL stores that sold both original price Ann
Taylor Loft merchandise and clearance merchandise from Ann Taylor stores
and Ann Taylor Loft stores were classified as ATFS stores. In 1996, these
stores were reclassified as ATL stores. During 1997, these stores'
merchandise assortment was changed to be predominantly Ann Taylor Loft
merchandise, and these stores are now operated as ATL stores.
The Company believes that its existing store base is a significant
strategic asset of its business. Ann Taylor stores are located in some of the
most productive retail centers in the United States. In addition, the Company
believes that it is among the tenants most highly desired by real estate
developers because of its strong Ann Taylor brand franchise and its high average
sales per square foot productivity ($502 per square foot in Fiscal 1999)
relative to other specialty apparel retailers.
The Company has invested approximately $153 million in its store base
since the beginning of Fiscal 1995; approximately 58% of its stores are either
new or have been remodeled, as a result of an expansion or relocation, in the
last five years.
The Company's 1999 real estate expansion plan resulted in an increase in
the Company's total store square footage of approximately 242,000 square feet
(net of store closings), or 11.9%, from approximately 2,038,000 square feet at
the end of fiscal 1998 to approximately 2,280,000 square feet at the end of
fiscal 1999. In Fiscal 2000, the Company intends to increase store square
footage by approximately 460,000 square feet, or 20%, representing approximately
15 new Ann Taylor stores, the expansion or relocation of approximately 5
existing Ann Taylor stores, and approximately 70 new Ann Taylor Loft stores.
Capital expenditures for the Company's Fiscal 1999 store expansion
program, net of landlord construction allowances, totaled approximately $33.5
million, including expenditures for store refurbishing and store refixturing.
The Company expects that capital expenditures for its Fiscal 2000 store
expansion program, net of landlord construction allowances, will be
approximately $57.6 million, including expenditures for store refurbishing and
store refixturing.
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The Company's ability to continue to increase store square footage will be
dependent upon, among other things, general economic and business conditions
affecting consumer confidence and spending, the availability of desirable
locations and the negotiation of acceptable lease terms. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Statement Regarding Forward
Looking Disclosures".
INTERNET STRATEGY
During fiscal 1999, the Company conducted rigorous research and analysis
of the potential for an Ann Taylor web site on the Internet. The Company
believes that an Ann Taylor web site offering Company merchandise on-line
presents the opportunity for incremental sales, both over the Internet and by
attracting customers to its stores. The Company believes that an Ann Taylor web
site would also enhance the Company's brand building activities, client service
and communication. The Company is currently developing the design and features
of its proposed initial web site. The Company expects that, at least initially,
site design, hosting, order fulfillment and customer service support for the
Company's web site will be performed by outside vendors, under the supervision
of the Company's new Internet division. The Company intends to finalize its
Internet entry strategy during fiscal 2000, and expects to have a web site
operational by Holiday 2000 or Spring 2001.
INFORMATION SYSTEMS
In 1997, the Company completed a thorough review of its information
systems, and developed a five-year strategic plan to upgrade these systems. The
Company reviews this plan annually, enhancing and adding projects as business
needs evolve. The Company believes that enhanced information systems are
critical to providing its management with efficient decision support tools and
maintaining the Company's competitive position.
The implementation of the core merchandising information system referred
to above under "Inventory Control and Merchandise Allocation" was a component of
the original five-year information systems upgrade plan.
An upgrade of the Company's store point of sale system is also part of
this five-year strategic plan. The Company will begin to pilot a new point of
sale system for its retail stores in 2000, and intends to roll the new system
out to all of its stores in fiscal 2001. The new point of sale system will give
the Company added capability for data exchange between store systems and home
office systems, providing the opportunity for enhanced operating efficiencies.
For example, when fully implemented, the new point of sale system will permit
stores to transmit certain associate information directly through the store
systems, reducing paperwork and increasing efficiency and accuracy.
During 1999, the Company developed an intensive training program for the
Company's store associates, designed to elevate sales associates' wardrobing
knowledge and client relationship skills. This training program will be
introduced in the Company's stores in the fall of 2000. Training will be
conducted, in part, through computerized modules delivered on CD-ROM, on a
dedicated personal computer to be installed at each store location. The
Company's information systems plan has been expanded to incorporate this
training program.
The original five-year information systems plan contemplated aggregate
investment in information systems of approximately $35 million. As a result of
updates to the plan, including addition of the stores training program and
internet initiatives described above, the five-year plan now contemplates
aggregate investment in information systems totaling approximately $41 million
for such period, of which approximately $25 million had been expended through
1999, including approximately $12 million expended in 1999. The Company expects
that approximately $16 million of its capital expenditures in 2000 will be
invested in information systems.
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CUSTOMER CREDIT
Customers may pay for merchandise with the Ann Taylor credit card,
American Express, Visa, MasterCard, JCB, Diner's Club, cash or check. The
Company also plans to introduce Discover card payment to its stores in 2000.
Credit card sales were 80.5% of net sales in Fiscal 1999, 80.2% in Fiscal 1998
and 78.7% in Fiscal 1997. In Fiscal 1999, 14.2% of net sales were made with the
Ann Taylor credit card, and 66.3% were made with third-party credit cards. As of
January 29, 2000, the Company's Ann Taylor credit card accounts receivable
totaled $51,440,000, net of allowance for doubtful accounts. Accounts written
off in Fiscal 1999 were approximately $1,186,000, or 0.1% of net sales.
The Company has offered customers its proprietary Ann Taylor credit card
since 1976. The Company believes that the Ann Taylor credit card enhances
customer loyalty while providing the customer with additional credit. However,
the percentage of the Company's total sales made with its proprietary credit
card has been declining over the past several years. The Company believes the
declining penetration of its Ann Taylor credit card as a percentage of sales is
attributable to the gain of market share by bank cards throughout the retail
industry generally. In addition, the Company's Ann Taylor Loft and Factory
Stores historically have experienced a significantly lower penetration of sales
with the Ann Taylor card. At January 29, 2000, over 357,000 Ann Taylor credit
card accounts had been used during the past 18 months.
ADVERTISING AND PROMOTION
The Company believes it is strategically important to communicate on a
regular basis directly with its current customer base and with potential
customers, through national and regional advertising, including outdoor media,
as well as through direct mail marketing and in-store presentation. Marketing
expenditures as a percentage of sales were 2.4% in Fiscal 1999, 2.0% in Fiscal
1998, and 1.3% in Fiscal 1997.
TRADEMARKS AND SERVICE MARKS
The Ann Taylor trademark, and certain other trademarks and service marks
used by the Company, either are registered or have trademark applications
pending with the United States Patent and Trademark Office ("USPTO") and with
the registries of many foreign countries. The Company's rights in the
"AnnTaylor" mark are a significant part of the Company's business, as the
Company believes its trademark is well known in the women's retail apparel
industry. Accordingly, the Company intends to maintain its "AnnTaylor" mark and
related registrations and vigorously protect its trademarks against
infringement.
In 1994, the Company initiated trademark registration applications with
the USPTO for its AnnTaylor Loft trademark in the categories of retail store
services and apparel. Registration of the trademark was issued in the retail
store services category in 1996. However, the Company's application for a
trademark registration in the apparel classification was challenged in the USPTO
by a French company, Freche et Fils, which cited its own "Loft Design By..."
trademark in opposition to the Ann Taylor Loft mark. In February 2000, the USPTO
granted the Company's motion for summary judgment, dismissing with prejudice
Freche et Fils' opposition to the Company's AnnTaylor Loft trademark
application, and granting the counterclaim filed by the Company to cancel Freche
et Fils' U.S. registration of their "Loft Design By . . . " mark. This decision
is subject to appeal by Freche et Fils.
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COMPETITION
The women's retail apparel industry is highly competitive. The Company's
stores compete with certain departments in national or local department stores,
and with other specialty store chains, independent retail stores, and catalog
and internet businesses that offer similar categories of merchandise. The
Company believes that its focused merchandise selection, exclusive fashions,
personalized service and convenience distinguish it from other apparel
retailers. Many of the Company's competitors are considerably larger and have
substantially greater financial, marketing and other resources than the Company
and there is no assurance that the Company will be able to compete successfully
with them in the future. In addition, the Company has only limited experience in
the "moderate" priced category, and existing competitors may have significantly
greater brand recognition among this customer segment than the Company. Further,
certain of the Company's competitors have established presence on and greater
experience with the Internet.
EMPLOYEES
As of January 29, 2000, the Company had approximately 7,980 employees, of
whom 1,900 were full-time salaried employees, 2,035 were full-time hourly
employees and 4,045 were part-time hourly employees working less than 30 hours
per week. None of the Company's employees are represented by a labor union. The
Company believes that its relationship with its employees is good.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURES
Sections of this Annual Report on Form 10-K contain various forward looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, with respect to the financial condition, results of operations and
business of the Company. Examples of forward-looking statements are statements
that use the words "expect", "anticipate", "plan", "intend", "project",
"believe" and similar expressions. These forward-looking statements involve
certain risks and uncertainties, and no assurance can be given that any of such
matters will be realized. Actual results may differ materially from those
contemplated by such forward looking statements as a result of, among other
things, failure by the Company to predict accurately customer fashion
preferences; a decline in the demand for merchandise offered by the Company;
competitive influences; changes in levels of store traffic or consumer spending
habits; effectiveness of the Company's brand awareness and marketing programs;
lack of sufficient customer acceptance of the Ann Taylor Loft concept in the
upper-moderate-priced women's apparel market; general economic conditions that
are less favorable than expected or a downturn in the retail industry; the
inability of the Company to locate new store sites or negotiate favorable lease
terms for additional stores or for the expansion of existing stores; lack of
sufficient consumer interest in an Ann Taylor Internet web site; 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 update or
revise any such forward looking statements, which speak only as of their date,
even if experience or future events or changes make it clear that any projected
financial or operating results implied by such forward-looking statements will
not be realized. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Statement Regarding Forward Looking
Disclosures".
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ITEM 2. PROPERTIES
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As of January 29, 2000, the Company operated 405 stores, all of which were
leased. The store leases typically provide for initial terms of ten years,
although some leases have shorter or longer initial periods, and grant the
Company the right to extend the term for one or two additional five-year
periods. Most of the store leases require Ann Taylor to pay a specified minimum
rent, plus a contingent rent based on a percentage of the store's net sales in
excess of a specified threshold. Most of the leases also require Ann Taylor to
pay real estate taxes, insurance and certain common area and maintenance costs.
The current terms of the Company's leases, including renewal options, expire as
follows:
FISCAL YEARS LEASE NUMBER OF
TERMS EXPIRE STORES
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2000 - 2002........................ 34
2003 - 2005........................ 106
2006 - 2008........................ 159
2009 and later..................... 106
Ann Taylor leases corporate offices at 142 West 57th Street in New York
City, containing approximately 143,000 square feet and approximately 59,000
square feet of office space at 1372 Broadway in New York City. The leases for
these premises expire in 2006 and 2010, respectively. The Company also leases
office space in New Haven, Connecticut, containing approximately 39,000 square
feet. This lease expires in October, 2001.
Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution Services,
Inc., owns its 256,000 square foot distribution center located in Louisville,
Kentucky. Nearly all Ann Taylor merchandise is distributed to the Company's
stores through this facility. The parcel on which the Louisville distribution
center is located comprises approximately 20 acres and could accommodate
possible future expansion of the facility.
ITEM 3. LEGAL PROCEEDINGS
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On April 26, 1996, certain alleged stockholders of the Company filed a
purported class action lawsuit in the United States District Court Southern
District of New York, against the Company, the Company's wholly owned subsidiary
AnnTaylor, Inc., ("Ann Taylor"), certain officers and directors of the Company
and Ann Taylor, Merrill Lynch & Co. ("ML&Co.") and certain affiliates of ML&Co.
(Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The complaint
alleged causes of action under Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended, by alleging that the Company and the other
defendants engaged in a fraudulent scheme and course of business that operated a
fraud or deceit on purchasers of the Company's common stock during the period
commencing February 3, 1994 through May 4, 1995, due to alleged false and
misleading statements about the Company and Ann Taylor. The complaint sought,
among other things, certification as a class action on behalf of all purchasers
of common stock during the period commencing February 3, 1994 through May 4,
1995, the awarding of compensatory damages to the plaintiffs and purported
members of the class, the awarding of costs, including pre-judgment and
post-judgment interest, reasonable attorneys' fees and expert witness fees to
the plaintiffs and purported members of the class and equitable and/or
injunctive relief. On November 9, 1998, the District Court issued an order
granting the defendants' motion to dismiss the amended complaint with prejudice,
for its failure to plead fraud with particularity. On or about December 15,
1998, the plaintiffs filed a notice of appeal to the United States Court of
Appeals for the Second Circuit, seeking review of the District court's order.
The Court heard oral argument on this appeal on September 15, 1999. ML&Co., its
affiliates and the two directors who previously served on the Company's Board of
Directors as representatives of certain affiliates of ML&Co. (the "settling
defendants"), reached a settlement with the plaintiffs, which provides, among
other things, for the establishment of a settlement fund in the amount of
$3,000,000 plus interest. On or about December 14, 1999, the District Court
entered an Order and Final Judgment approving this partial settlement,
dismissing the amended complaint with prejudice as to the settling defendants,
and barring and enjoining any future claims by, among others, the remaining
defendants against the settling defendants for contribution. The appeal as
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against the remaining defendants, including the Company, is pending before the
Second Circuit Court of Appeals. As a result, any liability that may arise from
this action cannot be predicted at this time. The Company believes that the
amended complaint is without merit and intends to continue to defend the action
vigorously.
The Company is also a party to routine litigation incident to its
business. Although the amount of any liability that could arise with respect to
these actions cannot be accurately predicted, in the opinion of the Company, any
such liability will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------
None.
-9-
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PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------
The Company's common stock is listed and traded on the New York Stock
Exchange under the symbol ANN. The number of holders of record of common stock
at February 25, 2000 was 580. The following table sets forth the high and low
closing sale prices for the common stock on the New York Stock Exchange during
Fiscal 1999 and Fiscal 1998.
MARKET PRICE
----------------
HIGH LOW
-------- ------
FISCAL YEAR 1999
Fourth quarter.............................. $46-5/16 $22-1/4
Third quarter............................... 45 32-1/2
Second quarter.............................. 50-7/16 34-1/2
First quarter............................... 52-13/16 33-1/8
FISCAL YEAR 1998
Fourth quarter.............................. $41-9/16 $28-3/4
Third quarter............................... 29-5/8 19-3/8
Second quarter.............................. 23-1/2 16-1/8
First quarter............................... 16-1/2 11-13/16
The Company has never paid dividends on the common stock and does not
intend to pay dividends in the foreseeable future. As a holding company, the
ability of the Company to pay dividends is dependent upon the receipt of
dividends or other payments from its subsidiaries, including the Company's
direct wholly owned subsidiary AnnTaylor, Inc. ("Ann Taylor"). The payment of
dividends by Ann Taylor to the Company is subject to certain restrictions under
Ann Taylor's Credit Facility described below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources". The payment of cash dividends on the common stock by the Company is
also subject to certain restrictions contained in the Company's guarantee of Ann
Taylor's obligations under the Credit Facility. Any determination to pay cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, contractual restrictions and other factors deemed relevant
at that time by the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
- -------
The following selected historical financial information for the periods
indicated has been derived from the audited consolidated financial statements of
the Company. The Company's consolidated statements of income, stockholders'
equity and cash flows for each of the three fiscal years ended January 29, 2000,
January 30, 1999 and January 31, 1998 and consolidated balance sheets as of
January 29, 2000 and January 30, 1999, as audited by Deloitte & Touche LLP,
independent auditors, appear elsewhere in this document. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto of the Company included elsewhere in this
document. All references to years are to the fiscal year of the Company, which
ends on the Saturday nearest January 31 in the following calendar year. All
fiscal years for which financial information is set forth below had 52 weeks,
except the fiscal year ended February 3, 1996 which had 53 weeks.
-10-
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Fiscal Years Ended
--------------------------------------------------------------------------
January 29, January 30, January 31, February 1, February 3,
2000 1999 1998 1997 1996
------------- ----------- ------------ ----------- -----------
(dollars in thousands, except per square foot data and per share data)
Income Statement Information:
Net sales ................................... $ 1,084,519 $ 911,939 $ 781,028 $ 798,117 $ 731,142
Cost of sales ............................... 536,014 455,724 411,756 443,443 425,225
----------- ----------- ----------- ----------- -----------
Gross profit ................................ 548,505 456,215 369,272 354,674 305,917
Selling, general and administrative expenses 413,058 349,955 308,232 291,027
271,136
Studio shoe stores closing expense (a) ...... -- -- -- 3,600 --
Employment contract separation expense (b) .. -- -- -- 3,500 --
Retirement of assets (c) .................... -- 3,633 -- -- --
Amortization of goodwill (d) ............... 11,040 11,040 11,040 10,086 9,506
----------- ----------- ----------- ----------- -----------
Operating income ............................ 124,407 91,587 50,000 46,461 25,275
Interest income ............................. 4,378 2,241 1,157 176 34
Interest expense (e) ........................ 11,814 20,358 21,146 24,592 20,990
Other (income) expense, net ................. 1,257 567 548 403 38
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary loss .......................... 115,714 72,903 29,463 21,642 4,281
Income tax provision ........................ 50,221 33,579 17,466 12,975 5,157
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary loss ..... 65,493 39,324 11,997 8,667 (876)
Extraordinary loss (f) ...................... 962 -- 173 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)............................ $ 64,531 $ 39,324 $ 11,824 $ 8,667 $ (876)
=========== =========== =========== =========== ===========
Basic earnings (loss) per share before
extraordinary loss........................... $ 2.25 $ 1.53 $ 0.47 $ 0.36 $ (0.04)
Extraordinary loss per share (f) ............ 0.03 -- 0.01 -- --
----------- ----------- ----------- ----------- -----------
Basic earnings (loss) per share ............. $ 2.22 $ 1.53 $ 0.46 $ 0.36 $ (0.04)
=========== =========== =========== =========== ===========
Diluted earnings (loss) per share before
extraordinary loss........................... $ 2.08 $ 1.44 $ 0.47 $ 0.36 $ (0.04)
Extraordinary loss per share (f) ............ 0.03 -- 0.01 -- --
----------- ----------- ----------- ----------- -----------
Diluted earnings (loss) per share ........... $ 2.05 $ 1.44 $ 0.46 $ 0.36 $ (0.04)
=========== =========== =========== =========== ===========
Weighted average shares outstanding (in 000s) 29,021 25,715 25,628 23,981
23,067
Weighted average shares outstanding,
assuming dilution (in 000s) ................. 32,849 31,006 25,693 24,060 23,167
Operating Information:
Percentage increase (decrease) in comparable
store sales (g) ............................. 8.4% 7.9% (5.5)% 1.8% (8.9)%
Net sales per gross square foot (h) ......... $ 502 $ 474 $ 445 $ 476 $ 518
Number of stores:
Open at beginning of period ................. 365 324 309 306 262
Opened during the period .................... 47 45 27 11 48
Expanded during the period .................. 8 8 9 7 30
Closed during the period .................... 7 4 12 8 4
Open at the end of the period ............... 405 365 324 309 306
Total store square footage at
end of period.............................. 2,280,000 2,038,000 1,808,000 1,705,000 1,651,000
Capital expenditures......................... $ 53,409 $ 45,131 $ 22,945 $ 16,107 $ 78,378
Depreciation and amortization including
goodwill (d)................................. $ 41,387 $ 39,823 $ 38,843 $ 36,294 $ 28,294
Working capital turnover (i) ............... 6.8x 6.3x 6.5x 7.8x 7.8x
Inventory turnover (j) ...................... 4.8x 5.0x 5.1x 4.7x 4.3x
Balance Sheet Information (at end of period):
Working capital (k).......................... $ 151,368 $ 168,708 $ 122,181 $ 118,850 $ 86,477
Goodwill, net (d) ........................... 308,659 319,699 330,739 341,779 313,525
Total assets ................................ 765,117 775,417 683,661 688,139 678,709
Total debt .................................. 115,785 105,157 106,276 131,192 272,458
Preferred securities ........................ -- 96,624 96,391 96,158 --
Stockholders' equity ........................ 515,622 432,699 384,107 370,582 325,688
(Footnotes on following page)
-11-
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(Footnotes for preceding page. In Fiscal 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" and all prior year
per share information has been recalculated. Unless otherwise noted, all per
share information is for diluted earnings per share.)
(a) Relates to the closing of the nine Ann Taylor Studio shoe stores. The
charge of $3,600,000 ($2,052,000, or $0.08 per share, net of income tax
benefit) in Fiscal 1996 was comprised of $2,500,000 related to the
write-off of the net book value of the nine stores and $1,100,000 related
to leases and other related costs for these locations.
(b) In connection with the resignation in August 1996 of a former executive, a
one-time pre-tax charge of $3,500,000 ($1,958,000, or $0.08 per share, net
of related tax benefit) was recorded in Fiscal 1996 relating to the
estimated costs of the Company's obligations under her employment contract
with the Company.
(c) A charge of $3,633,000 ($2,180,000, or $0.07 per share, net of tax benefit)
was recorded in Fiscal 1998 for the retirement of certain assets in
connection with the renovation of the Company's corporate offices.
(d) The Company acquired Ann Taylor in a leveraged buyout in 1989. As a result
of that transaction, $380,250,000, representing the excess of the allocated
purchase price over the fair value of the Company's net assets, was
recorded as goodwill and is being amortized on a straight-line basis over
40 years. In addition, as a result of the September 1996 acquisition of the
operations that comprise the Company's sourcing division, the Company
recorded goodwill of $38,430,000 that is being amortized on a straight-line
basis over 25 years.
(e) Includes non-cash interest expense of $3,026,000, $1,290,000, $1,419,000,
$1,574,000 and $1,004,000, in Fiscal 1999, 1998, 1997, 1996 and 1995,
respectively, from amortization of deferred financing costs.
(f) In Fiscal 1999, Ann Taylor incurred an extraordinary loss of $1,603,000
($962,000, or $0.03 per share, net of income tax benefit) in connection
with the redemption of its outstanding 8 3/4% Subordinated Notes due 2000.
In Fiscal 1997, Ann Taylor incurred an extraordinary loss of $303,000
($173,000, or $0.01 per share, net of income tax benefit), in connection
with the prepayment of the outstanding balance of a term loan.
(g) Comparable store sales are calculated by excluding the net sales of a store
for any month of one period if the store was not also open during the same
month of the prior period. In a year with 53 weeks, such as Fiscal 1995,
sales in the last week of that year are not included in determining
comparable store sales. A store that is expanded by more than 15% is
treated as a new store for the first year following the opening of the
expanded store.
(h) Net sales per square foot ("sales per square foot") is determined by
dividing net sales for the period by the average of the gross square feet
at the beginning and end of each period. Unless otherwise indicated,
references herein to square feet are to gross square feet, rather than net
selling space.
(i) Working capital turnover is determined by dividing net sales by the average
of the amount of working capital at the beginning and end of the period.
(j) Inventory turnover is determined by dividing cost of sales by the average
of the cost of inventory at the beginning and end of the period (excluding
inventory associated with the Company's sourcing division). Effective
February 1, 1998, the Company elected to change its method of inventory
valuation to the average cost method as discussed in Note 1 to the
Consolidated Financial Statements of the Company.
(k) Includes current portion of long-term debt of $1,300,000, $1,206,000,
$1,119,000, $287,000 and $40,266,000, in Fiscal 1999, 1998, 1997, 1996 and
1995, respectively.
-12-
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SALES
The following table sets forth certain sales and store data for the
periods indicated:
Fiscal Year
---------------------------------------
1999 1998 1997
---- ---- ----
Net sales ($000).............................. $1,084,519 $ 911,939 $ 781,028
Total net sales increase (decrease) percentage 18.9% 16.8% (2.1)%
Comparable store sales increase
(decrease) percentage ...................... 8.4% 7.9% (5.5)%
Net sales per average square foot............. $ 502 $ 474 $ 445
Total store square footage at end of period .. 2,280,000 2,038,000 1,808,000
Number of
New stores ................................. 47 45 27
Expanded stores ............................ 8 8 9
Closed stores .............................. 7 4 12
Total stores open at end of period ........... 405 365 324
The Company's net sales do not show significant seasonal variation,
although net sales in the fourth quarter have historically been moderately
higher than in the other quarters. As a result, the Company has not had
significant overhead and other costs generally associated with large seasonal
variations.
RESULTS OF OPERATIONS
The following table sets forth income statement data expressed as a
percentage of net sales for the periods indicated:
Fiscal Year
-------------------------------
1999 1998 1997
----- ----- -----
Net sales............................ 100.0% 100.0% 100.0%
Cost of sales........................ 49.4 50.0 52.7
---- ---- -----
Gross profit..................... 50.6 50.0 47.3
Selling, general and
administrative expenses.......... 38.1 38.4 39.5
Retirement of assets................. --- 0.4 ---
Amortization of goodwill............. 1.0 1.2 1.4
----- ----- -----
Operating income................. 11.5 10.0 6.4
Interest income...................... 0.4 0.2 0.1
Interest expense..................... 1.1 2.2 2.7
Other expense, net................... 0.1 --- ---
----- ----- -----
Income before income taxes and
extraordinary loss............... 10.7 8.0 3.8
Income tax provision................. 4.6 3.7 2.3
----- ----- -----
Income before extraordinary loss..... 6.1 4.3 1.5
Extraordinary loss................... 0.1 --- ---
----- ----- -----
Net income........................... 6.0% 4.3% 1.5%
===== ===== =====
-13-
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FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net sales increased to $1,084,519,000 over $911,939,000 in
Fiscal 1998, an increase of $172,580,000, or 18.9%. Comparable store sales for
Fiscal 1999 increased 8.4%, compared to an increase of 7.9% in Fiscal 1998. The
sales increase was primarily attributable to the opening of new stores, the
expansion of existing stores and the net increase in comparable store sales in
1999. Management believes that the increase in comparable store sales was the
result of improved customer acceptance of the Company's product offerings and
merchandise assortment.
Gross profit as a percentage of net sales increased to 50.6% in 1999 from
50.0% in 1998. This increase in gross margin reflects a higher initial markup
rate, reflecting on-going improvements achieved by the Company's sourcing
division, offset in part by a higher markdown rate on goods that were sold below
full price.
Selling, general and administrative expenses were $413,058,000, or 38.1%
of net sales, in 1999, compared to $349,955,000, or 38.4% of net sales, in 1998.
The decrease in selling, general and administrative expenses as a percentage of
net sales was primarily attributable to increased leverage on fixed expenses
resulting from increased comparable store sales and improved operating
efficiencies. The benefits of this leverage were partially offset by an increase
in marketing expenditures in support of the Company's strategic initiatives to
enhance the Ann Taylor brand and increased investment in infrastructure,
including in the Company's stores organization, to support the planned expansion
of the Company's Ann Taylor Loft business.
Operating income increased to $124,407,000, or 11.5% of net sales, in 1999
from $91,587,000, or 10.0% of net sales, in 1998. Amortization of goodwill was
$11,040,000, or 1.0% of net sales, in 1999 compared to $11,040,000, or 1.2% of
net sales, in 1998. Operating income without giving effect to such amortization
was $135,447,000, or 12.5 % of net sales, in 1999 and $102,627,000, or 11.2% of
net sales, in 1998.
Interest income was $4,378,000 in 1999 compared to $2,241,000 in 1998. The
increase was primarily attributable to interest income earned on increased cash
on hand for the portion of the fiscal year prior to execution by the Company, in
the second half of 1999, of the securities repurchase program described below
under "Liquidity and Capital Resources".
Interest expense was $11,814,000 in 1999 compared to $20,358,000 in 1998.
The decrease in interest expense was primarily attributable to the redemption
during the second quarter of 1999 of the preferred securities issued by
AnnTaylor Finance Trust, the Company's special purpose finance trust, and the 8
3/4% Notes, issued by the Company's wholly-owned subsidiary, AnnTaylor, Inc.
("Ann Taylor") described below under "Liquidity and Capital Resources." This
reduction in interest expense was offset in part by interest expense on the
Convertible Subordinated Debentures due 2019 (the "Convertible Debentures")
issued by the Company during the second quarter of 1999, also described below
under "Liquidity and Capital Resources". The weighted average interest rate on
the Company's outstanding indebtedness at January 29, 2000 was 3.88% compared to
8.60% at January 30, 1999.
The income tax provision was $50,221,000, or 43.4% of income before income
taxes and extraordinary loss, in the 1999 period, compared to $33,579,000, or
46.1% of income before income taxes in 1998. The effective tax rates for both
periods were higher than the statutory rates, primarily as a result of
non-deductible goodwill expense.
On July 22, 1999, the Company applied the proceeds received from the
issuance of the Convertible Debentures to the redemption of Ann Taylor's
outstanding 8 3/4% Notes. This resulted in an extraordinary charge to earnings
in Fiscal 1999 of $962,000, net of income tax benefit, or $0.03 per share on a
diluted basis.
As a result of the foregoing factors, the Company had net income of
$64,531,000, or 6.0% of net sales, for 1999, compared to net income of
$39,324,000, or 4.3% of net sales, for 1998.
-14-
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FISCAL 1998 COMPARED TO FISCAL 1997
The Company's net sales increased to $911,939,000 in Fiscal 1998 over
$781,028,000 in Fiscal 1997, an increase of $130,911,000, or 16.8%. Comparable
store sales for Fiscal 1998 increased 7.9%, compared to a decrease of 5.5% in
Fiscal 1997. The sales increase was primarily attributable to the opening of new
stores, the expansion of existing stores and the net increase in comparable
store sales in 1998. Management believes that the net increase in comparable
store sales was the result of improved customer acceptance of the Company's
product offerings and merchandise assortment.
Gross profit as a percentage of net sales increased to 50.0% in 1998 from
47.3% in 1997. As discussed in Note 1 to the Consolidated Financial Statements,
the Company elected in Fiscal 1998 to change the method by which the Company
accounts for inventory, from the retail method to the average cost method. The
effect of this accounting change on Fiscal 1998 net income was an increase of
$1,272,000, or $0.04 per share on a diluted basis. Under the retail method,
gross margin as a percentage of net sales would have been approximately 49.8%.
The increase in gross margin reflects continued merchandise margin improvements
resulting from the maturation of the Company's sourcing organization, since the
acquisition of the Company's sourcing joint venture in September 1996, as well
as a reduction in markdowns as a percentage of sales.
Selling, general and administrative expenses were $349,955,000, or 38.4%
of net sales, in 1998, compared to $308,232,000, or 39.5% of net sales, in 1997.
The decrease in selling, general and administrative expenses as a percentage of
net sales was primarily attributable to increased leverage on fixed expenses
resulting from increased comparable store sales. The benefits of this leverage
were partially offset by an increase in the provision for management performance
bonus expense, and an increase in marketing expenditures in support of the
Company's strategic initiatives to enhance the Ann Taylor brand.
Operating income increased to $91,587,000, or 10.0% of net sales, in 1998
from $50,000,000, or 6.4% of net sales, in 1997. Operating income in 1998 was
reduced by $3,633,000, or 0.4% of net sales, for the retirement of certain
assets in connection with the renovation of the Company's corporate offices.
Amortization of goodwill was $11,040,000, or 1.2% of net sales, in 1998 compared
to $11,040,000, or 1.4% of net sales, in 1997. Operating income without giving
effect to such amortization was $102,627,000, or 11.2% of net sales, in 1998 and
$61,040,000, or 7.8% of net sales, in 1997.
Interest income was $2,241,000 in 1998 compared to $1,157,000 in 1997. The
increase was primarily attributable to interest income earned on increased cash
on hand.
Interest expense was $20,358,000 in 1998 compared to $21,146,000 in 1997.
The decrease in interest expense was primarily attributable to a decrease in the
Company's outstanding long-term debt, resulting in part from the prepayment in
July 1997 of a $24,500,000 term loan. The weighted average interest rate on the
Company's outstanding indebtedness at January 30, 1999 was 8.60% compared to
8.59% at January 31, 1998.
The income tax provision was $33,579,000, or 46.1% of income before income
taxes, in the 1998 period, compared to $17,466,000, or 59.3% of income before
income taxes and extraordinary loss, in 1997. The effective tax rates for both
periods were higher than the statutory rates, primarily as a result of
non-deductible goodwill expense. Without giving effect to such non-deductible
goodwill amortization, the Company's effective income tax rate was 40% of income
before income taxes in the 1998 period, compared to 43% before income taxes and
extraordinary loss in the 1997 period. The decrease in the effective income tax
rate resulted primarily from the implementation of additional state tax planning
and from an increase in the amount of income earned outside the United States by
the Company's non-U.S. sourcing subsidiaries.
As a result of the foregoing factors, the Company had net income of
$39,324,000, or 4.3% of net sales, for 1998, compared to net income of
$11,824,000, or 1.5% of net sales, for 1997.
-15-
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CHANGES IN FINANCIAL POSITION
Accounts receivable decreased to $67,092,000 at the end of 1999 from
$71,049,000 at the end of 1998, a decrease of $3,957,000, or 5.6%. This decrease
was primarily attributable to construction allowance receivables, which
decreased $4,079,000 to $8,406,000 in 1999.
Merchandise inventories increased to $140,026,000 at January 29, 2000 from
$136,748,000 at January 30, 1999, an increase of $3,278,000, or 2.4%. The
increase in merchandise inventories is primarily due to inventory purchased for
new store square footage. Merchandise inventories at January 29, 2000 and
January 30, 1999 included approximately $22,959,000 and $32,329,000,
respectively, of inventory associated with the Company's sourcing division,
which is principally finished goods in transit from factories. Total square
footage increased to approximately 2,280,000 square feet at January 29, 2000
from approximately 2,038,000 square feet at January 30, 1999. Merchandise
inventory on a per square foot basis, excluding inventory associated with the
Company's sourcing division, was approximately $51 at the end of 1999 as well as
1998. Inventory turned 4.8 times in 1999 compared to 5.0 times in 1998,
excluding inventory associated with the Company's sourcing division. Inventory
turnover is determined by dividing cost of sales by the average of the cost of
inventory at the beginning and end of the period (excluding inventory associated
with the sourcing division).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital is cash flow from
operations. The following table sets forth material measures of the Company's
liquidity:
Fiscal Year
-----------------------------
1999 1998 1997
---- ---- -----
(dollars in thousands)
Cash provided by operating activities....... $ 98,299 $75,535 $ 71,589
Working capital............................. $151,368 $168,708 $ 122,181
Current ratio............................... 2.26:1 2.30:1 2.39:1
Debt to equity ratio........................ .22:1 .24:1 .28:1
Cash provided by operating activities, as presented on the consolidated
statements of cash flows, increased in 1999 principally as a result of earnings,
noncash charges and decreases in net long term assets and receivables partially
offset by decreases in accounts payable and accrued liabilities and increases in
deferred income taxes, prepaid expenses and other current assets and merchandise
inventories.
Ann Taylor's principal credit facility is a bank credit facility that it
entered into in June 1998 with a syndicate of lenders (the "Credit Facility").
Ann Taylor uses the Credit Facility for the issuance of commercial and standby
letters of credit and to provide funds for other general corporate purposes. The
lenders' commitment under the Credit Facility was originally $150,000,000. The
Credit Facility had an original maturity date of June 30, 2000, subject to
extension upon the satisfaction of certain conditions. Effective September 3,
1999, Ann Taylor elected to reduce the commitment of the lenders under the
Credit Facility by $25,000,000 to $125,000,000 and extended the term of the
Credit Facility to June 30, 2001.
Loans outstanding under the Credit Facility at any time may not exceed
$50,000,000. The Company did not make any borrowings under the loan provisions
of the Credit Facility during Fiscal 1999, and there were no loans outstanding
at fiscal year end. The outstanding loan balance is required to be reduced to
zero for the thirty-day period commencing January 1 each year. This cleandown
period was achieved for January 2000. Maximum availability for loans and letters
of credit under the Credit Facility is governed by a monthly borrowing base,
determined by the application of specified advance rates against certain
eligible assets. Based on this calculation, the maximum amount available for
loans and letters of credit under the Credit Facility at January 29, 2000 was
$125,000,000. Commercial and standby letters of credit outstanding under the
Credit Facility at January 29, 2000 were approximately $69,649,000.
-16-
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Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at Ann Taylor's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%,
respectively. In addition, Ann Taylor is required to pay the lenders a quarterly
commitment fee on the unused revolving loan commitment amount at a rate ranging
from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby
letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens and investments, restrictions on dividends or
other distributions to stockholders and maintenance of certain financial ratios
including a specified fixed charge ratio and specified levels of net worth.
The lenders have been granted a pledge of the common stock of Ann Taylor
and certain of its subsidiaries, and a security interest in substantially all
other tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of Ann Taylor and its subsidiaries, as
collateral for Ann Taylor's obligations under the Credit Facility.
During the second quarter of Fiscal 1999, the Company completed the
issuance of an aggregate of $199,072,000 principal amount at maturity of its
Convertible Debentures. The Convertible Debentures were sold at an original
issue price of $552.56 per $1,000 principal amount at maturity of Debenture. The
net proceeds of the sale were applied to the redemption, described below, of the
$100,000,000 outstanding 8 3/4% Subordinated Notes due 2000 (the "8 3/4% Notes")
issued by Ann Taylor. Cash interest is payable on the principal amount at
maturity of the Convertible Debentures at the rate of 0.55% per annum. This
interest rate and the accrual of original issue discount represent a yield to
maturity on the Convertible Debentures of 3.75%. The Convertible Debentures are
convertible at the option of the holders thereof initially into 12.078 shares of
the Company's common stock per $1,000 principal amount at maturity of Debenture.
The Convertible Debentures may be redeemed at the Company's option on or after
June 18, 2004. The Company's obligations with respect to the Convertible
Debentures are guaranteed on a subordinated basis by Ann Taylor.
On July 22, 1999, Ann Taylor redeemed all of its outstanding 8 3/4% Notes,
at a redemption price of 101.375% of principal amount, plus accrued unpaid
interest to the redemption date. The redemption of the 8 3/4% Notes resulted in
an extraordinary charge to earnings in the second quarter and fiscal year of
$962,000, or $0.03 per share on a diluted basis, net of income tax benefit.
On June 29, 1999, the Company's special purpose financing vehicle,
AnnTaylor Finance Trust, redeemed all of its outstanding 8 1/2% Company
Obligated Mandatorily Redeemable Convertible Preferred Securities ("preferred
securities"). All but $100,000 liquidation amount of the preferred securities
were tendered for conversion into an aggregate of 5,116,717 shares of Company
common stock prior to the redemption date, at a conversion price of $19.65 per
share of common stock, or 2.545 shares of common stock per $50 liquidation
amount of the security. The 5,116,717 shares of Company common stock issued
represented approximately 16% of the Company's outstanding common stock as of
the date of issuance. Holders of preferred securities that were not tendered for
conversion received a cash payment equal to 105.95% of the liquidation amount of
the preferred securities redeemed, plus accrued distributions.
Ann Taylor and its wholly owned subsidiary, AnnTaylor Distribution
Services, Inc., are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage loan
balance at January 29, 2000 was $3,950,000.
The Company's capital expenditures totaled $53,409,000, $45,131,000 and
$22,945,000, in Fiscal 1999, 1998 and 1997, respectively. Capital expenditures
were primarily attributable to the Company's store expansion, renovation and
refurbishment programs, as well as the investment the Company made in certain
information systems and, in Fiscal 1999 and 1998, the Company's corporate
offices. The Company expects its total capital expenditure requirements in
Fiscal 2000 will be approximately $78,000,000, including capital for new store
construction for a planned square footage increase of approximately 460,000
square feet, or 20%, as well as capital to support continued investments in
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information systems. The actual amount of the Company's capital expenditures
will depend in part on the number of stores opened, expanded and refurbished and
on the amount of construction allowances the Company receives from the landlords
of its new or expanded stores. See "Business--Stores and Expansion".
On September 9, 1999, the Company announced a securities repurchase
program authorized by its Board of Directors, pursuant to which the Company was
authorized to purchase up to $40,000,000 of the Company's common stock and/or
Convertible Debentures, through open market purchases and privately negotiated
transactions. In January 2000, the Board of Directors authorized a $50,000,000
increase in the securities repurchase program, bringing the total amount of
securities that may be repurchased under the program to $90,000,000. In the
third and fourth quarters of 1999, the Company repurchased an aggregate of
3,012,500 shares of its Common Stock, for an aggregate repurchase price of
$89,900,000 (exclusive of brokerage commissions), pursuant to this program. All
of the repurchased shares became treasury shares and may be used for general
corporate and other purposes. No Convertible Debentures were repurchased.
Dividends and distributions from Ann Taylor to the Company are restricted
by the Credit Facility.
In order to finance its operations and capital requirements, the Company
expects to use internally generated funds, trade credit and funds available to
it under the Credit Facility. The Company believes that cash flow from
operations and funds available under the Credit Facility are sufficient to
enable it to meet its on-going cash needs for its business, as presently
conducted, for the foreseeable future.
Effective February 1, 1998, the Company elected to change its method of
inventory valuation from the retail method to the average cost method. The
Company believes the average cost method, which traces each inventory unit and
its cost, is a preferable method for matching the cost of merchandise with the
revenues generated. The retail method does not provide for individual unit cost
information. The cumulative effect of this accounting change on February 1, 1998
was not material. The effect of this accounting change on Fiscal 1998 net income
was an increase of $1,272,000, or $0.04 per share on a diluted basis. It is not
possible to determine the effect of the change on income in fiscal periods
ending prior to February 1, 1998 as no cost information was available.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of FASB Statement No. 133". This statement establishes accounting
and reporting standards for derivative instruments embedded in other contracts,
and for hedging activities. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management is currently
evaluating the impact of this statement and believes its adoption will not
affect the Company's consolidated financial position, results of operations or
cash flows.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES
Sections of this Annual Report on Form 10-K, including the preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain various forward looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, with respect to the
financial condition, results of operations and business of the Company. Examples
of forward-looking statements are statements that use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar expressions.
These forward-looking statements involve certain risks and uncertainties, and no
assurance can be given that any of such matters will be realized. Actual results
may differ materially from those contemplated by such forward looking statements
as a result of, among other things, failure by the Company to predict accurately
customer fashion preferences; a decline in the demand for merchandise offered by
the Company; competitive influences; changes in levels of store traffic or
consumer spending habits; effectiveness of the Company's brand awareness and
marketing programs; lack of sufficient customer acceptance of the Ann Taylor
Loft concept in the upper-moderate-priced women's apparel market; general
economic conditions that are less favorable than expected or a downturn in the
retail industry; the inability of the Company to locate new store sites or
negotiate favorable lease terms for additional stores or for the expansion of
existing stores; lack of sufficient consumer interest in an Ann Taylor Internet
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Website; a significant change in the regulatory environment applicable to the
Company's business; an increase in the rate of import duties or export quotas
with respect to the Company's merchandise; financial or political instability in
any of the countries in which the Company's goods are manufactured; or an
adverse outcome of the litigation referred to in 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 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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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company maintains the majority of its cash and cash equivalents in
financial instruments with original maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, a change of 100 basis points in interest rates would not have a
material effect on the Company's financial condition.
The Company's outstanding long-term debt as of January 29, 2000 bears
interest at fixed rates; therefore, the Company's results of operations would
only be affected by interest rate changes to the extent that fluctuating rate
loans are outstanding under the Credit Facility. As of January 29, 2000, the
Company has no such amounts outstanding. Future borrowings would be affected by
interest rate changes; however, the Company does not believe that a change of
100 basis points in interest rates would have a material effect on the Company's
financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company for the
years ended January 29, 2000, January 30, 1999 and January 31, 1998 are
included as a part of this Report (See Item 14):
Consolidated Statements of Income for the fiscal years ended January 29,
2000, January 30, 1999 and January 31, 1998.
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999.
Consolidated Statements of Stockholders' Equity for the fiscal years ended
January 29, 2000, January 30, 1999 and January 31, 1998.
Consolidated Statements of Cash Flows for the fiscal years ended January
29, 2000, January 30, 1999 and January 31, 1998.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the Section entitled "Election of Class III Directors", "Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement for its 2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Sections entitled "Compensation of Directors and Related Matters",
"Compensation Committee Report on Executive Compensation" and "Executive
Compensation" in the Company's Proxy Statement for its 2000 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Section entitled "Beneficial Ownership of Common Stock" in the Company's
Proxy Statement for its 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Section entitled "Compensation Committee Report on Executive
Compensation--Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" in the Company's Proxy Statement for its 2000 Annual
Meeting of Stockholders.
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PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Annual Report:
The following consolidated financial statements of the Company are
included on pages 28 through 47 and are filed as part of this Annual
Report: Independent Auditors' Report; Consolidated Statements of
Income for the fiscal years ended January 29, 2000, January 30, 1999
and January 31, 1998; Consolidated Balance Sheets as of January 29,
2000 and January 30, 1999; Consolidated Statements of Stockholders'
Equity for the fiscal years ended January 29, 2000, January 30, 1999
and January 31, 1998; Consolidated Statements of Cash Flows for the
fiscal years ended January 29, 2000, January 30, 1999, and January 31,
1998; Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
The Company filed a report dated January 10, 2000 with the Commission
on Form 8-K, with respect to the approval by the Company's Board of
Directors of a $50,000,000 increase in the Company's securities
repurchase program that was originally announced in September 1999,
raising the total amount of the securities that may be purchased under
the program to $90,000,000.
(c) Exhibits
The exhibits listed below are filed as a part of this Annual Report.
EXHIBIT NUMBER
--------------
3.1 Restated Certificate of Incorporation of the Company as amended
through May 18, 1999. Incorporated by reference to Exhibit 3.1 to
the Form 10-Q of the Company for the Quarter Ended May 1, 1999
filed on June 1, 1999.
3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.2 to
the Form 10-Q of the Company for the Quarter Ended November 2, 1991
filed on December 17, 1991 (Registration No. 33-28522).
4.1 Indenture, dated as of June 18, 1999, between the Company, Ann
Taylor, and the Bank of New York, as Trustee relating to the
Company's Convertible Subordinated Debentures due 2019.
Incorporated by reference to Exhibit 4.01 to the Registration
Statement of the Company filed on September 13, 1999.
4.2 Registration Rights Agreement, dated as of June 18, 1999, between
the Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith and Banc America Securities LLC. Incorporated by reference to
Exhibit 4.02 to the Registration Statement of the Company filed on
September 13, 1999.
10.1 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18
to the Registration Statement of the Company and Ann Taylor filed
on May 3, 1989 (Registration No. 33-28522).
10.1.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to
Exhibit 10.15.1 to the Annual Report on Form 10-K of the Company
filed on April 30, 1993.
10.2 Lease, dated as of March 17, 1989, between Carven Associates and
Ann Taylor concerning the West 57th Street headquarters.
Incorporated by reference to Exhibit 10.21 to the Registration
Statement of the Company and Ann Taylor filed on May 3, 1989
(Registration No. 33-28522).
-22-
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EXHIBIT NUMBER
- --------------
10.2.1 First Amendment to Lease, dated as of November 14, 1990, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.1 to the Registration Statement of the Company filed
on April 11, 1991 (Registration No. 33-39905).
10.2.2 Second Amendment to Lease, dated as of February 28, 1993, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.2 to the Annual Report on Form 10-K of the Company
filed on April 29, 1993.
10.2.3 Extension and Amendment to Lease dated as of October 1, 1993,
between Carven Associates and Ann Taylor. Incorporated by reference
to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter
ended October 30, 1993 filed on November 26, 1993.
10.2.4 Modification of Amendment and Extension to Lease, dated as of April
14, 1994 between Carven Associates and Ann Taylor. Incorporated by
reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of
the Company filed on April 28, 1995.
10.2.5 Fifth Amendment to Lease, dated as of March 14, 1995, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.15.5 to the Annual Report on Form 10-K of the Company
filed on April 28, 1995.
10.2.6 Sixth Amendment to Lease, dated as of January 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.6 to the Annual Report on Form 10-K of
the Company filed on April 30, 1998.
10.2.7 Seventh Amendment to Lease, dated as of June 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.7 to the Annual Report on Form 10-K of
the Company filed on April 30, 1998.
10.2.8 Eighth Amendment to Lease, undated, between Pacific Metropolitan
Corporation and Ann Taylor. Incorporated by reference to Exhibit
10.8.8 to the Annual Report on Form 10-K of the Company filed on
April 30, 1998.
10.2.9 Ninth Amendment to Lease, dated as of May 13, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference
to Exhibit 10.8.9 to the Annual Report on Form 10-K of the Company
filed on April 30, 1998.
10.2.10 Tenth Amendment to Lease, dated as of May 21, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by reference
to Exhibit 10.8.10 to the Annual Report on Form 10-K of the Company
filed on April 30, 1998.
10.2.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.3.11 to the Annual Report on Form 10-K of
the Company filed on March 29, 1999.
10.2.12 Sublease Agreement, dated as of February 23, 1999, between Societe
Air France (formerly known as Compagnie Nationale Air France) and
Ann Taylor.
10.3 Tax Sharing Agreement, dated as of July 13, 1989, between the
Company and Ann Taylor. Incorporated by reference to Exhibit 10.24
to Amendment No. 2 to the Registration Statement of the Company and
Ann Taylor filed on July 13, 1989 (Registration No. 33-28522).
10.4 Employment Agreement dated as of February 1, 1994 between the
Company and Sally Frame Kasaks. Incorporated by reference to
Exhibit 10.8 to the Form 10-Q of the Company for the Quarter ended
October 29, 1994 filed on December 9, 1994.
10.5 Employment Agreement dated February 16, 1996 between the Company
and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.4
to the Annual Report on Form 10-K of the Company filed on April 8,
1996.
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EXHIBIT NUMBER
- --------------
10.5.1 Amendment to the Employment Agreement, dated August 23, 1996,
between the Company and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.11.1 to the Annual Report on Form 10-K of
the Company filed on May 1, 1997.
10.5.2 Amendment #2 to the Employment Agreement, dated August 12, 1999,
between the Company and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.6.2 to the Form 10-Q of the Company
for the Quarter ended July 31, 1999 filed on September 14, 1999.
Confidential treatment has been granted with respect to certain
portions of this exhibit.
10.5.3 Amendment #3 to the Employment Agreement, dated March 10, 2000,
between the Company and J. Patrick Spainhour.
10.6 Employment Agreement dated November 25, 1996 between the Company
and Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to
Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996
filed on December 17, 1996.
10.6.1 Amendment #1 to the Employment Agreement, dated as of February 16,
2000, between the Company and Patricia DeRosa. Confidential
treatment has been requested with respect to certain portions of
this exhibit.
10.7 Employment Agreement dated September 20, 1996 between Ann Taylor
and Dwight F. Meyer. Incorporated by reference to Exhibit 10.4 to
the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996
filed on December 17, 1996.
10.8 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted
Stock and Unit Award Plan, Amended and Restated as of February 23,
1994. Incorporated by reference to Exhibit 10.15 to the Annual
Report on Form 10-K of the Company filed on May 1, 1997.
10.8.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan, as
approved by stockholders on June 18, 1997. Incorporated by
reference to Exhibit 10.15.1 to the Form 10-Q of the Company for
the Quarter Ended August 2, 1997 filed on September 12, 1997.
10.8.2 Amendment to the AnnTaylor Stores Corporation Amended and
Restated 1992 Stock Option and Restricted Stock and Unit Award
Plan dated as of January 16, 1998. Incorporated by reference to
Exhibit 10 of Form 8-K of the Company filed on March 12, 1998.
10.8.3 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan dated as
of May 2, 1998. Incorporated by reference to Exhibit 10.16.3 to the
Form 10-Q of the Company for the Quarter ended April 2, 1998 filed
on June 16, 1998.
10.8.4 Amendment to the AnnTaylor Stores Corporation Amended and Restated
1992 Stock Option and Restricted Stock and Unit Award Plan dated as
of March 10, 2000.
10.9 AnnTaylor Stores Corporation Amended and Restated Management
Performance Compensation Plan, as approved by stockholders on June
18, 1997. Incorporated by reference to Exhibit 10.16 to the Form
10-Q of the Company for the Quarter Ended August 2, 1997 filed on
September 12, 1997.
10.9.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan dated as of March 12,
1998. Incorporated by reference to Exhibit 10.17.1 to the Annual
Report on Form 10-K of the Company filed on April 30, 1998.
10.9.2 Amendment to the AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan, dated as of March 10,
2000.
10.10 Associate Stock Purchase Plan. Incorporated by reference to Exhibit
10.31 to the Form 10-Q of the Company for the Quarter Ended October
31, 1992 filed on December 15, 1992.
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EXHIBIT NUMBER
- --------------
10.11 AnnTaylor Stores Corporation Deferred Compensation Plan.
Incorporated by reference to Exhibit 10.33 to the Annual Report on
Form 10-K of the Company filed on April 28, 1995.
10.11.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation
Plan as approved by the Board of Directors on August 11, 1995.
Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of
the Company for the Quarter Ended July 29, 1995 filed on September
11, 1995.
10.12 Mortgage, Assignment of Rents and Leases, Security Agreement and
Fixture Financing Statement dated November 20, 1995, between
AnnTaylor Distribution Services, Inc., as Mortgagor, and General
Electric Capital Assurance Company, as Mortgagee. Incorporated by
reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the
Quarter ended October 28, 1995 filed on December 8, 1995.
10.13 Promissory Note dated November 20, 1995 from Ann Taylor and
AnnTaylor Distribution Services, Inc., collectively as Borrower, to
General Electric Capital Assurance Company, as Lender. Incorporated
by reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for
the Quarter ended October 28, 1995 filed on December 8, 1995.
10.14 Commitment Letter dated as of May 7, 1998 among Ann Taylor, Bank of
America National Trust and Savings Association, BancAmerica
Robertson Stephens, Citicorp USA and CoreStates Bank, N.A.
Incorporated by reference to Exhibit 10.27 to the Form 10-Q of the
Company for the Quarter Ended May 2, 1998 filed on June 16, 1998.
10.15 Credit Agreement, dated as of June 30, 1998 among Ann Taylor, Bank
of America, Citicorp USA and First Union National Bank, as
Co-Agents, the financial institutions from time to time party
thereto, BancAmerica Robertson Stephens, as Arranger, and Bank of
America, as Administrative Agent. Incorporated by reference to
Exhibit 10.28 to the Form 10-Q of the Company for the Quarter Ended
August 1, 1998 filed on September 14, 1998.
10.15.1 Trademark Security Agreement, dated as of June 30, 1998, made by
Ann Taylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.1 to the Form 10-Q of
the Company for the Quarter Ended August 1, 1998 filed on September
14, 1998.
10.15.2 Guaranty, dated as of June 30, 1998, made by the Company in favor
of Bank of America, as Administrative Agent. Incorporated by
reference to Exhibit 10.28.2 to the Form 10-Q of the Company for
the Quarter Ended August 1, 1998 filed on September 14, 1998.
10.15.3 Security and Pledge Agreement, dated as of June 30, 1998, made by
the Company in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.3 to the Form 10-Q of
the Company for the Quarter Ended August 1, 1998 filed on September
14, 1998.
10.15.4 Security and Pledge Agreement, dated as of June 30, 1998 made by
Ann Taylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.4 to the Form 10-Q of
the Company for the Quarter Ended August 1, 1998 filed on September
14, 1998.
10.15.5 Subsidiary Guaranty, dated as of June 30, 1998 made by AnnTaylor
Distribution Services in favor of Bank of America, as
Administrative Agent. Incorporated by reference to Exhibit 10.28.5
to the Form 10-Q of the Company for the Quarter Ended August 1,
1998 filed on September 14, 1998.
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EXHIBIT NUMBER
- --------------
10.15.6 First Amendment to the Credit Agreement, dated as of September 7,
1999, among Ann Taylor, Bank of America, N.A., Citibank, N.A.,
First Union National Bank and each of the other lenders party to
the Credit Agreement, NationsBanc Montgomery Securities LLC, as
Arranger and Bank of America, as Administrative Agent. Incorporated
by reference to Exhibit 10.19.6 to the Form 10-Q of the Company for
the Quarter Ended July 31, 1999 filed on September 14, 1999.
10.15.7 Second Amendment to the Credit Agreement, dated December 1999,
among Ann Taylor, Bank of America, N.A., Citibank, N.A., First
Union National Bank, and each of the other lenders party to the
Credit Agreement, NationsBanc Montgomery Securities LLC, as
Arranger and Bank of America, as Administrative Agent.
10.16 AnnTaylor Stores Corporation Long-Term Cash Incentive Compensation
Plan, as approved by stockholders on June 17, 1998. Incorporated by
reference to Exhibit A to the Proxy Statement dated May 1, 1998
filed on May 6, 1998.
10.16.1 Amendment to the AnnTaylor Stores Corporation Long-Term Cash
Incentive Compensation Plan, dated as of March 10, 2000.
10.17 Separation Agreement dated March 25, 1999 between Ann Taylor and
Walter Parks. Incorporated by reference to Exhibit 10.21 to the
Form 10-Q of the Company for the Quarter Ended May 1, 1999 filed on
June 1, 1999.
10.18 AnnTaylor Stores Corporation Special Severance Plan, dated as of
March 10, 2000.
18 Preferability letter relating to the change in accounting
principle. Incorporated by reference to Exhibit 18 to the Form 10-Q
of the Company for the Quarter Ended May 2, 1998 filed on June 16,
1998.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
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SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANNTAYLOR STORES CORPORATION
By: /s/ J. Patrick Spainhour
-------------------------
J. Patrick Spainhour
Chairman and Chief Executive Officer
Date: April 18, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. Patrick Spainhour Chairman and Chief Executive April 18, 2000
- ------------------------ Officer and Director
J. Patrick Spainhour
/s/ Patricia DeRosa President and Chief Operating April 18, 2000
- ------------------------- Officer and Director
Patricia DeRosa
/s/ Barry Erdos Executive Vice President - April 18, 2000
- ------------------------- Chief Financial Officer
Barry Erdos and Treasurer
/s/ James M. Smith Vice President and Controller April 18, 2000
- ------------------------- Principal Accounting Officer
James M. Smith
/s/ Gerald S. Armstrong Director April 18, 2000
- -------------------------
Gerald S. Armstrong
/s/ James J. Burke, Jr. Director April 18, 2000
- -------------------------
James J. Burke, Jr.
/s/ Wesley E. Cantrell Director April 18, 2000
- --------------------------
Wesley E. Cantrell
/s/ Robert C. Grayson Director April 18, 2000
- --------------------------
Robert C. Grayson
/s/ Ronald W. Hovsepian Director April 18, 2000
- --------------------------
Ronald W. Hovsepian
/s/ Rochelle B. Lazarus Director April 18, 2000
- --------------------------
Rochelle B. Lazarus
/s/ Hanne M. Merriman Director April 18, 2000
- --------------------------
Hanne M. Merriman
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ANNTAYLOR STORES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Independent Auditors' Report...................................... 29
Consolidated Financial Statements:
Consolidated Statements of Income for the fiscal years ended
January 29, 2000, January 30, 1999 and January 31, 1998... 30
Consolidated Balance Sheets as of January 29, 2000 and
January 30, 1999......................................... 31
Consolidated Statements of Stockholders' Equity for the fiscal
years ended January 29, 2000, January 30, 1999 and
January 31, 1998........................................... 32
Consolidated Statements of Cash Flows for the fiscal years
ended January 29, 2000, January 30, 1999 and
January 31, 1998........................................... 33
Notes to Consolidated Financial Statements................... 34
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INDEPENDENT AUDITORS' REPORT
To the Stockholders of
ANNTAYLOR STORES CORPORATION:
We have audited the accompanying consolidated financial statements of
AnnTaylor Stores Corporation and its subsidiaries, listed in the accompanying
index. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries at January 29, 2000 and January 30, 1999 and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 29, 2000 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, during
the fiscal year ended January 30, 1999, the Company changed its method of
inventory valuation to the average cost method from the retail method.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 2000
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ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Fiscal Years Ended January 29, 2000, January 30, 1999
and January 31, 1998
Fiscal Years Ended
----------------------------------
January 29, January 30, January 31,
2000 1999 1998
--------- --------- ----------
(in thousands, except per share amounts)
Net sales.............................. $1,084,519 $ 911,939 $ 781,028
Cost of sales.......................... 536,014 455,724 411,756
-------- -------- --------
Gross profit........................... 548,505 456,215 369,272
Selling, general and administrative
expenses............................. 413,058 349,955 308,232
Retirement of assets................... --- 3,633 ---
Amortization of goodwill............... 11,040 11,040 11,040
-------- -------- --------
Operating income....................... 124,407 91,587 50,000
Interest income........................ 4,378 2,241 1,157
Interest expense....................... 11,814 20,358 21,146
Other expense, net..................... 1,257 567 548
-------- -------- --------
Income before income taxes and
extraordinary loss................... 115,714 72,903 29,463
Income tax provision................... 50,221 33,579 17,466
-------- -------- --------
Income before extraordinary loss....... 65,493 39,324 11,997
Extraordinary loss (net of income
tax benefit of $641,000, $0
and $130,000, respectively).......... 962 --- 173
-------- -------- --------
Net income......................... $ 64,531 $ 39,324 $ 11,824
======== ======== ========
Basic earnings per share:
Basic earnings per share before
extraordinary loss............... $ 2.25 $ 1.53 $ 0.47
Extraordinary loss per share....... 0.03 --- 0.01
-------- -------- --------
Basic earnings per share........... $ 2.22 $ 1.53 $ 0.46
======== ======== =======
Diluted earnings per share:
Diluted earnings per share before
extraordinary loss............... $ 2.08 $ 1.44 $ 0.47
Extraordinary loss per share....... 0.03 --- 0.01
-------- -------- --------
Diluted earnings per share......... $ 2.05 $ 1.44 $ 0.46
======== ======== ========
See accompanying notes to consolidated financial statements.
-30-
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ANNTAYLOR STORES CORPORATION
CONSOLIDATED BALANCE SHEETS
January 29, 2000 and January 30, 1999
January 29, January 30,
2000 1999
---------- ----------
ASSETS (in thousands)
Current assets
Cash and cash equivalents..............................$ 35,081 $67,031
Accounts receivable, net............................... 67,092 71,049
Merchandise inventories................................ 140,026 136,748
Prepaid expenses and other current assets.............. 29,390 23,637
------ ------
Total current assets............................... 271,589 298,465
Property and equipment, net.............................. 173,639 151,785
Goodwill, net............................................ 308,659 319,699
Deferred financing costs, net............................ 5,358 2,627
Other assets............................................. 5,872 2,841
------ ------
Total assets.......................................$765,117 $775,417
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................$ 56,175 $65,419
Accrued salaries and bonus............................. 23,297 17,132
Accrued tenancy........................................ 7,800 8,465
Gift certificates and merchandise credits redeemable... 15,618 12,102
Accrued expenses....................................... 16,031 25,433
Current portion of long-term debt...................... 1,300 1,206
------ ------
Total current liabilities.......................... 120,221 129,757
Long-term debt, net...................................... 114,485 103,951
Deferred lease costs and other liabilities............... 14,789 12,386
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of Subsidiary, AnnTaylor
Finance Trust, Holding Solely Convertible Debentures... --- 96,624
Stockholders' equity
Common stock, $.0068 par value; 120,000,000 and
40,000,000 shares authorized, respectively;
31,598,423 and 26,035,301 shares issued,
respectively......................................... 215 177
Additional paid-in capital............................. 470,307 359,805
Warrants to acquire 0 and 2,814 shares of common
stock, respectively.................................. --- 46
Retained earnings...................................... 137,730 73,295
Deferred compensation on restricted stock.............. (2,246) (272)
------ ------
606,006 433,051
Treasury stock, 3,028,448 and 17,201 shares,
respectively, at cost........................... (90,384) (352)
------- ------
Total stockholders' equity......................... 515,622 432,699
------- -------
Total liabilities and stockholders' equity.........$765,117 $775,417
======= =======
See accompanying notes to consolidated financial statements.
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ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended January 29, 2000, January 30, 1999
and January 31, 1998
(in thousands)
Common Stock Additional Warrants Restricted Treasury Stock
--------------------- Paid-In --------------- Retained Stock ------------------
Shares Amount Capital Shares Amount Earnings Awards Shares Amount
--------- --------- --------- ------ ------- --------- --------- -------- --------
Balance at February 1, 1997 ....... 25,598 $ 174 $ 349,545 3 $ 46 $ 22,613 $ (1,590) 12 $ (206)
Net income ........................ -- -- -- -- -- 11,824 -- -- --
Exercise of stock options and
related tax benefit ............ 48 -- 890 -- -- -- -- 1 (10)
Amortization of discount on
preferred securities .......... -- -- -- -- -- (233) -- -- --
Activity related to common
stock issued as employee
incentives ..................... 12 -- 212 -- -- -- 853 -- (11)
--------- -------- --------- ----- ------- --------- --------- -------- --------
Balance at January 31, 1998 ....... 25,658 174 350,647 3 46 34,204 (737) 13 (227)
Net income ........................ -- -- -- -- -- 39,324 -- -- --
Exercise of stock options and
related tax benefit ............ 373 3 9,061 -- -- -- -- 3 (106)
Amortization of discount on
preferred securities .......... -- -- -- -- -- (233) -- -- --
Activity related to common
stock issued as employee
incentives ..................... 4 -- 97 -- -- -- 465 1 (19)
--------- -------- --------- ----- ------- --------- --------- -------- --------
Balance at January 30, 1999 ....... 26,035 177 359,805 3 46 73,295 (272) 17 (352)
Net income ........................ -- -- -- -- -- 64,531 -- -- --
Exercise of stock options and
related tax benefit ............ 352 2 10,039 -- -- -- -- 1 (55)
Amortization of discount on
preferred securities .......... -- -- -- -- -- (96) -- -- --
Activity related to common
stock issued as employee
incentives ..................... 94 1 3,850 -- -- -- (1,974) -- --
Exercise and expiration of warrants -- -- 28 (3) (46) -- -- (3) 18
Repurchase of common stock ........ -- -- -- -- -- -- -- 3,013 (89,995)
Conversion of preferred
securities .................... 5,117 35 96,585 -- -- -- -- -- --
--------- --------- --------- ----- ------- --------- --------- -------- --------
Balance at January 29, 2000 ....... 31,598 $ 215 $470,307 -- -- $ 137,730 $ (2,246) 3,028 $(90,384)
========= ========= ========= ===== ======= ========= ========= ======== ========
See accompanying notes to consolidated financial statements.
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ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended January 29, 2000, January 30, 1999
and January 31, 1998
Fiscal Years Ended
-------------------------------------
January 29, January 30, January 31,
2000 1999 1998
--------- --------- ---------
(in thousands)
Operating activities:
Net income ..................................................... $ 64,531 $ 39,324 $ 11,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss ........................................ 1,603 --- 303
Provision for loss on accounts receivable ................. 1,032 1,476 1,795
Depreciation and amortization ............................. 30,347 28,783 27,803
Amortization of goodwill .................................. 11,040 11,040 11,040
Amortization of deferred compensation ..................... 1,877 465 1,065
Non-cash interest ......................................... 3,026 1,290 1,419
Deferred income taxes ..................................... (3,843) 3,966 (2,687)
Loss on disposal of property and equipment ................ 1,219 4,175 248
Changes in assets and liabilities:
Decrease (increase) in receivables .................. 2,925 (12,314) 1,599
Decrease (increase) in merchandise inventories ...... (3,278) (39,514) 3,003
Decrease (increase) in prepaid expenses and
other current assets ............................ (5,680) (5,581) 1,894
Decrease in other non-current assets and liabilities,
net ............................................. 3,131 679 2,861
Increase (decrease) in accounts payable and
and accrued liabilities .............................. (9,631) 41,746 9,422
--------- --------- ---------
Net cash provided by operating activities ...................... 98,299 75,535 71,589
--------- --------- ---------
Investing activities:
Purchases of property and equipment ............................ (53,409) (45,131) (22,945)
--------- --------- ---------
Net cash used by investing activities .......................... (53,409) (45,131) (22,945)
--------- --------- ---------
Financing activities:
Proceeds from issuance of Convertible Debentures ............... 110,000 --- ---
Redemption of 8 3/4% Notes ..................................... (101,375) --- ---
Redemption of Company Obligated Mandatorily Redeemable
Convertible Preferred Secutities ............................. (100) --- ---
Repayment of term loan ......................................... -- --- (24,500)
Term loan prepayment penalty ................................... -- --- (184)
Payments of mortgage ........................................... (1,206) (1,119) (416)
Repurchase of common stock ..................................... (89,995) --- ---
Proceeds from exercise of stock options ........................ 9,986 9,036 869
Payment of financing costs ..................................... (4,150) (2,659) (69)
--------- --------- ---------
Net cash provided by (used by) financing activities ............ (76,840) 5,258 (24,300)
--------- --------- ---------
Net increase (decrease) in cash ................................... (31,950) 35,662 24,344
Cash, beginning of year ........................................... 67,031 31,369 7,025
--------- --------- ---------
Cash, end of year ................................................. $ 35,081 $ 67,031 $ 31,369
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ......................... $ 9,405 $ 18,582 $ 19,251
========= ========= =========
Cash paid during the year for income taxes ..................... $ 51,222 $ 33,934 $ 17,220
========= ========= =========
See accompanying notes to consolidated financial statements.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a leading national specialty retailer of better quality
women's apparel, shoes and accessories sold principally under the Ann Taylor
brand name.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AnnTaylor
Stores Corporation (the "Company") and its subsidiaries, including AnnTaylor,
Inc. ("Ann Taylor"). The Company has no material assets other than the common
stock of Ann Taylor and conducts no business other than the management of Ann
Taylor. All intercompany accounts have been eliminated in consolidation.
Certain Fiscal 1998 and 1997 amounts have been reclassified to conform to
the Fiscal 1999 presentation.
FISCAL YEAR
The Company follows the standard fiscal year of the retail industry, which
is a 52 or 53 week period ending on the Saturday closest to January 31 of the
following calendar year. All fiscal years presented include 52 weeks.
REVENUE RECOGNITION
The Company records revenue as merchandise is sold. The Company's policy
with respect to gift certificates is to record revenue as the certificates are
redeemed for merchandise. Prior to their redemption, the certificates are
recorded as a liability.
CASH EQUIVALENTS
Cash and short-term highly liquid investments with original maturities of
three months or less are considered cash or cash equivalents.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of average cost or market.
Effective February 1, 1998, the Company elected to change its method of
inventory valuation from the retail method to the average cost method. The
Company believes the average cost method is a preferable method for matching the
cost of merchandise with the revenues generated. This is principally because the
average cost method traces each individual unit sold during a period and its
individual cost, while the retail method estimates the cost value of the
inventory sold, instead of using the actual cost of each individual unit. The
cumulative effect of this accounting change on February 1, 1998 was not
material. The effect of this accounting change on Fiscal 1998 net income was an
increase of $1,272,000, or $0.04 per share on a diluted basis. It is not
possible to determine the effect of the change on income in any previously
reported fiscal years as no cost information was available.
The majority of the Company's inventory represents finished goods
available for sale.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
assets (3 to 40 years) or, in the case of leasehold improvements, over the lives
of the respective leases, if shorter.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the interest method
over the term of the related debt. Accumulated amortization at January 29, 2000
and January 30, 1999 was $1,628,000 and $3,119,000, respectively.
FINANCE SERVICE CHARGE INCOME
Income from finance service charges relating to customer receivables,
which is deducted from selling, general and administrative expenses, amounted to
$8,650,000 for Fiscal 1999, $8,422,000 for Fiscal 1998 and $8,568,000 for Fiscal
1997.
GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill relating to the 1989 acquisition of Ann Taylor by the Company is
being amortized on a straight-line basis over 40 years. Goodwill relating to the
acquisition, in 1996, of the operations comprising the Company's sourcing
division, is being amortized on a straight-line basis over 25 years. Accumulated
amortization at January 29, 2000 and January 30, 1999 was $109,931,000 and
$98,891,000, respectively.
The Company evaluates its long-lived assets for impairment annually or
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. The Company compares the carrying value of its long-lived
assets to an estimate of their expected future cash flows (undiscounted and
without interest charges) to evaluate the reasonableness of the carrying value
and remaining depreciation or amortization period. If the sum of the expected
future cash flows is less than the carrying amount of the asset, an impairment
loss is recognized.
ADVERTISING
Costs associated with the production of advertising, such as printing and
other costs, are expensed as incurred. Costs associated with communicating
advertising that has been produced, such as magazine ads, are expensed when the
advertising first takes place. Costs of direct mail catalogs and postcards are
expensed when the advertising arrives in customers' homes. Advertising costs
were $25,700,000, $17,800,000 and $10,500,000 in Fiscal 1999, 1998 and 1997,
respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires an asset and liability method of accounting for deferred income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized, and income or expense is recorded, for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of FASB Statement No. 133". This statement establishes accounting
and reporting standards for derivative instruments embedded in other contracts,
and for hedging activities. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management is currently
evaluating the impact of this statement and believes its adoption will not
affect the Company's consolidated financial position, results of operations or
cash flows.
2. LONG-TERM DEBT
The following table summarizes long-term debt outstanding at January 29,
2000 and January 30, 1999:
January 29, 2000 January 30, 1999
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- -------- -------- --------
(in thousands)
Mortgage............................ $ 3,950 $ 3,950 $ 5,157 $ 5,157
8 3/4% Notes ....................... -- -- 100,000 101,875
Convertible Debentures, net ........ 111,835 84,606 -- --
-------- -------- -------- --------
Total debt .................. 115,785 88,556 105,157 107,032
Less current portion ............... 1,300 1,300 1,206 1,206
-------- -------- -------- --------
Total long-term debt......... $114,485 $ 87,256 $103,951 $105,826
======== ======== ======== ========
In accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the
Company determined the estimated fair value of its financial instruments using
quoted market information, as available. As judgement is involved, the estimates
are not necessarily indicative of the amounts the Company could realize in a
current market exchange.
Ann Taylor's principal credit facility is a bank credit facility that it
entered into in June 1998 with a syndicate of lenders (the "Credit Facility").
Ann Taylor uses the Credit Facility for the issuance of commercial and standby
letters of credit and to provide funds for other general corporate purposes. The
lenders' commitment under the Credit Facility was originally $150,000,000. The
Credit Facility had an original maturity date of June 30, 2000, subject to
extension upon the satisfaction of certain conditions. Effective September 3,
1999, Ann Taylor elected to reduce the commitment of the lenders under the
Credit Facility by $25,000,000 to $125,000,000 and extended the term of the
credit agreement to June 30, 2001.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
Loans outstanding under the Credit Facility at any time may not exceed
$50,000,000. The Company did not make any borrowings under the loan provisions
of the Credit Facility during Fiscal 1999, and there were no loans outstanding
at fiscal year end. The outstanding loan balance is required to be reduced to
zero for the thirty-day period commencing January 1 each year. This cleandown
period was achieved for January 2000. Maximum availability for loans and letters
of credit under the Credit Facility is governed by a monthly borrowing base,
determined by the application of specified advance rates against certain
eligible assets. Based on this calculation, the maximum amount available for
loans and letters of credit under the Credit Facility at January 29, 2000 was
$125,000,000. Commercial and standby letters of credit outstanding under the
Credit Facility at January 29, 2000 were approximately $69,649,000.
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at Ann Taylor's option, the lead lender's Base Rate or Eurodollar
Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%,
respectively. In addition, Ann Taylor is required to pay the lenders a quarterly
commitment fee on the unused revolving loan commitment amount at a rate ranging
from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby
letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens and investments, restrictions on dividends or
other distributions to stockholders and maintenance of certain financial ratios
including a specified fixed charge coverage ratio and specified levels of net
worth.
The lenders have been granted a pledge of the common stock of Ann Taylor
and certain of its subsidiaries, and a security interest in substantially all
other tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of Ann Taylor and its subsidiaries, as
collateral for Ann Taylor's obligations under the Credit Facility.
During the second quarter of Fiscal 1999, the Company completed the
issuance of an aggregate of $199,072,000 principal amount at maturity of its
Convertible Subordinated Debentures due 2019 ("Convertible Debentures"). The
Convertible Debentures were sold at an original issue price of $552.56 per
$1,000 principal amount at maturity of Debenture. The net proceeds of the sale
were applied to the redemption, described below, of the $100,000,000 outstanding
8 3/4% Subordinated Notes due 2000 (the "8 3/4% Notes") issued by Ann Taylor.
Cash interest is payable on the principal amount at maturity of the Convertible
Debentures at the rate of 0.55% per annum. This interest rate and the accrual of
original issue discount represent a yield to maturity on the Convertible
Debentures of 3.75%. The Convertible Debentures are convertible at the option of
the holders thereof initially into 12.078 shares of the Company's common stock
per $1,000 principal amount at maturity of Debenture. The Convertible Debentures
may be redeemed at the Company's option on or after June 18, 2004. The Company's
obligations with respect to the Convertible Debentures are guaranteed on a
subordinated basis by Ann Taylor.
On July 22, 1999, Ann Taylor redeemed all of its outstanding 8 3/4% Notes,
at a redemption price of 101.375% of principal amount, plus accrued unpaid
interest to the redemption date. The redemption of the 8 3/4% Notes resulted in
an extraordinary charge to earnings in the second quarter and fiscal year of
$962,000, or $0.03 per share on a diluted basis, net of income tax benefit.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
Ann Taylor and its wholly owned subsidiary AnnTaylor Distribution
Services, Inc. are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's distribution center land and
building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately $130,000. The mortgage loan
balance at January 29, 2000 was $3,950,000.
The aggregate principal payments for the next five years of all long-term
obligations at January 29, 2000 are as follows :
Fiscal Year
----------- (in thousands)
2000............................................$ 1,300
2001............................................ 1,400
2002............................................ 1,250
2003............................................ ---
2004............................................ ---
------
Total...........................................$ 3,950
======
3. PREFERRED SECURITIES
In April and May of Fiscal 1996, the Company completed the sale of an
aggregate of $100,625,000 of 8 1/2% Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities (the "preferred securities") issued by its
financing vehicle, AnnTaylor Finance Trust, a Delaware business trust (the
"Trust"). On June 29, 1999, AnnTaylor Finance Trust redeemed all of the
outstanding preferred securities. All but $100,000 of the liquidation amount of
the preferred securities were tendered for conversion into an aggregate of
5,116,717 shares of Company common stock prior to the redemption date, at a
conversion price of $19.65 per share of common stock, or 2.545 shares of common
stock per $50 liquidation amount of the security. Holders of preferred
securities that were not tendered for conversion received 105.95% of the
liquidation amount of the preferred securities redeemed, plus accrued
distributions.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the allowance for doubtful accounts for the fiscal
years ended January 29, 2000, January 30, 1999 and January 31, 1998 is as
follows:
Fiscal Years Ended
-----------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
(in thousands)
Balance at beginning of year ............ $ 820 $ 812 $ 811
Provision for loss on accounts receivable 1,032 1,476 1,795
Accounts written off .................... (1,186) (1,468) (1,794)
------- ------- -------
Balance at end of year .................. $ 666 $ 820 $ 812
======= ======= =======
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. COMMITMENTS AND CONTINGENCIES
RENTAL COMMITMENTS
The Company occupies its retail stores and administrative facilities under
operating leases, most of which are non-cancelable. Some leases contain renewal
options for periods ranging from one to ten years under substantially the same
terms and conditions as the original leases. Most of the store leases require
payment of a specified minimum rent, plus a contingent rent based on a
percentage of the store's net sales in excess of a specified threshold. In
addition, most of the leases require payment of real estate taxes, insurance and
certain common area and maintenance costs in addition to the future minimum
lease payments shown below.
Future minimum lease payments under non-cancelable operating leases at
January 29, 2000 are as follows:
Fiscal Year (in thousands)
-----------
2000.........................................$ 95,655
2001......................................... 94,422
2002......................................... 91,391
2003......................................... 85,413
2004......................................... 81,065
2005 and thereafter.......................... 288,433
-------
Total........................................$ 736,379
=======
Rent expense for the fiscal years ended January 29, 2000, January 30, 1999
and January 31, 1998 was as follows:
Fiscal Years Ended
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
(in thousands)
Minimum rent..................... $72,763 $66,358 $59,495
Percentage rent.................. 3,131 2,414 1,671
------ ------ ------
Total....................... $75,894 $68,772 $61,166
====== ====== ======
LITIGATION
The Company has been named as a defendant in several legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to these actions cannot be accurately predicted, in the
opinion of the Company, any such liability will not have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
In addition, the Company, Ann Taylor, certain directors and former
officers and directors of the Company and Ann Taylor, Merrill Lynch & Co.
("ML&Co.") and certain affiliates of ML&Co. have been named as defendants in a
purported class action lawsuit filed in April 1996 by certain alleged
stockholders, alleging that the Company and the other defendants engaged in a
fraudulent scheme and course of business that operated a fraud or deceit on
purchasers of the Company's common stock during the period from February 3, 1994
through May 4, 1995. On November 9, 1998, the District Court issued an order
granting the defendants' motion to dismiss the amended complaint with prejudice
for its failure to plead fraud with particularity. On or about December 15,
1998, the plaintiffs filed a notice of appeal to the United States Court of
Appeals for the Second Circuit, seeking review of the District court's order.
The Court heard oral argument on this appeal on September 15, 1999. ML&Co., its
affiliates and the two directors who previously served on the Company's Board of
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Directors as representatives of certain affiliates of ML&Co. (the "settling
defendants") reached a settlement with the plaintiffs, which provides, among
other things, for the establishment of a settlement fund in the amount of
$3,000,000 plus interest. On or about December 14, 1999, the District Court
entered an Order and Final Judgment approving this partial settlement,
dismissing the amended complaint with prejudice as to the settling defendants,
and barring and enjoining any future claims by, among others, the remaining
defendants against the settling defendants for contribution. The appeal as
against the remaining defendants, including the Company, is pending before the
Second Circuit Court of Appeals. As a result, any liability that may arise from
this action cannot be predicted at this time. The Company believes that the
amended complaint is without merit and intends to continue to defend the action
vigorously.
6. NET INCOME PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share assumes the issuance of additional shares of common stock,
that are issuable by the Company upon the conversion of all outstanding
warrants, stock options and convertible securities. Basic and diluted earnings
per share calculations follow:
Fiscal Years Ended
-------------------------------------------------------------------------
January 29, 2000 January 30, 1999 January 31, 1998
----------------------- -------------------- ------------------------
(In thousands, except per share amounts)
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
------- ------ ------ ------ ------ ------ ------ ------ ------
BASIC EARNINGS PER SHARE
- ------------------------
Income Available
to common stockholders
before extraordinary
loss ............................... $65,493 29,021 $2.25 $39,324 25,715 $1.53 $11,997 25,628 $0.47
==== ==== ====
EFFECT OF DILUTIVE
SECURITIES
- ---------
Warrants .............................. --- 1 --- 3 --- 3
Stock options ......................... --- 269 --- 166 --- 62
Preferred securities................... 1,123 2,083 5,189 5,122 --- ---
Convertible Debentures ................ 1,570 1,475 --- --- --- ---
------- ------- ------ ----- ------ ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available
to common stockholders
before extraordinary loss........... $68,186 32,849 $2.08 $44,513 31,006 $1.44 $11,997 25,693 $0.47
======= ======= ==== ====== ====== ==== ====== ====== ====
Conversion of the preferred securities into common stock is not included in
the computation of diluted earnings per share for the fiscal year ended January
31, 1998 due to the antidilutive effect of the conversion as of that date.
-40-
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. ENTERPRISE-WIDE OPERATING INFORMATION
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, major customers and the material countries in which the entity holds
assets and reports revenues.
The Company is a specialty retailer of women's apparel, shoes and
accessories. Given the economic characteristics of the store formats, the
similar nature of the products sold, the type of customer and method of
distribution, the operations of the Company are aggregated into one reportable
segment. The Company believes that the customer base for its stores consists
primarily of relatively affluent, fashion-conscious women from the ages of 25 to
55, and that the majority of its customers are working women with limited time
to shop.
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Fiscal Years Ended
---------------------------
January 29, January 30,
2000 1999
----------- -----------
(in thousands)
Land and building..........................$ 8,774 $ 8,683
Leasehold improvements..................... 110,573 93,168
Furniture and fixtures..................... 169,521 153,395
Construction in progress................... 23,518 11,059
------- -------
312,386 266,305
Less accumulated depreciation
and amortization...................... 138,747 114,520
------- -------
Net property and equipment............$173,639 $151,785
======= =======
9. OTHER EQUITY AND STOCK OPTION PLANS
COMMON STOCK
During 1999, the number of authorized shares of common stock was increased
from 40,000,000 to 120,000,000.
PREFERRED STOCK
At January 29, 2000, January 30, 1999 and January 31, 1998, there were
2,000,000 shares of preferred stock, par value $0.01, authorized and unissued.
REPURCHASE PROGRAM
During the third quarter of Fiscal 1999, the Company's Board of Directors
authorized a program under which the Company was authorized to purchase up to
$40,000,000 of the Company's common stock and/or Convertible Debentures through
open market purchases and/or in privately negotiated transactions. On January
10, 2000, the Board of Directors increased the amount of securities that could
be purchased under the program to $90,000,000. As of January 29, 2000, 3,012,500
shares of the Company's common stock had been repurchased for an aggregate
purchase price of $89,900,000 (exclusive of brokerage commissions), completing
the securities repurchase program. All of the repurchased shares became treasury
shares and may be used for general corporate or other purposes. No Convertible
Debentures were purchased.
-41-
- --------------------------------------------------------------------------------
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. OTHER EQUITY AND STOCK OPTION PLANS (CONTINUED)
ASSOCIATE DISCOUNT STOCK PURCHASE PLAN
In Fiscal 1999, the Company established an Associate Discount Stock
Purchase Plan (the "Plan") through which participating eligible employees may
purchase shares of the Company's common stock semi-annually, at a price equal to
the lower of 85% of the closing price of the Company's common stock on the grant
date or the purchase date of each semiannual stock purchase period.
Participating employees pay for their stock purchases under the Plan by
authorizing limited payroll deductions of up to a maximum of 15% of their
compensation. No shares of common stock will be issued pursuant to the Plan
until Fiscal 2000. At January 29, 2000, there were 250,000 shares available for
future issuance under this Plan.
STOCK OPTION PLANS
In 1989 and 1992, the Company established stock option plans. At January
29, 2000, 22,547 shares of common stock were reserved for issuance under the
1989 plan and 2,299,305 shares of common stock were reserved for issuance under
the 1992 plan. Under the terms of both plans, the exercise price of any option
may not be less than 100% of the fair market value of the common stock on the
date of grant.
Stock options granted prior to 1994 generally vest over a five year
period, with 20% becoming exercisable immediately upon grant of the option and
20% per year for the next four years. Stock options granted since 1994 generally
vest either (i) over a four year period, with 25% becoming exercisable on each
of the first four anniversaries of the grant, or (ii) in seven or nine years
with accelerated vesting upon the achievement of specified earnings or stock
price targets within a five year period. All stock options granted under the
1989 plan and the 1992 plan expire ten years from the date of grant. At January
29, 2000, there were no shares under the 1989 plan and 446,300 shares under the
1992 plan available for future grant.
The Company accounts for the stock options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation costs have been
recognized for stock option awards. Had compensation costs of option awards been
determined under a fair value alternative method as stated in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company would have been required to prepare a fair value
model for such options and record such amount in the financial statements as
compensation expense. Pro forma net income before extraordinary loss and net
income per share before extraordinary loss, on a diluted basis, after taking
into account such expense would have been $63.9 million and $2.03, respectively
for Fiscal 1999, $38.4 million and $1.41, respectively for Fiscal 1998 and $11.0
million and $0.43, respectively, for Fiscal 1997. For purposes of this
calculation, the Company arrived at the fair value of each stock grant at the
date of grant by using the Black Scholes option pricing model with the following
weighted average assumptions used for grants for the fiscal years ended January
29, 2000, January 30, 1999 and January 31, 1998: risk-free interest rate of
4.9%, 5.4% and 6.2%, respectively; expected life of 4.0 years, 4.0 years and 5.0
years, respectively; and expected volatility of 49.1%, 59.4% and 67.9%,
respectively.
-42-
- --------------------------------------------------------------------------------
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. OTHER EQUITY AND STOCK OPTIONS PLANS (CONTINUED)
The following summarizes stock option transactions for the fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998:
Weighted
Average Number
Option Prices Price of Shares
------ ------ -------- ---------
Outstanding Options February 1, 1997 .. $ 6.80 - $44.125 $22.69 1,664,085
Granted ............................. $14.25 - $22.75 $20.60 590,000
Exercised ........................... $ 6.80 - $20.00 $15.45 (47,436)
Canceled ............................ $11.50 - $39.75 $25.11 (585,557)
----------
Outstanding Options January 31, 1998 .. $ 6.80 - $44.125 $21.20 1,621,092
Granted ............................. $14.00 - $36.25 $17.52 306,574
Exercised ........................... $ 6.80 - $36.25 $19.09 (373,544)
Canceled ............................ $ 6.80 - $42.50 $23.68 (162,224)
----------
Outstanding Options January 30, 1999 .. $ 6.80 - $44.125 $20.67 1,391,898
Granted.......................... $22.813- $47.688 $43.56 882,500
Exercised ........................... $ 6.80 - $42.50 $18.65 (351,737)
Canceled ............................ $11.00 - $44.25 $25.41 (123,980)
----------
Outstanding Options January 29, 2000 .. $11.50 - $47.688 $31.98 1,798,681
=========
At January 29, 2000, January 30, 1999 and January 31, 1998 there were
exercisable 558,321 options, 696,596 options and 450,776 options, respectively,
which have weighted average exercise prices of $20.74 per share, $19.76 per
share and $19.02 per share, respectively.
In 1994, the Company's 1992 stock option plan was amended and restated to
include restricted stock and unit awards. A unit represents the right to receive
the cash value of a share of common stock on the date the restrictions on the
unit lapse. The restrictions on grants generally lapse over a four year period
from the date of the grant. In the event a grantee terminates employment with
the Company, any restricted stock or restricted units remaining subject to
restrictions are forfeited. During 1997, 1998 and 1999, certain executives were
awarded restricted common stock and, in some cases, restricted units. The
resulting unearned compensation expense, based upon the market value on the date
of grants, was charged to stockholders' equity and is being amortized over the
restricted period.
10. EXECUTIVE COMPENSATION
In 1996, J. Patrick Spainhour, the Chairman and Chief Executive Officer of
Ann Taylor, was granted 75,000 shares of restricted common stock. The resulting
unearned compensation expense of $1,171,875, based upon the market value on the
date of the grant, was charged to stockholders' equity and was amortized over
the restricted period applicable to these shares. In 1999, Mr. Spainhour was
granted an additional 25,000 shares of restricted stock which will vest on March
8, 2000. This restricted stock award resulted in unearned compensation expense
of $829,688, based on the market value of the common stock on the date of the
grant. The unearned compensation expense was charged to stockholders' equity and
is being amortized over the restricted period applicable to these shares. In
addition to the restricted stock, Mr. Spainhour was awarded a non-qualified
stock option award to purchase 250,000 shares of common stock at the current
market price, as well as "super-incentive" non-qualified performance-vesting
stock options to purchase 100,000 shares of common stock. The "super-incentive"
-43-
- --------------------------------------------------------------------------------
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. EXECUTIVE COMPENSATION (CONTINUED)
non-qualified performance vesting stock options will become exercisable upon
achievement of various earnings per share targets between March 2000 and March
2002. Additionally, as of December 9, 1996, the President and Chief Operating
Officer of the Company received a grant of 30,000 restricted shares of common
stock and 20,000 restricted units. The resulting unearned compensation expense
of $592,500, based on the market value of the common stock on the date of the
grant, was charged to stockholders' equity and was amortized over the restricted
period applicable to these shares.
11. EXTRAORDINARY ITEMS
On July 22, 1999, the Company applied the proceeds received from the
issuance of its Convertible Debentures to redeem the outstanding 8 3/4% Notes.
This resulted in an extraordinary charge to earnings in Fiscal 1999 of $962,000,
net of income tax benefit of $641,000.
On July 2, 1997, the Company used available cash to prepay $24,500,000,
the outstanding balance of its term loan due September 1998, which resulted in
an extraordinary charge to earnings in Fiscal 1997 of $173,000, net of income
tax benefit of $130,000.
12. NONRECURRING CHARGES
RETIREMENT OF ASSETS
In the fourth quarter of Fiscal 1998, the Company recorded a $3,633,000
non-cash pre-tax charge for the retirement of certain assets. This charge
related to the write-off of the net book value of assets relinquished during the
renovation of the Company's corporate offices.
13. INCOME TAXES
The provision for income taxes for the fiscal years ended January 29,
2000, January 30, 1999 and January 31, 1998 consists of the following:
Fiscal Years Ended
---------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
(in thousands)
Federal:
Current...........................$ 41,682 $21,589 $14,427
Deferred.......................... (3,033) 2,748 (1,917)
------- ------ -------
Total federal................... 38,649 24,337 12,510
------ ------ ------
State and local:
Current........................... 11,856 7,869 5,538
Deferred.......................... (809) 1,217 (769)
------- ------ -------
Total state and local........... 11,047 9,086 4,769
------ ------ ------
Foreign:
Current........................... 525 156 187
Deferred.......................... --- --- ---
------ ------ ------
Total foreign................... 525 156 187
------ ------ ------
Total.............................$ 50,221 $33,579 $17,466
====== ====== ======
-44-
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. INCOME TAXES (CONTINUED)
The reconciliation between the provision for income taxes and the
provision for income taxes at the federal statutory rate for the fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998 is as follows:
Fiscal Years Ended
---------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
(in thousands)
Income before income taxes and
extraordinary loss...................$ 115,714 $ 72,903 $ 29,463
======= ======= =======
Federal statutory rate.................. 35% 35% 35%
====== ======= =======
Provision for income taxes at
federal statutory rate...............$ 40,500 $ 25,516 $ 10,312
State and local income taxes,
net of federal income tax
benefit.............................. 6,278 4,660 3,800
Non-deductible amortization of goodwill. 3,500 3,500 3,500
Earnings of foreign subsidiaries........ 79 (188) (314)
Other................................... (136) 91 168
------- ------- -------
Provision for income taxes..............$ 50,221 $ 33,579 $ 17,466
====== ======= =======
The tax effects of significant items comprising the Company's deferred tax
assets (liabilities) as of January 29, 2000 and January 30, 1999 are as follows:
January 29, January 30,
2000 1999
---------- ----------
(in thousands)
Current:
Inventory.................................. $ 2,071 $ 128
Accrued expenses........................... 2,306 3,812
Real estate................................ (2,050) (1,686)
Other...................................... --- ---
------- -------
Total current............................... $ 2,327 $ 2,254
======= =======
Noncurrent:
Accrued expenses........................... $ 763 $ ---
Depreciation and amortization.............. (2,936) (5,510)
Rent expense............................... 5,168 4,786
Other...................................... 327 276
------- -------
Total noncurrent............................ $ 3,322 $ (448)
======= ========
Income taxes provided reflect the current and deferred tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. U.S. federal income taxes are provided on unremitted foreign earnings
except those that are considered permanently reinvested, which at January 29,
2000 amounted to approximately $6,852,000. However, if these earnings were not
considered permanently reinvested, under current law, the incremental tax on
such undistributed earnings would be approximately $2,137,000.
14. RETIREMENT PLANS
Savings Plan. Ann Taylor maintains a defined contribution 401(k) savings
plan for substantially all full-time employees of Ann Taylor and its
subsidiaries. Participants may contribute to the plan an aggregate of up to 10%
of their annual earnings. Ann Taylor makes a matching contribution of 50% with
respect to the first 3% of each participant's annual earnings contributed to the
plan. Ann Taylor's contributions to the plan for Fiscal 1999, Fiscal 1998 and
Fiscal 1997 were $697,000, $592,000 and $519,000, respectively.
-45-
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. RETIREMENT PLANS (CONTINUED)
Pension Plan. Substantially all full-time employees of Ann Taylor and its
subsidiaries are covered under a noncontributory defined benefit pension plan.
Through December 31, 1997, the pension plan was a "cash balance pension plan",
under which each participant accrued a benefit based on compensation and years
of service with Ann Taylor. As of January 1, 1998, the plan was amended and the
formula to calculate benefits was changed to a career average formula. The new
career average formula was used to determine the funding status of the plan
beginning in Fiscal 1997. Ann Taylor's funding policy for the plan is to
contribute annually the amount necessary to provide for benefits based on
accrued service and projected pay increases. Plan assets consist primarily of
cash, equity and fixed income securities.
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which standardizes the disclosure requirements for
pension and other postretirement benefits, eliminates certain disclosures, and
requires additional information on the changes in the benefit obligations and
fair value of plan assets.
The following table provides information for the Pension Plan at January
29, 2000, January 30, 1999 and January 31, 1998:
Fiscal Years Ended
-----------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
(in thousands)
Change in benefit obligation:
Benefit obligation, beginning
of year........................ $ 4,642 $ 3,820 $3,413
Service cost..................... 1,129 669 571
Interest......................... 340 292 250
Plan amendments.................. --- --- 81
Actuarial loss (gain)............ 19 348 (103)
Benefits paid.................... (1,176) (487) (392)
-------- -------- -------
Benefit obligation, end of year.. 4,954 4,642 3,820
------- ------- -------
Change in plan assets:
Fair value of plan assets,
beginning of year.............. 7,486 5,128 4,745
Actual return on plan assets..... 763 1,205 907
Employer contribution (refund)... 2,416 1,640 (132)
Benefits paid.................... (1,176) (487) (392)
-------- -------- -------
Fair value of plan assets,
end of year.................... 9,489 7,486 5,128
-------- -------- -------
Funded status (fair value of
plan assets less
benefit obligation)........... 4,535 2,844 1,308
Unrecognized net actuarial gain.. (1,621) (1,675) (1,361)
Unrecognized prior service cost.. 63 69 75
------- ------- -------
Prepaid benefit cost.............$ 2,977 $ 1,238 $ 22
======= ======= =======
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ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. RETIREMENT PLANS (CONTINUED)
Net pension cost includes the following components:
Fiscal Years Ended
-------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
(in thousands)
Service cost..............................$ 1,129 $ 669 $ 571
Interest cost............................. 340 292 250
Expected return on assets................. (776) (481) (409)
Amortization of prior gains............... (22) (61) (42)
Amortization of prior service cost........ 6 6 6
------- ------- --------
Net periodic pension cost.................$ 677 $ 425 $ 376
======= ======= ========
For the fiscal years ended January 29, 2000, January 30, 1999 and January
31, 1998, the following actuarial assumptions were used:
Fiscal Years Ended
-------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
Discount rate............................. 8.25% 6.75% 7.50%
Long-term rate of return on assets........ 9.00% 9.00% 9.00%
Rate of increase in future compensation... 4.00% 4.00% 4.00%
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter
------------------------------------------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share amounts)
Fiscal 1999
Net sales ....................... $249,400 $ 265,747 $272,289 $297,083
Gross profit .................... 131,337 125,905 149,875 141,388
Income before extraordinary loss 14,755 13,373 21,448 15,917
Extraordinary loss .............. -- 962 -- --
-------- ----------- -------- --------
Net income ...................... $ 14,755 $ 12,411 $ 21,448 $ 15,917
======== =========== ======== ========
Basic earnings per share before
extraordinary loss............ $ 0.56 $ 0.47 $ 0.68 $ 0.53
Extraordinary loss per share .... -- 0.03 -- --
-------- ----------- -------- --------
Basic earnings per share......... $ 0.56 $ 0.44 $ 0.68 $ 0.53
======== =========== ======== ========
Diluted earnings per share before
extraordinary loss............ $ 0.51 $ 0.42 $ 0.65 $ 0.50
Extraordinary loss per share .... -- 0.03 -- --
-------- ----------- -------- --------
Diluted earnings per share....... $ 0.51 $ 0.39 $ 0.65 $ 0.50
======== =========== ======== ========
Fiscal 1998
Net sales........................ $198,170 $ 223,393 $227,535 $262,841
Gross profit .................... 101,334 104,934 124,418 125,529
Net income....................... $ 6,419 $ 7,044 $ 14,074 $ 11,787
======== =========== ======== ========
Basic earnings per share......... $ 0.25 $ 0.27 $ 0.55 $ 0.46
======== =========== ======== ========
Diluted earnings per share....... $ 0.25 $ 0.27 $ 0.50 $ 0.42
======== =========== ======== ========
The sum of the quarterly per share data may not equal the annual amounts
due to changes in the weighted average shares and share equivalents outstanding.
-47-