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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
FORM 10-K
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(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934.
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FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002
OR
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|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934.
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Commission File No. 1-107384
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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 1, 2002 was $1,179,296,764.
The number of shares of the registrant's common stock outstanding as of
March 1, 2002 was 29,316,909.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the Registrant's 2001
Annual Meeting of Stockholders to be held on May 2, 2002 are incorporated by
reference into Part III.
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1
PART I
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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"
and "Ann Taylor Loft" brand names. The Company believes that "Ann Taylor" is
a highly recognized national brand that defines a distinct fashion point of
view. Ann Taylor merchandise represents classic styles, updated to reflect
current fashion trends. The Company's stores offer a full range of career
and casual separates, dresses, tops, weekend wear, shoes and accessories,
coordinated as part of a total wardrobing strategy. This total wardrobing
strategy is reinforced by an emphasis on customer service. Ann Taylor sales
associates are trained to assist customers in merchandise selection and
wardrobe coordination, helping them achieve the "Ann Taylor look" while
reflecting the customers' personal styles. Unless the context indicates
otherwise, all references herein to the Company include the Company and its
wholly owned subsidiaries.
As of February 2, 2002, the Company operated 538 retail stores in 42
states, the District of Columbia and Puerto Rico under the names Ann Taylor,
Ann Taylor Loft and Ann Taylor Factory Store. The Company's 342 Ann Taylor
stores compete in the "better"-priced market. These stores represent the
Company's core merchandise line. Approximately three-quarters of these
stores are located in regional malls and upscale specialty retail centers,
with the balance located in downtown and village locations. The Company
believes that the customer base for its Ann Taylor stores consists primarily
of relatively affluent, fashion-conscious women from the ages of 25 to 55,
and that the majority of its customers are professional women with limited
time to shop, who are attracted to Ann Taylor by its focused merchandising
and total wardrobing strategies, personalized customer service, efficient
store layouts and continual flow of new merchandise.
As of February 2, 2002, the Company operated 186 Ann Taylor Loft
stores. Ann Taylor Loft stores compete in the "upper-moderate"-priced
market. Ann Taylor Loft is designed for women with a more relaxed lifestyle
and work environment, who appreciate the Ann Taylor style but are more price
sensitive. Merchandise is created uniquely for these stores and is sold
under the Ann Taylor Loft label. The first Ann Taylor Loft stores opened by
the Company were located in factory outlet centers. In 1998, the Company
began opening Ann Taylor Loft stores outside the factory outlet environment,
in regional malls, strip shopping centers and urban and village street
locations. At February 2, 2002, 168 Ann Taylor Loft stores were located in
these venues. Management believes that Ann Taylor Loft represents a
significant opportunity for the Company to compete in the
upper-moderate-priced women's apparel market. See "Stores and Expansion",
"Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Statement Regarding Forward Looking
Disclosures" below.
As of February 2, 2002, the Company also operated 10 Ann Taylor Factory
stores in factory outlet centers. The Company plans to convert all 18 Ann
Taylor Loft outlet stores to Ann Taylor Factory stores during Fiscal 2002.
The Ann Taylor Factory outlet stores will then serve as a brand-appropriate
clearance vehicle for merchandise from both Ann Taylor and Ann Taylor Loft
stores and will also handle an increasing assortment of current season styles
created uniquely for these stores and sold under the Ann Taylor Factory store
label.
From time to time, the Company introduces new product categories to its
merchandise assortment. The Company believes that product extensions support the
Company's total wardrobing strategy and provide existing and new customers with
additional reasons to shop at the Company's stores. Product extensions
introduced over the last several years include petite sizes in the Company's
apparel offerings and fragrance and personal care products in both Ann Taylor
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2
and Ann Taylor Loft stores. In Fiscal 2001, the Company discontinued its line of
color cosmetics. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Fiscal 2001 Compared to Fiscal 2000".
In Fiscal 2000, the Company launched anntaylor.com, (the "Online Store")
making Ann Taylor merchandise available for direct retail sale to customers
over the Internet. The Online Store was designed as an extension of the
in-store experience and offers a wide selection of each season's Ann Taylor
stores' collection. Although the Company's Online Store did not achieve the
expected sales volume during Fiscal 2001, the Company believes that the
Online Store further builds the Ann Taylor brand and enhances the Company's
relationships with customers, as well as creates the opportunity for sales to
new and existing customers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Fiscal 2001 Compared to
Fiscal 2000" for information regarding the asset write-off associated with
the Company's Online Store.
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 216 manufacturers and
vendors, none of which accounted for more than 5% of the Company's
merchandise purchases in Fiscal 2001. The Company's merchandise is
manufactured in over 25 countries, with approximately 27% of the Company's
merchandise manufactured in China, 16% in Korea, 13% in the Philippines, and
9% in Hong Kong. Any event causing a sudden disruption of manufacturing or
imports from China, Korea, the Philippines or Hong Kong, including the
imposition of additional import restrictions, could have a material adverse
effect on the Company's operations. Substantially all of the Company's
foreign purchases are negotiated and paid for in U.S. dollars.
The Company cannot predict whether any of the foreign countries in which
its products are currently manufactured or any of the countries in which the
Company may manufacture its products in the future will be subject to future
or increased import restrictions by the U.S. government, including the
likelihood, type or effect of any trade restriction. Trade restrictions,
including increased tariffs or quotas, against apparel, footwear or other
items sold by the Company could affect the importation of such merchandise
generally and could increase the cost or reduce the supply of merchandise
available to the Company and adversely affect the Company's business,
financial condition, results of operations and liquidity. The Company's
merchandise flow may also be adversely affected by financial or political
instability in any of the countries in which its goods are manufactured or
acts of war or terrorism in the United States or worldwide, if it affects the
production, shipment or receipt 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, 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.
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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 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.
In Fiscal 2001, inventory turned 4.7 times compared to 4.9 times in
Fiscal 2000 and 4.8 times in Fiscal 1999. 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.
The Company's comprehensive merchandising information system,
implemented in Fiscal 2000, provides improved systems support for the
Company's merchandising functions. This system serves as the Company's central
source of information regarding merchandise items, inventory management,
purchasing, replenishment, receiving and distribution.
The Company uses a centralized distribution system, under which nearly
all merchandise is distributed to the Company's stores through its
distribution center, located in Louisville, Kentucky. See "Information
Systems" and "Properties". Merchandise is shipped by the distribution center
to the Company's stores several times each week.
STORES AND EXPANSION
An important aspect of the Company's business strategy is a real estate
expansion program designed to reach new customers through the opening of new
stores. The Company opens new stores in markets that it believes have a
sufficient concentration of its target customers. The Company also adds
stores, or expands the size of existing stores, in markets where the Company
already has a presence, as market conditions warrant and sites become
available. Store locations are determined on the basis of various factors,
including geographic location, demographic studies, anchor tenants in a mall
location, other specialty stores in a mall or specialty center location or in
the vicinity of a village location, and the proximity to professional offices
in a downtown or village location. Stores opened in factory outlet centers
are located in factory outlet malls in which co-tenants generally include a
significant number of outlet or discount stores operated under nationally
recognized upscale brand names. Store size also is determined on the basis
of various factors, including geographic location, demographic studies, and
space availability.
As of February 2, 2002, the Company operated 538 stores throughout the
United States, the District of Columbia and Puerto Rico, of which 342 were
Ann Taylor stores, 186 were Ann Taylor Loft stores, and 10 were Ann Taylor
Factory Stores.
The average Ann Taylor store is approximately 5,000 square feet in
size. The Company also has three flagship Ann Taylor stores in New York
City, San Francisco and Chicago, which represent the fullest assortment of
Ann Taylor merchandise. In Fiscal 2001, the Company opened 10 Ann Taylor
stores that averaged approximately 4,700 square feet. In Fiscal 2002, the
Company plans to open approximately 7 Ann Taylor stores, which are expected
to average approximately 4,800 square feet.
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4
Ann Taylor Loft stores that are located in factory outlet centers
average approximately 9,000 square feet. Ann Taylor Loft stores that are
located in regional malls, strip shopping centers and urban and village
street locations average approximately 6,000 square feet. In Fiscal 2001,
the Company opened 57 Ann Taylor Loft stores that averaged approximately
6,200 square feet. In Fiscal 2002, the Company expects to open approximately
38 Ann Taylor Loft stores, primarily in regional malls, life style centers,
shopping centers and street locations. These stores are expected to average
approximately 5,600 square feet.
The Company's 10 Ann Taylor Factory Stores, located in factory outlet
centers, average 8,000 square feet. As mentioned above, the Company plans to
convert all Ann Taylor Loft outlet stores to Ann Taylor Factory stores during
Fiscal 2002.
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") and Ann Taylor Loft stores ("ATL") over the past five
years:
TOTAL STORES NO. NO.
OPEN AT NO. STORES STORES STORES
BEGINNING OPENED DURING EXPANDED CLOSED NO. STORES OPEN
OF FISCAL YEAR DURING DURING AT END OF
FISCAL FISCAL ------------ FISCAL FISCAL FISCAL YEAR
YEAR YEAR ATS ATFS ATL YEAR(A) YEAR(A) ATS ATFS(B) ATL(B) TOTAL
- ---- ----------- --- ---- --- ------ ------ --- ------ ----- ----
1997..... 309 27 --- --- 9 12 283 14 27 324
1998..... 324 26 --- 19 8 4 306 13 46 365
1999..... 365 18 --- 29 8 7 319 11 75 405
2000..... 405 18 --- 63 4 8 332 13 133 478
2001..... 478 10 --- 57 6 7 342 10 186 538
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(a) All stores expanded and all stores closed were ATS stores, except
that in 2001, five stores closed were ATFS stores, and two stores closed
were ATL stores; in 2000, two stores closed were ATL stores and one store
closed was an ATFS store; in 1998 one store closed was an ATFS store; and
in 1997 nine of the Company's former Ann Taylor Studio shoe stores closed.
In addition, two stores closed in 2000 and four stores closed in 1999 were
ATS stores that were replaced in the same locations with new ATL stores.
(b) In 2001 and 2000, two and three ATL stores located in factory outlet malls
were converted to ATFS stores, respectively.
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 ($452 per square foot in
Fiscal 2001) relative to other specialty apparel retailers.
The Company has invested approximately $180 million in its store base
since the beginning of Fiscal 1997; approximately 56% 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 Fiscal 2001 real estate expansion plan resulted in an
increase in the Company's total store square footage of approximately 362,000
square feet (net of store closings), or 13.4%, from approximately 2,695,000
square feet at the end of Fiscal 2000 to approximately 3,057,000 square feet
at the end of Fiscal 2001. In Fiscal 2002, the Company intends to increase
store square footage by approximately 246,000 square feet, or 8.0%,
representing approximately 7 new Ann Taylor stores, the expansion or
relocation of approximately one existing Ann Taylor store, and approximately
38 new Ann Taylor Loft stores.
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5
Capital expenditures for the Company's Fiscal 2001 store expansion
program, net of landlord construction allowances, totaled approximately $52.4
million, including expenditures for store refurbishing and store
refixturing. The Company expects that capital expenditures for its Fiscal
2002 store expansion program, net of landlord construction allowances, will
be approximately $33.2 million, including expenditures for store refurbishing
and refixturing.
The Company's ability to continue to increase store square footage will
be dependent upon, among other things, general economic and business
conditions affecting consumer confidence and spending, the availability of
desirable locations and the negotiation of acceptable lease terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Statement
Regarding Forward Looking Disclosures".
INFORMATION SYSTEMS
In Fiscal 2000, the Company implemented its core merchandising
information system referred to above under "Inventory Control and Merchandise
Allocation". In Fiscal 2001, the Company completed the renovation project at
its distribution center, located in Louisville, Kentucky, to optimize
physical capacity and decrease the amount of time it takes to get merchandise
to the stores. During this project, the Company replaced the software of the
sorting equipment to provide for greater operational stability of the
equipment and improved accuracy of product distribution. Additionally, the
Company implemented a warehouse management system which integrates the
receiving, picking, sorting, packing and shipping systems. This allows the
work to be more effectively managed in the distribution center. The
integration of the receiving system in the warehouse management system with
the core merchandising system establishes the platform for future receiving
enhancements.
CUSTOMER CREDIT
Customers may pay for merchandise with cash, personal checks, the Ann
Taylor credit card, or credit cards issued by third parties. Credit card
sales were 84.4% of net sales in Fiscal 2001, 83.9% of net sales in Fiscal
2000, and 80.5% of net sales in Fiscal 1999. In Fiscal 2001, 12.2% of net
sales were made with the Ann Taylor credit card, and 72.2% were made with
third-party credit cards. As of February 2, 2002, the Company's Ann Taylor
credit card accounts receivable totaled $55,412,000, net of allowance for
doubtful accounts. Accounts written off in Fiscal 2001 were approximately
$1,501,000, or 0.1% of net sales.
On February 4, 2002, the Company sold its proprietary credit card
portfolio to World Financial Network National Bank (the "Bank") and
contracted with Alliance Data Systems Corporation ("ADS"), the Bank's
affiliated servicer, to provide private label credit card services to
proprietary Ann Taylor credit card customers. The Company believes that
having ADS provide these services rather than continuing to handle this
program in-house will further strengthen the Company's relationship with its
clients and aid in the growth of the Ann Taylor credit card. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
BRAND BUILDING AND MARKETING
The Company believes that its Ann Taylor brand is among its most
important assets. The ability of the Company to evolve its brand
continuously to appeal to the changing needs and priorities of its target
customer base is a key source of competitive advantage. All aspects of brand
development, including product design, store merchandising and shopping
environments, channels of distribution, and marketing and advertising, are
controlled by the Company. The Company continues to invest in the
development of its brand through, among other things, client research,
advertising, in-store marketing, direct mail marketing, and its internet
presence. The Company also makes investments to enhance the client
experience through the opening of new stores, the expansion and remodeling of
existing stores, and a focus on client service.
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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, as well as through
direct mail marketing and in-store presentation. Marketing expenditures as a
percentage of sales were 2.4% in Fiscal 2001, 2.5% in Fiscal 2000 and 2.4% in
Fiscal 1999.
TRADEMARKS AND SERVICE MARKS
The "AnnTaylor" and "AnnTaylor Loft" trademarks are registered with the
United States Patent and Trademark Office and with the trademark registries
of many foreign countries. The Company's rights in the "AnnTaylor" mark are
a significant part of the Company's business, as the Company believes its
trademark is well known in the women's retail apparel industry. Accordingly,
the Company intends to maintain its "AnnTaylor" mark and related
registrations and vigorously protect its trademarks against infringement.
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, catalog and internet businesses that offer similar categories of
merchandise. The Company believes that its focused merchandise selection,
exclusive fashions, personalized service, wardrobing advice and convenience
distinguish it from other apparel retailers. Many of the Company's
competitors are considerably larger and have substantially greater financial,
marketing and other resources than the Company and there is no assurance that
the Company will be able to compete successfully with them in the future. In
addition, the Company has only limited experience in the
"upper-moderate"-priced category, and existing competitors may have
significantly greater brand recognition among this customer segment than the
Company. Further, certain of the Company's competitors have established
presence on and greater experience with the Internet.
EMPLOYEES
As of February 2, 2002, the Company had approximately 9,500 employees,
of whom 2,600 were full-time salaried employees, 1,900 were full-time hourly
employees and 5,000 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, made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The forward-looking
statements may use the words "expect", "anticipate", "plan", "intend",
"project", "believe" and similar expressions. These forward-looking
statements reflect the Company's current expectations concerning future
events, and actual results may differ materially from current expectations or
historical results. Any such forward-looking statements are subject to
various risks and uncertainties, including failure by the Company to predict
accurately customer fashion preferences; decline in the demand for
merchandise offered by the Company; competitive influences; changes in levels
of store traffic or consumer spending habits; effectiveness of the Company's
brand awareness and marketing programs; lack of sufficient customer
acceptance of the Ann Taylor Loft concept in the upper-moderate-priced
women's apparel market; general economic conditions or a downturn in the
retail industry; the inability of the Company to locate new store sites or
negotiate favorable lease terms for additional stores or for the expansion of
existing stores; lack of sufficient consumer interest in the Company's Online
Store; a significant change in the regulatory environment applicable to the
Company's business; an increase in the rate of import duties or export quotas
with respect to the Company's merchandise; financial or political instability
in any of the countries in which the Company's goods are manufactured; acts
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of war or terrorism in the United States or worldwide; and other factors that
materially or adversely affect the Company's financial condition. The Company
does not assume any obligation to update or revise any forward-looking
statements at any time for any reason. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Statement Regarding
Forward-Looking Disclosures".
ITEM 2. PROPERTIES
As of February 2, 2002, the Company operated 538 stores, all of which
were leased. The store leases typically provide for initial terms of ten
years, although some leases have shorter or longer initial periods, and grant
the Company the right to extend the term for one or two additional five-year
periods. Most of the store leases require Ann Taylor to pay a specified
minimum rent, plus a contingent rent based on a percentage of the store's net
sales in excess of a specified threshold. Most of the leases also require
Ann Taylor to pay real estate taxes, insurance and certain common area and
maintenance costs. 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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2002 - 2004................. 55
2005 - 2007.................140
2008 - 2010.................202
2011 and later..............141
Ann Taylor leases corporate offices at 142 West 57th Street in New York
City, containing approximately 143,000 square feet and approximately 93,000
square feet of office space at 1372 Broadway in New York City. The leases
for these premises expire in 2006 and 2010, respectively. The Company also
leases office space in New Haven, Connecticut, containing approximately
39,000 square feet. This lease expires in October 2004.
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
The Company settled the purported class action lawsuit pending in the
United States District Court for the Southern District of New York against
the Company, its wholly owned subsidiary and certain former officers and
directors. Finalization of the settlement is subject to Court approval. The
complaint alleged that the defendants made false and misleading statements
about the Company and its subsidiary from February 3, 1994 through May 4,
1995. The net cost to the Company, after application of insurance proceeds,
will be approximately $3.3 million. The decision to settle this action was
not an admission of any wrongdoing, but reflected the significant legal fees,
other expenses and management time that would have to be devoted to continue
to vigorously defend it in the courts.
The Company is also a party to routine litigation incident to its
business. Although the amount of any liability that could arise with respect
to these actions cannot be accurately predicted, in the opinion of the
Company, any such liability will not have a material adverse effect on the
consolidated financial position, consolidated results of operations, or
liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange under the symbol ANN. The number of holders of record of common
stock at March 1, 2002 was 564. The following table sets forth the high and
low sale prices for the common stock on the New York Stock Exchange during
Fiscal 2001 and Fiscal 2000.
Market Price
High Low
---- ---
FISCAL YEAR 2001
Fourth quarter........................ $39.35 $23.80
Third quarter......................... 35.70 21.10
Second quarter........................ 39.29 29.25
First quarter......................... 30.90 23.25
FISCAL YEAR 2000
Fourth quarter........................ $39.38 $18.25
Third quarter......................... 44.88 24.75
Second quarter........................ 39.38 19.13
First quarter......................... 28.63 15.00
The Company has never paid cash dividends on the common stock and does
not intend to pay cash dividends in the foreseeable future. As a holding
company, the Company's ability to pay dividends is dependent upon the receipt
of dividends or other payments from its subsidiaries, including the Company's
direct wholly owned subsidiary AnnTaylor, Inc. ("Ann Taylor"). The payment
of dividends by Ann Taylor to the Company is subject to certain restrictions
under Ann Taylor's Credit Facility described below under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". The payment of cash dividends
on the common stock by the Company is also subject to certain restrictions
contained in the Company's guarantee of Ann Taylor's obligations under the
Credit Facility. Any determination to pay cash dividends in the future will
be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's consolidated results of operations, financial
condition, contractual restrictions and other factors deemed relevant at that
time by the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following historical consolidated income statement and consolidated
balance sheet information has been derived from the audited consolidated
financial statements of the Company. The Company's consolidated statements
of income, stockholders' equity and cash flows for each of the three fiscal
years ended February 2, 2002, February 3, 2001 and January 29, 2000 and
consolidated balance sheets as of February 2, 2002 and February 3, 2001, as
audited by Deloitte & Touche llp, independent auditors, appear elsewhere in
this document. The information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto of
the Company included elsewhere in this document. All references to years are
to the fiscal year of the Company, which ends on the Saturday nearest January
31 in the following calendar year. All fiscal years for which financial
information is set forth below had 52 weeks, except the fiscal year ended
February 3, 2001 which had 53 weeks.
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FISCAL YEARS ENDED
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FEB. 2, FEB. 3, JAN. 29, JAN. 30, JAN. 31,
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SQUARE FOOT DATA AND PER SHARE DATA)
CONSOLIDATED INCOME STATEMENT INFORMATION:
Net sales ...................................... $ 1,299,573 $ 1,232,776 $ 1,084,519 $ 911,939 $ 781,028
Cost of sales .................................. 651,808 622,036 536,014 455,724 411,756
----------- ----------- ----------- ----------- -----------
Gross profit ................................... 647,765 610,740 548,505 456,215 369,272
Selling, general and administrative expenses ... 576,584 501,460 414,315 350,522 308,780
Retirement of assets (a) ...................... --- --- --- 3,633 ---
Amortization of goodwill (b) ................... 11,040 11,040 11,040 11,040 11,040
----------- ----------- ----------- ----------- -----------
Operating income ............................... 60,141 98,240 123,150 91,020 49,452
Interest income ................................ 1,390 2,473 4,378 2,241 1,157
Interest expense (c) ........................... 6,869 7,315 11,814 20,358 21,146
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary loss ............................. 54,662 93,398 115,714 72,903 29,463
Income tax provision ........................... 25,557 41,035 50,221 33,579 17,466
----------- ----------- ----------- ----------- -----------
Income before extraordinary loss ............... 29,105 52,363 65,493 39,324 11,997
Extraordinary loss (d) ......................... --- --- 962 --- 173
----------- ----------- ----------- ----------- -----------
Net income ..................................... $ 29,105 $ 52,363 $ 64,531 $ 39,324 $ 11,824
=========== =========== =========== =========== ===========
Basic earnings per share before
extraordinary loss............................ $ 1.01 $ 1.83 $ 2.25 $ 1.53 $ 0.47
Extraordinary loss per share (d) ............... --- --- 0.03 --- 0.01
----------- ----------- ----------- ----------- -----------
Basic earnings per share....................... $ 1.01 $ 1.83 $ 2.22 $ 1.53 $ 0.46
=========== =========== =========== =========== ===========
Diluted earnings per share before
extraordinary loss............................ $ 1.00 $ 1.76 $ 2.08 $ 1.44 $ 0.47
Extraordinary loss per share (d) ............... --- --- 0.03 --- 0.01
----------- ----------- ----------- ----------- -----------
Diluted earnings per share ..................... $ 1.00 $ 1.76 $ 2.05 $ 1.44 $ 0.46
=========== =========== =========== =========== ===========
Weighted average shares outstanding (in 000s) .. 28,883 28,608 29,021 25,715 25,628
Weighted average shares outstanding,
assuming dilution (in 000s) .................... 31,511 31,221 32,849 31,006 25,693
CONSOLIDATED OPERATING INFORMATION:
Percentage increase (decrease) in comparable
store sales (e) .............................. (6.1)% (0.5)% 8.4% 7.9% (5.5)%
Net sales per gross square foot (f) ............ $ 452 $ 496 $ 502 $ 474 $ 445
Number of stores:
Open at beginning of period .................... 478 405 365 324 309
Opened during the period ....................... 67 81 47 45 27
Expanded during the period ..................... 6 4 8 8 9
Closed during the period ....................... 7 8 7 4 12
Open at the end of the period .................. 538 478 405 365 324
Total store square footage at end of period .... 3,057,000 2,695,000 2,280,000 2,038,000 1,808,000
Capital expenditures............................ $ 83,693 $ 83,310 $ 53,409 $ 45,131 $ 22,945
Depreciation and amortization including
goodwill (b).................................... $ 54,569 $ 46,073 $ 41,387 $ 39,823 $ 38,843
Working capital turnover (g) ................... 7.2x 7.6x 6.8x 6.3x 6.5x
Inventory turnover (h) ......................... 4.7x 4.9x 4.8x 5.0x 5.1x
CONSOLIDATED BALANCE SHEET INFORMATION
(AT END OF PERIOD):
Working capital (i)...... ....................... $ 189,239 $ 172,767 $ 151,368 $ 168,708 $ 122,181
Goodwill, net (b) ............................... 286,579 297,619 308,659 319,699 330,739
Total assets .................................... 882,986 848,115 765,117 775,417 683,661
Total debt ...................................... 119,530 117,610 115,785 105,157 106,276
Preferred securities ............................ --- --- --- 96,624 96,391
Stockholders' equity ............................ 612,129 574,029 515,622 432,699 384,107
(Footnotes on following page)
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10
(Footnotes for preceding page. Unless otherwise noted, all per share
information is presented on a diluted basis.)
(a) A charge of $3,633,000 ($2,180,000, or $0.07 per share, net of income tax
benefit) was recorded in Fiscal 1998 for the retirement of certain assets
in connection with the renovation of the Company's corporate offices.
(b) 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 has been amortized on a straight-line basis
through the end of Fiscal 2001 using an assumed 40 year life. In
addition, as a result of the September 1996 acquisition of the operations
that became the Company's sourcing division, the Company recorded goodwill
of $38,430,000 that has been amortized on a straight-line basis through
the end of Fiscal 2001 using an assumed 25 year life. The Company will
adopt Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" beginning in Fiscal 2002, which requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment. In connection with this, the Company has
determined that the carrying value of its goodwill at February 2, 2002 is
not impaired.
(c) Includes non-cash interest expense of $4,140,000, $4,247,000, $3,026,000,
$1,290,000, and $1,419,000, in Fiscal 2001, 2000, 1999, 1998 and 1997,
respectively, from amortization of deferred financing costs and, in Fiscal
1999, 2000, and 2001, accretion of original issue discount.
(d) 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.
(e) Comparable store sales are calculated by excluding the net sales of a
store for any month of one period if the store was not also open during
the same month of the prior period. A store that is expanded by more than
15% is treated as a new store for the first year following the opening of
the expanded store. In addition, in a year with 53 weeks, sales in the
last week of that year are not included in determining comparable store
sales; therefore, comparable store sales for Fiscal 2000 reflect a 52-week
period.
(f) Net sales per gross 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.
(g) 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.
(h) Inventory turnover is determined by dividing cost of sales by the average
of the cost of inventory at the beginning and end of the period (excluding
inventory associated with the Company's sourcing division). Effective
February 1, 1998, the Company elected to change its method of inventory
valuation to the average cost method. The cumulative effect of this
accounting change on February 1, 1998 was not material. The effect of
this accounting change on Fiscal 1998 net income was an increase of
$1,272,000, or $0.04 per share on a diluted basis. It is not possible to
determine the effect of the change on income in any previously reported
fiscal years as no cost information was available.
(i) Includes current portion of long-term debt of $1,250,000, $1,400,000,
$1,300,000, $1,206,000 and $1,119,000, in Fiscal 2001, 2000, 1999, 1998
and 1997, respectively.
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11
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
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
(52 weeks) (53 weeks) (52 weeks)
Net sales ($000) .......................... $ 1,299,573 $ 1,232,776 $ 1,084,519
Total net sales increase
percentage (52-week basis) ............ 6.8% 12.2% 18.9%
Comparable store sales increase
(decrease) percentage (52-week basis) ... (6.1)% (0.5)% 8.4%
Net sales per average gross square foot ... $ 452 $ 496 $ 502
Total store square footage at end of period 3,057,000 2,695,000 2,280,000
Number of:
New stores .............................. 67 81 47
Expanded stores ......................... 6 4 8
Closed stores ........................... 7 8 7
Total stores open at end of period ........ 538 478 405
The Company's net sales do not show significant seasonal variation,
although net sales in the fourth quarter have historically been higher than
in the other quarters. As a result, the Company has not had significant
overhead and other costs generally associated with large seasonal variations.
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data
expressed as a percentage of net sales for the periods indicated:
FISCAL YEAR
-----------------------
2001 2000 1999
----- ----- -----
Net sales ...................... 100.0% 100.0% 100.0%
Cost of sales .................. 50.2 50.5 49.4
----- ----- -----
Gross profit ............... 49.8 49.5 50.6
Selling, general and
administrative expenses ...... 44.4 40.7 38.2
Amortization of goodwill ....... 0.8 0.9 1.0
----- ----- -----
Operating income ........... 4.6 7.9 11.4
Interest income ................ 0.1 0.2 0.4
Interest expense ............... 0.5 0.6 1.1
----- ----- -----
Income before income taxes
and extraordinary loss ....... 4.2 7.5 10.7
Income tax provision ........... 2.0 3.3 4.6
----- ----- -----
Income before extraordinary loss 2.2 4.2 6.1
Extraordinary loss ............. -- -- 0.1
----- ----- -----
Net income ..................... 2.2% 4.2% 6.0%
===== ===== =====
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12
FISCAL 2001 COMPARED TO FISCAL 2000
The Company's net sales increased to $1,299,573,000 over $1,232,776,000
in Fiscal 2000, an increase of $66,797,000, or 5.4%. Comparable store sales
for Fiscal 2001 decreased 6.1%, compared to a decrease of 0.5% in Fiscal
2000. Total sales for Fiscal 2001 were up 6.8% from $1,216,808,000 for the
52-week period ended January 27, 2001. The sales increase was primarily
attributable to the opening of new stores and the expansion of existing
stores, partially offset by the decrease in comparable store sales in Fiscal
2001. Management believes that the decrease in comparable store sales was,
in part, the result of customer dissatisfaction with certain of the Company's
product offerings and merchandise assortment available in Ann Taylor stores
in the Spring 2001 season. Sales were also impacted by an overall reduction
in client spending caused by the current economic environment, as well as the
impact of the events of September 11, 2001.
Gross margin as a percentage of net sales, excluding certain
nonrecurring expenses described below, increased to 50.2% in Fiscal 2001 from
49.5% in Fiscal 2000. The increase in gross margin reflects higher margins
achieved on full price and non-full price sales at both divisions, offset, in
part, by higher promotional sales activity in Fiscal 2001 compared to the
prior year. In addition, during the fourth quarter of Fiscal 2001, the
Company incurred a pre-tax nonrecurring charge of approximately $17,000,000.
Approximately $4,100,000 of this charge affected gross margin, and related to
the inventory write-off associated with the discontinuation of the Ann Taylor
cosmetics line, and inventory costs associated with canceling certain Fall
2001 and Spring 2002 merchandise orders. The remaining $12,900,000 were
additional selling, general and administrative costs, as further discussed
below. After taking these nonrecurring charges into account, gross margin,
as a percentage of sales, was 49.8%.
Selling, general and administrative expenses, excluding certain
nonrecurring expenses described below, were $563,658,000, or 43.4% of net
sales, in Fiscal 2001, compared to $490,760,000, or 39.8% of net sales, in
Fiscal 2000. The increase in selling, general and administrative expenses as
a percentage of net sales was primarily attributable to decreased leverage on
fixed expenses resulting from negative comparable store sales, and increases
in tenancy and Loft store operations expenses due to expansion. Of the
$17,000,000 pre-tax nonrecurring charge discussed above, approximately
$12,900,000 represented increased selling, general and administrative costs.
Approximately $7,200,000 of the nonrecurring charge related to the write-down
of certain anntaylor.com assets, based upon projected cash flows, which were
not deemed adequate to support the carrying value of the assets associated
with this ongoing business. An additional $3,300,000 related to the cost,
net of insurance proceeds, of settling a class action lawsuit (see Item 3 -
"Legal Proceedings"). The remaining $2,400,000 represented the write-off of
certain fixed assets related to the discontinuation of the Ann Taylor
cosmetics line, and severance costs associated with reductions made in the
Company's store and home office workforce. After taking these nonrecurring
charges into account, selling, general and administrative expenses, as a
percentage of net sales, were 44.4%. During the first quarter of Fiscal
2000, the Company incurred a pre-tax nonrecurring charge of approximately
$8,500,000 in connection with an extensive review conducted with the
Company's financial and legal advisors of various strategic approaches to
enhance shareholder value. In the fourth quarter of Fiscal 2000, the
Company recorded a nonrecurring pre-tax charge of $2,200,000 relating to the
costs of the Company's obligations under a former executive's employment
contract with the Company, in connection with the executive's resignation in
January 2001. After taking these nonrecurring charges into account, selling,
general and administrative expenses for Fiscal 2000, as a percentage of
sales, were 40.7%.
Operating income decreased to $60,141,000, or 4.6% of net sales, in
Fiscal 2001, from $98,240,000, or 7.9% of net sales, in Fiscal 2000.
Amortization of goodwill was $11,040,000, or 0.8% of net sales, in Fiscal
2001, compared to $11,040,000, or 0.9% of net sales, in Fiscal 2000.
Operating income without giving effect to such amortization was $71,181,000,
or 5.4% of net sales, in Fiscal 2001 and $109,280,000, or 8.8% of net sales,
in Fiscal 2000.
Interest income was $1,390,000 in Fiscal 2001, compared to $2,473,000 in
Fiscal 2000. The decrease was primarily attributable to lower cash on hand
and lower interest rates during Fiscal 2001 compared to Fiscal 2000.
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13
Interest expense was $6,869,000 in Fiscal 2001, compared to $7,315,000
in Fiscal 2000. The weighted average interest rate on the Company's
outstanding indebtedness at February 2, 2002 was 3.75%.
The income tax provision was $25,557,000, or 46.8% of income before
income taxes in Fiscal 2001, compared to $41,035,000, or 43.9% of income
before income taxes in Fiscal 2000. The effective tax rates for both periods
were higher than the statutory rates, primarily as a result of non-deductible
goodwill expense.
As a result of the foregoing factors, the Company had net income of
$29,105,000, or 2.2% of net sales, for Fiscal 2001, compared to net income of
$52,363,000, or 4.2% of net sales, for Fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999
The Company's net sales increased to $1,232,776,000 over $1,084,519,000
in Fiscal 1999, an increase of $148,257,000, or 13.7%. Comparable store
sales for Fiscal 2000 decreased 0.5%, compared to an increase of 8.4% in
Fiscal 1999. Total sales for the 52-week period ended January 27, 2001 were
up 12.2% to $1,216,808,000, compared to the same period in Fiscal 1999. The
sales increase was primarily attributable to the opening of new stores and
the expansion of existing stores, partially offset by a net decrease in
comparable store sales in Fiscal 2000. Management believes that the decrease
in comparable store sales was the result of customer dissatisfaction with
certain of the Company's product offerings and merchandise assortment in the
Fall 2000 season.
Gross profit as a percentage of net sales decreased to 49.5% in Fiscal
2000 from 50.6% in Fiscal 1999. This decrease in gross margin reflects a
higher markdown rate on goods sold below full price and the sale of a greater
amount of goods below full price as a percentage of sales, most significantly
in the fourth quarter of Fiscal 2000, compared to the prior year. These
decreases were offset, in part, by higher gross margins achieved on
merchandise that was sold at full price, attained through ongoing
efficiencies achieved through continued improvements in the Company's
sourcing, merchandising, and inventory processes.
Selling, general and administrative expenses, excluding certain
nonrecurring expenses described below, were $490,760,000, or 39.8% of net
sales, in Fiscal 2000, compared to $414,315,000, or 38.2% of net sales, in
Fiscal 1999. Selling, general and administrative expenses for Fiscal 2000
included approximately $10,300,000 of expenses related to the development of
the Company's Online Store, which commenced during Fiscal 2000. Selling,
general and administrative expenses as a percentage of net sales also
reflected increases in tenancy expenses and increases in Ann Taylor Loft
store operations expenses, offset by a decrease in the provision for
management performance bonus expense. During the first quarter of Fiscal
2000, the Company incurred a pre-tax nonrecurring charge of approximately
$8,500,000 in connection with an extensive review conducted with the
Company's financial and legal advisors of various strategic approaches to
enhance shareholder value. In the fourth quarter of Fiscal 2000, the
Company recorded a nonrecurring pre-tax charge of $2,200,000 relating to the
estimated costs of the Company's obligations under a former executive's
employment contract with the Company, in connection with the executive's
resignation in January 2001. After taking these nonrecurring charges into
account, selling, general and administrative expenses, as a percentage of
sales, were 40.7%.
Operating income decreased to $98,240,000, or 7.9% of net sales, in
Fiscal 2000, from $123,150,000, or 11.4% of net sales, in Fiscal 1999.
Amortization of goodwill was $11,040,000, or 0.9% of net sales, in Fiscal
2000, compared to $11,040,000, or 1.0% of net sales, in Fiscal 1999.
Operating income without giving effect to such amortization was $109,280,000,
or 8.8% of net sales, in Fiscal 2000 and $134,190,000, or 12.4% of net sales,
in Fiscal 1999.
Interest income was $2,473,000 in Fiscal 2000, compared to $4,378,000 in
Fiscal 1999. The decrease was primarily attributable to decreased cash on
hand in Fiscal 2000 resulting from the execution by the Company, in the
second half of Fiscal 1999, of the securities repurchase program described
below under "Liquidity and Capital Resources".
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14
Interest expense was $7,315,000 in Fiscal 2000, compared to $11,814,000 in
Fiscal 1999. The decrease in interest expense was primarily attributable to the
net reduction in the Company's outstanding long-term debt and other obligations,
and a decrease in the interest rate borne by the Company's remaining outstanding
long-term debt. During the second quarter of Fiscal 1999, a subsidiary of the
Company redeemed its 8-1/2% Company Obligated Mandatorily Redeemable Convertible
Preferred Securities ("preferred securities"), and AnnTaylor, Inc., a wholly
owned subsidiary of the Company ("Ann Taylor"), redeemed its 8-3/4% Subordinated
Notes Due 2000 ("8-3/4% Notes"). These redemptions were completed using, in
part, the proceeds from the issuance by the Company, also during the second
quarter of Fiscal 1999, of its deep discount Convertible Subordinated Debentures
due 2019 ("Convertible Debentures"), which bear interest at a rate of 3.75% per
annum. The weighted average interest rate on the Company's outstanding
indebtedness at February 3, 2001 was 3.79%.
The income tax provision was $41,035,000, or 43.9% of income before
income taxes in Fiscal 2000, compared to $50,221,000, or 43.4% of income
before income taxes and extraordinary loss in Fiscal 1999. The effective tax
rates for both periods were higher than the statutory rates, primarily as a
result of non-deductible goodwill expense.
As a result of the foregoing factors, the Company had net income of
$52,363,000, or 4.2% of net sales, for Fiscal 2000, compared to net income of
$64,531,000, or 6.0% of net sales, for Fiscal 1999.
CHANGES IN FINANCIAL POSITION
Accounts receivable increased to $65,296,000 at the end of Fiscal 2001
from $57,989,000 at the end of Fiscal 2000, an increase of $7,307,000, or
12.6%. This increase was primarily attributable to an increase of $6,083,000
in trade accounts receivable.
Merchandise inventories increased to $180,117,000 at February 2, 2002
from $170,631,000 at February 3, 2001, an increase of $9,486,000, or 5.6%.
Merchandise inventories at February 2, 2002 and February 3, 2001 included
approximately $37,558,000 and $33,469,000, respectively, of inventory
associated with the Company's sourcing division, which is principally
finished goods in transit from factories. The increase in merchandise
inventories is primarily due to inventory purchased to support 67 new stores
opened since the beginning of the year. Total store square footage increased
to approximately 3,057,000 square feet at February 2, 2002 from approximately
2,695,000 square feet at February 3, 2001. Merchandise inventory on a
per-square-foot basis, excluding inventory associated with the Company's
sourcing division, was approximately $47 at the end of Fiscal 2001, compared
to $51 at the end of Fiscal 2000. Inventory turned 4.7 times in Fiscal 2001,
compared to 4.9 times in Fiscal 2000, excluding inventory associated with the
Company's sourcing division. Inventory turnover is determined by dividing
cost of sales by the average of the cost of inventory at the beginning and
end of the period (excluding inventory associated with the sourcing division).
Accounts payable decreased to $59,482,000 at the end of Fiscal 2001 from
$65,903,000 at the end of Fiscal 2000, a decrease of $6,421,000, or 9.7%.
The decrease in accounts payable is primarily due to the timing of payments
at the end of Fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital is cash flow from
operations. The following table sets forth material measures of the Company's
liquidity:
FISCAL YEAR
-------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Cash provided by operating activities.. $ 78,579 $ 77,422 $101,782
Working capital ....................... $189,239 $172,767 $151,368
Current ratio ......................... 2.39:1 2.22:1 2.26:1
Debt to equity ratio .................. .20:1 .20:1 .22:1
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15
Cash provided by operating activities in Fiscal 2001, as presented on
the consolidated statements of cash flows, primarily resulted from earnings,
noncash charges, and a decrease in prepaid expenses and other current assets,
partially offset by increases in accounts receivable and inventory and
decreases in accounts payable and accrued liabilities.
On April 30, 2001, Ann Taylor entered into an Amended and Restated
$175,000,000 senior secured revolving Credit Facility (the "Credit Facility")
with Bank of America N.A. and a syndicate of lenders. This Credit Facility
was further amended on December 20, 2001 to adjust certain ratio provisions,
and amend certain definitions used in the calculation of ratios required in
the Credit Facility. The Credit Facility matures on April 29, 2004.
Maximum availability for loans and letters of credit under the Credit
Facility is governed by a monthly borrowing base, determined by the
application of specified advance rates against certain eligible assets.
Based on this calculation, the maximum amount available for loans and letters
of credit under the Credit Facility at February 2, 2002 was $175,000,000.
Commercial and standby letters of credit outstanding under the Credit
Facility as of February 2, 2002 were approximately $77,934,000. Loans
outstanding under the Credit Facility at any time may not exceed
$75,000,000. There were no loans outstanding at fiscal year end. In
addition, the Credit Facility requires that the outstanding loan balance be
reduced to zero for a 30-day period each calendar year. This "cleandown"
period was achieved in January 2002.
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at Ann Taylor's option, the Bank of America Base Rate, defined as
the higher of (a) the Federal Funds Rate plus one-half of 1% and (b) the
Prime Rate for such day, or Eurodollar Rate; plus, in either case, a margin
ranging from 0.25% to 2.00%. Ann Taylor is also required to pay the lenders
a quarterly commitment fee on the unused revolving loan commitment amount at
a rate ranging from 0.30% to 0.50% per annum. Fees for outstanding
commercial and standby letters of credit range from 0.50% to 0.875% and from
1.25% to 2.00%, respectively. Premiums ranging from 0.125% to 0.50% may
apply to all interest and commitment fees, depending on the calculated
Leverage ratio.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens and investments, restrictions on dividends
or other distributions to stockholders and maintenance of certain financial
ratios including specified levels of tangible net worth.
The lenders have been granted a pledge of the common stock of 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 Fiscal 1999, the Company completed the issuance of an aggregate
of $199,072,000 principal amount at maturity of its Convertible Debentures.
The Convertible Debentures were sold at an original issue price of $552.56
per $1,000 principal amount at maturity of Debenture. The net proceeds of
the sale were applied to the redemption, described below, of the 8-3/4% Notes
issued by Ann Taylor. Cash interest is payable on the principal amount at
maturity of the Convertible Debentures at the rate of 0.55% per annum. This
interest rate and the accrual of original issue discount represent a yield to
maturity on the Convertible Debentures of 3.75%. The Convertible Debentures
are convertible at the option of the holders thereof initially into 12.078
shares of the Company's common stock per $1,000 principal amount at maturity
of Debenture. The Convertible Debentures may be redeemed at the Company's
option on or after June 18, 2004. The Company's obligations with respect to
the Convertible Debentures are guaranteed on a subordinated basis by Ann
Taylor.
On July 22, 1999, Ann Taylor redeemed all of its outstanding 8-3/4% Notes,
at a redemption price of 101.375% of principal amount, plus accrued unpaid
interest to the redemption date. The redemption of the 8-3/4% Notes resulted in
an extraordinary charge to earnings in the second quarter of Fiscal 1999 of
$962,000, or $0.03 per share on a diluted basis, net of income tax benefit.
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16
On June 29, 1999, a subsidiary of the Company redeemed all of the
preferred securities. All but $100,000 liquidation amount of the preferred
securities was tendered for conversion into an aggregate of 5,116,717 shares
of Company common stock prior to the redemption date, at a conversion price
of $19.65 per share of common stock, or 2.545 shares of common stock per $50
liquidation amount of the security. The 5,116,717 shares of Company common
stock issued represented approximately 16% of the Company's outstanding
common stock as of the date of issuance. Holders of preferred securities
that were not tendered for conversion received a cash payment equal to
105.95% of the liquidation amount of the preferred securities redeemed, plus
accrued distributions.
Ann Taylor and its wholly owned subsidiary, AnnTaylor Distribution
Services, Inc., are parties to a $7,000,000 seven-year mortgage loan maturing
in Fiscal 2002. The loan is secured by the Company's distribution center
land and building in Louisville, Kentucky. The mortgage loan bears interest
at 7.5% and is payable in monthly installments of approximately $130,000.
The mortgage loan balance at February 2, 2002 was $1,250,000.
The Company's capital expenditures totaled $83,693,000, $83,310,000 and
$53,409,000 in Fiscal 2001, 2000 and 1999, respectively. Capital
expenditures were primarily attributable to the Company's store expansion,
renovation and refurbishment programs, as well as the investment the Company
made in certain information systems and the Company's corporate offices.
These expenditures also include, in Fiscal 2001 and Fiscal 2000, capital
expenditures related to the Company's Internet e-commerce Web site, and
related enhancements to the material handling system at the Company's
distribution center. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Fiscal 2001 Compared to Fiscal 2000"
for information regarding the asset write-off associated with the Company's
Online Store. The Company expects its total capital expenditure requirements
in Fiscal 2002 will be approximately $47,000,000, including capital for new
store construction for a planned square footage increase of approximately
246,000 square feet, or 8%, as well as capital to support continued
investments in information systems. The actual amount of the Company's
capital expenditures will depend in part on the number of stores opened,
expanded and refurbished and on the amount of construction allowances the
Company receives from the landlords of its new or expanded stores. See
"Business--Stores and Expansion".
On September 9, 1999, the Company announced a securities repurchase
program authorized by its Board of Directors, pursuant to which the Company
was authorized to purchase up to $40,000,000 of the Company's common stock
and/or Convertible Debentures, through open market purchases and privately
negotiated transactions. In January 2000, the Board of Directors authorized
a $50,000,000 increase in the securities repurchase program, bringing the
total amount of securities that could have been repurchased under the program
to $90,000,000. In the third and fourth quarters of Fiscal 1999, the Company
repurchased an aggregate of 3,012,500 shares of its common stock, for an
aggregate repurchase price of $89,900,000 (exclusive of brokerage
commissions), pursuant to this program. All of the repurchased shares became
treasury shares and may be used for general corporate and other purposes. No
Convertible Debentures were purchased.
Dividends and distributions from Ann Taylor to the Company are
restricted by the Credit Facility.
In order to finance its operations and capital requirements, the Company
expects to use internally generated funds and trade credit and funds
available to it under the Credit Facility. The Company believes that cash
flow from operations and funds available under the Credit Facility are
sufficient to enable it to meet its ongoing cash needs for its business, as
presently conducted, for the foreseeable future.
On February 4, 2002, the Company sold the assets associated with its Ann
Taylor credit card accounts to World Financial Network National Bank (the
"Bank"). In connection with the sale, the Company contracted with Alliance
Data Systems Corporation ("ADS"), the Bank's affiliated servicer, to provide
private label credit card services to proprietary Ann Taylor credit card
customers. Under the terms of the transaction, ADS will manage the Ann Taylor
credit card program, and pay the Company a percentage of all collected
finance charges. The Company believes that having ADS provide these services
rather than continuing to handle this program in-house will further
strengthen the Company's relationship with its clients, and aid in the growth
of the Ann Taylor credit card.
-16-
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17
On May 18, 2000, the Board of Directors of the Company adopted a
Stockholder Rights Plan, pursuant to which Rights were distributed as a
dividend at the rate of one Right for each share of common stock of the
Company held by stockholders of record as of the close of business on May 30,
2000. Each Right entitles stockholders to buy one unit of a share of a new
series of preferred stock for $125. The Rights generally are exercisable
only if a person or group acquires beneficial ownership of 15% or more of the
Voting Power of the Company as represented by the Company's common stock or
commences a tender or exchange offer upon consummation of which such person
or group would beneficially own 15% or more of the Voting Power of the
Company as represented by the Company's common stock. The Rights will expire
on May 18, 2010.
In 1998, the Financial Accounting Standards Board (the "FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statement No. 133", which establishes accounting and
reporting standards for derivatives, derivative instruments embedded in other
contracts and for hedging activities. In 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for certain derivatives,
derivative instruments embedded in other contracts and for certain hedging
activities. These statements were effective for the Company's Fiscal 2001
financial statements. The adoption of these standards had no impact on the
Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
SFAS No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001 and clarifies the criteria for recognition of intangible
assets separately from goodwill. Management has determined that the adoption
of SFAS No. 141 will have no impact on the Company's consolidated financial
statements.
SFAS No. 142 requires that ratable amortization of goodwill be replaced
with periodic tests of the goodwill's impairment and that intangible assets,
other than goodwill, which have determinable useful lives be amortized over
that period. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Management intends to adopt SFAS No. 142 in Fiscal 2002,
and has determined that the fair value of the Company exceeds the carrying
value of its recorded net assets, including goodwill, as of February 2,
2002. Management further estimates that adoption of SFAS No. 142 will add
approximately $11,000,000 and $0.35 to Fiscal 2002 net income and earnings
per share, respectively.
SFAS No. 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. Management does not believe that
the adoption of SFAS No. 143 will have a significant impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
accounting and reporting for the impairment or disposal of long-lived assets,
other than goodwill, including discontinued operations. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management has
determined that the adoption of SFAS No. 144 will have no impact on the
Company's consolidated financial statements.
On December 12, 2001, the United States Securities and Exchange
Commission (the "SEC") issued Financial Reporting Release ("FRR") No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies",
which encourages the identification and disclosure of the most critical
accounting policies applied in the preparation of a company's financial
statements. In response to FRR No. 60, Management has determined that the
Company's most critical accounting policies are those related to merchandise
inventory valuation and recorded goodwill. These policies are further
described in the Notes to the Consolidated Financial Statements, and in
relevant sections of this discussion and analysis.
-17-
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18
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES
Sections of this Annual Report on Form 10-K, including the preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain various forward-looking statements, made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements may use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar
expressions. These forward-looking statements reflect the Company's current
expectations concerning future events, and actual results may differ
materially from current expectations or historical results. Any such
forward-looking statements are subject to various risks and uncertainties,
including failure by the Company to predict accurately customer fashion
preferences; decline in the demand for merchandise offered by the Company;
competitive influences; changes in levels of store traffic or consumer
spending habits; effectiveness of the Company's brand awareness and marketing
programs; lack of sufficient customer acceptance of the Ann Taylor Loft
concept in the upper-moderate-priced women's apparel market; general economic
conditions or a downturn in the retail industry; the inability of the Company
to locate new store sites or negotiate favorable lease terms for additional
stores or for the expansion of existing stores; lack of sufficient consumer
interest in the Company's Online Store; a significant change in the
regulatory environment applicable to the Company's business; an increase in
the rate of import duties or export quotas with respect to the Company's
merchandise; financial or political instability in any of the countries in
which the Company's goods are manufactured; acts of war or terrorism in the
United States or worldwide; and other factors set forth in the Company's
filings with the SEC. The Company does not assume any obligation to update
or revise any forward-looking statements at any time for any reason.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains the majority of its cash and cash equivalents in
financial instruments with original maturity dates of three months or less.
These financial instruments are subject to interest rate risk and will
decline in value if interest rates increase. Due to the short duration of
these financial instruments, a change of 100 basis points in interest rates
would not have a material effect on the Company's financial condition.
The Company's outstanding long-term debt as of February 2, 2002 bears
interest at fixed rates; therefore, the Company's consolidated results of
operations would only be affected by interest rate changes to the extent that
fluctuating rate loans are outstanding under the Credit Facility. As of
February 2, 2002, the Company has no such amounts outstanding. Future
borrowings would be affected by interest rate changes; however, the Company
does not believe that a change of 100 basis points in interest rates would
have a material effect on the Company's financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company for the
years ended February 2, 2002, February 3, 2001 and January 29, 2000 are
included as a part of this Report (See Item 14):
Consolidated Statements of Income for the fiscal years ended February 2,
2002, February 3, 2001 and January 29, 2000.
Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001.
Consolidated Statements of Stockholders' Equity for the fiscal years
ended February 2, 2002, February 3, 2001 and January 29, 2000.
Consolidated Statements of Cash Flows for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
-18-
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19
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 II Directors",
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for its 2002 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 2002 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 2002 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 2002 Annual
Meeting of Stockholders.
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20
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Annual Report:
The following consolidated financial statements of the Company are
included on pages 27 through 47 and are filed as part of this
Annual Report:
Independent Auditors' Report; Consolidated Statements of Income for
the fiscal years ended February 2, 2002, February 3, 2001 and
January 29, 2000; Consolidated Balance Sheets as of February 2,
2002 and February 3, 2001; Consolidated Statements of Stockholders'
Equity for the fiscal years ended February 2, 2002, February 3,
2001 and January 29, 2000; Consolidated Statements of Cash Flows
for the fiscal years ended February 2, 2002, February 3, 2001 and
January 29, 2000; Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
The Company filed a report dated January 10, 2002 with the
Commission on Form 8-K with respect to the amendment of AnnTaylor,
Inc.'s existing senior secured revolving credit facility.
(c) Exhibits
The exhibits listed below are filed as a part of this Annual Report.
Schedules other than the above have been omitted because they are
either not applicable or the required information has been
disclosed in the consolidated financial statements or notes thereto.
EXHIBIT NUMBER
- --------------
3.1 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 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).
-20-
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21
EXHIBIT NUMBER
- --------------
10.1.1 First Amendment to Lease, dated as of November 14, 1990, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.1 to the Registration Statement of the Company filed
on April 11, 1991 (Registration No. 33-39905).
10.1.2 Second Amendment to Lease, dated as of February 28, 1993, between
Carven Associates and Ann Taylor. Incorporated by reference to
Exhibit 10.17.2 to the Annual Report on Form 10-K of the Company
filed on April 29, 1993.
10.1.3 Extension and Amendment to Lease dated as of October 1, 1993,
between Carven Associates and Ann Taylor. Incorporated by
reference to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the
Quarter ended October 30, 1993 filed on November 26, 1993.
10.1.4 Modification of Amendment and Extension to Lease, dated as of April
14, 1994 between Carven Associates and Ann Taylor. Incorporated
by reference to Exhibit 10.15.4 to the Annual Report on Form 10-K
of the Company filed on April 28, 1995.
10.1.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven
Associates and Ann Taylor. Incorporated by reference to Exhibit
10.15.5 to the Annual Report on Form 10-K of the Company filed on
April 28, 1995.
10.1.6 Sixth Amendment to Lease, dated as of January 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.6 to the Annual Report on Form 10-K of
the Company filed on April 30, 1998.
10.1.7 Seventh Amendment to Lease, dated as of June 5, 1996, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.7 to the Annual Report on Form 10-K of
the Company filed on April 30, 1998.
10.1.8 Eighth Amendment to Lease, undated, between Pacific Metropolitan
Corporation and Ann Taylor. Incorporated by reference to Exhibit
10.8.8 to the Annual Report on Form 10-K of the Company filed on
April 30, 1998.
10.1.9 Ninth Amendment to Lease, dated as of May 13, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.9 to the Annual Report on Form 10-K of
the Company filed on April 30, 1998.
10.1.10 Tenth Amendment to Lease, dated as of May 21, 1997, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.8.10 to the Annual Report on Form 10-K of
the Company filed on April 30, 1998.
10.1.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between
Pacific Metropolitan Corporation and Ann Taylor. Incorporated by
reference to Exhibit 10.3.11 to the Annual Report on Form 10-K of
the Company filed on March 29, 1999.
10.1.12 Sublease Agreement, dated as of February 23, 1999, between Societe
Air France (formerly known as Compagnie Nationale Air France) and
Ann Taylor. Incorporated by reference to Exhibit 10.2.12 to the
Annual Report on Form 10-K of the Company filed on April 18, 2000.
10.2 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).
-21-
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22
EXHIBIT NUMBER
- --------------
10.3 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.
10.4 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.
10.4.1 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.
10.4.2 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.
10.4.3 Amendment #3 to the Employment Agreement, dated March 10, 2000,
between the Company and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.5.3 to the Annual Report on Form 10-K of
the Company filed on April 18, 2000.
*10.5 Employment Agreement, dated as of January 29, 2002, between the
Company and J. Patrick Spainhour.
10.6 Employment Agreement dated November 25, 1996 between the Company and
Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to
Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996
filed on December 17, 1996.
10.6.1 Amendment #1 to the Employment Agreement, dated as of February 16,
2000, between the Company and Patricia DeRosa. Incorporated by
reference to Exhibit 10.6.1 to the Annual Report on Form 10-K of
the Company filed on April 18, 2000. Confidential treatment has
been granted with respect to certain portions of this exhibit.
10.7 Separation Agreement dated as of January 15, 2001, between the
Company and Patricia DeRosa. Incorporated by reference to Exhibit
10.6.2 to the Annual Report on Form 10-K of the Company filed on
April 5, 2001.
10.8 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted
Stock and Unit Award Plan, Amended and Restated as of February 23,
1994. Incorporated by reference to Exhibit 10.15 to the Annual
Report on Form 10-K of 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.
-22-
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23
EXHIBIT NUMBER
- --------------
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. Incorporated by reference to Exhibit 10.8.4
to the Annual Report on Form 10-K of the Company filed on April
18, 2000.
*10.9 AnnTaylor Stores Corporation 2002 Stock Option and Restricted Stock
and Unit Award Plan.
10.10 AnnTaylor Stores Corporation Amended and Restated Management
Performance Compensation Plan, as approved by stockholders on June
18, 1997. Incorporated by reference to Exhibit 10.16 to the Form
10-Q of the Company for the Quarter ended August 2, 1997 filed on
September 12, 1997.
10.10.1 Amendment to the AnnTaylor Stores Corporation Amended and
Restated Management Performance Compensation Plan dated as of
March 12, 1998. Incorporated by reference to Exhibit 10.17.1 to
the Annual Report on Form 10-K of the Company filed on April 30,
1998.
10.10.2 Amendment to the AnnTaylor Stores Corporation Amended and
Restated Management Performance Compensation Plan, dated as of
March 10, 2000. Incorporated by reference to Exhibit 10.9.2 to
the Annual Report on Form 10-K of the Company filed on April 18,
2000.
10.11 AnnTaylor Stores Corporation Deferred Compensation Plan ("Deferred
Compensation Plan"). Incorporated by reference to Exhibit 10.33
to the Annual Report on Form 10-K of the Company filed on April
28, 1995.
10.11.1 Amendment to the Deferred Compensation Plan as approved by the
Board of Directors on August 11, 1995. Incorporated by reference
to Exhibit 10.33.1 to the Form 10-Q of the Company for the Quarter
ended July 29, 1995 filed on September 11, 1995.
*10.11.2 Amendment to the Deferred Compensation Plan, effective as of
January 1, 2002.
10.12 Mortgage, Assignment of Rents and Leases, Security Agreement and
Fixture Financing Statement dated November 20, 1995, between
AnnTaylor Distribution Services, Inc., as Mortgagor, and General
Electric Capital Assurance Company, as Mortgagee. Incorporated by
reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the
Quarter ended October 28, 1995 filed on December 8, 1995.
10.13 Promissory Note dated November 20, 1995 from Ann Taylor and
AnnTaylor Distribution Services, Inc., collectively as Borrower,
to General Electric Capital Assurance Company, as Lender.
Incorporated by reference to Exhibit 10.35 to the Form 10-Q of Ann
Taylor for the Quarter ended October 28, 1995 filed on December 8,
1995.
-23-
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24
EXHIBIT NUMBER
- --------------
10.14 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.
10.14.1 Trademark Security Agreement, dated as of June 30, 1998, made by
Ann Taylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.1 to the Form 10-Q of
the Company for the Quarter ended August 1, 1998 filed on
September 14, 1998.
10.14.2 Guaranty, dated as of June 30, 1998, made by the Company in favor
of Bank of America, as Administrative Agent. Incorporated by
reference to Exhibit 10.28.2 to the Form 10-Q of the Company for
the Quarter Ended August 1, 1998 filed on September 14, 1998.
10.14.3 Security and Pledge Agreement, dated as of June 30, 1998, made by
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.
10.14.4 Security and Pledge Agreement, dated as of June 30, 1998 made by
Ann Taylor in favor of Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.28.4 to the Form 10-Q of
the Company for the Quarter ended August 1, 1998 filed on
September 14, 1998.
10.14.5 Subsidiary Guaranty, dated as of June 30, 1998 made by AnnTaylor
Distribution Services in favor of Bank of America, as
Administrative Agent. Incorporated by reference to Exhibit
10.28.5 to the Form 10-Q of the Company for the Quarter ended
August 1, 1998 filed on September 14, 1998.
10.14.6 First Amendment to the Credit Agreement, dated as of September 7,
1999, among 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.
10.14.7 Second Amendment to the Credit Agreement, dated December 1999,
among Ann Taylor, Bank of America, N.A., Citibank, N.A., First
Union National Bank, and each of the other lenders party to the
Credit Agreement, NationsBanc Montgomery Securities LLC, as
Arranger and Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit 10.15.7 to the Annual Report
on Form 10-K of the Company filed on April 18, 2000.
10.15 Amended and Restated Credit Agreement, dated as of April 30, 2001,
among AnnTaylor, Inc., as Borrower, Bank of America, N.A., as
Administrative Agent, The CIT Group/Business Credit, Inc., Firstar
Bank, N.A., and Transamerica Business Capital Corporation, as
Co-Agents, The Chase Manhattan Bank and First Union National Bank,
as Syndication Agents, Fleet National Bank, as Documentation
Agent, and Bank of America, N.A., The Chase Manhattan Bank, and
First Union National Bank, as Issuing Banks and the Lenders from
time to time party thereto. Incorporated by reference to Exhibit
10.18 to the Form 10-Q of the Company for the Quarter ended May 5,
2001 filed on June 18, 2001.
-24-
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25
EXHIBIT NUMBER
- --------------
10.15.1 Amendment No. 1 to Credit Agreement, dated as of December 20, 2001,
by and among AnnTaylor, Inc., the Guarantors and Bank of America,
N.A., as Administrative Agent for each of the Lenders pursuant to
the Credit Agreement. Incorporated by reference to Exhibit 10.1 on
Form 8-K of the Company filed on January 10, 2002.
10.16 AnnTaylor Stores Corporation Long-Term Cash Incentive Compensation
Plan, as approved by stockholders on June 17, 1998. Incorporated by
reference to Exhibit A to the Proxy Statement dated May 1, 1998
filed on May 6, 1998.
10.16.1 Amendment to the AnnTaylor Stores Corporation Long-Term Cash
Incentive Compensation Plan, dated as of March 10, 2000.
Incorporated by reference to Exhibit 10.16.1 to the Annual Report
on Form 10-K of the Company filed on April 18, 2000.
10.17 AnnTaylor Stores Corporation Special Severance Plan, dated as of
March 10, 2000. Incorporated by reference to Exhibit 10.18 to the
Annual Report on Form 10-K of the Company filed on April 18, 2000.
10.18 The AnnTaylor Stores Corporation 2000 Stock Option and Restricted
Stock Award Plan (the "2000 Plan"). Incorporated by reference to
the Registration Statement on Form S-8 of the Company filed on May
31, 2000.
*10.18.1 First Amendment to the 2000 Plan, adopted January 29, 2002.
10.19 Employment Agreement, dated as of March 7, 2001, between the Company
and Barry Erdos ("Erdos Agreement"). Incorporated by reference to
Exhibit 10.17 to the Annual Report on Form 10-K of the Company
filed on April 5, 2001.
10.19.1 Amendment, dated as of June 1, 2001, to the Erdos Agreement.
Incorporated by reference to Exhibit 10.17.1 to the Form 10-Q of
the Company for the Quarter ended May 5, 2001 filed on June 18,
2001.
*10.19.2 Amendment No. 2, dated as of November 25, 2001, to the Erdos
Agreement.
10.20 Employment Agreement, dated as of April 24, 2001, between the
Company and Kim Roy ("Roy Agreement"). Incorporated by reference
to Exhibit 10.19 to the Form 10-Q of the Company for the Quarter
ended May 5, 2001 filed on June 18, 2001.
*10.20.1 Amendment No. 1, dated as of November 25, 2001 to the Roy Agreement.
10.21 Employment Agreement, dated as of May 3, 2001, between the Company
and Katherine Lawther Krill ("Krill Agreement"). Incorporated by
reference to Exhibit 10.20 to the Form 10-Q of the Company for the
Quarter ended May 5, 2001 filed on June 18, 2001.
*10.21.01 Amendment No. 1, dated as of November 25, 2001, to the Krill
Agreement.
*21 Subsidiaries of the Company.
*23 Consent of Deloitte & Touche LLP.
* Filed electronically herewith.
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26
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ANNTAYLOR STORES CORPORATION
By: /s/ J. Patrick Spainhour
-------------------------------
J. Patrick Spainhour
Chairman and Chief Executive Officer
Date: April 4, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. Patrick Spainhour Chairman, Chief Executive April 4, 2002
- ------------------------ Officer and Director ---------------------
J. Patrick Spainhour Date
/s/ Barry Erdos Senior Executive Vice April 4, 2002
- ------------------------ President, Chief ---------------------
Barry Erdos Operating Officer Date
and Director
/s/ James M. Smith Senior Vice President, April 4, 2002
- ------------------------ Chief Financial ---------------------
James M. Smith Officer and Treasurer Date
/s/ Gerald S. Armstrong Director April 4, 2002
- ------------------------ ---------------------
Gerald S. Armstrong Date
/s/ James J. Burke, Jr. Director April 4, 2002
- ------------------------ ---------------------
James J. Burke, Jr. Date
/s/ Wesley E. Cantrell Director April 4, 2002
- ------------------------ ---------------------
Wesley E. Cantrell Date
/s/ Robert C. Grayson Director April 4, 2002
- ------------------------ ---------------------
Robert C. Grayson Date
/s/ Ronald W. Hovsepian Director April 4, 2002
- ------------------------ ---------------------
Ronald W. Hovsepian Date
/s/ Rochelle B. Lazarus Director April 4, 2002
- ------------------------ ---------------------
Rochelle B. Lazarus Date
/s/ Hanne M. Merriman Director April 4, 2002
- ------------------------ ---------------------
Hanne M. Merriman Date
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27
ANNTAYLOR STORES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Independent Auditors' Report......................................... 28
Consolidated Financial Statements:
Consolidated Statements of Income for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000....... 29
Consolidated Balance Sheets as of February 2, 2002
and February 3, 2001.......................................... 30
Consolidated Statements of Stockholders' Equity for
the fiscal years ended February 2, 2002,
February 3, 2001 and January 29, 2000..................... 31
Consolidated Statements of Cash Flows for the fiscal
years ended February 2, 2002, February 3, 2001
and January 29, 2000...................................... 32
Notes to Consolidated Financial Statements................... 33
-27-
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28
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders of
ANNTAYLOR STORES CORPORATION:
We have audited the accompanying consolidated financial statements of
AnnTaylor Stores Corporation and its subsidiaries, listed in the accompanying
index. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company and its
subsidiaries at February 2, 2002 and February 3, 2001 and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended February 2, 2002 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
March 1, 2002
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29
ANNTAYLOR STORES CORPORATION
----------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 3, 2001 AND JANUARY 29,
2000
FISCAL YEARS ENDED
------------------------------------
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
---------- ---------- ----------
(in thousands, except per share amounts)
Net sales .............................. $1,299,573 $1,232,776 $1,084,519
Cost of sales .......................... 651,808 622,036 536,014
---------- ---------- ----------
Gross profit ........................... 647,765 610,740 548,505
Selling, general and
administrative expenses .............. 576,584 501,460 414,315
Amortization of goodwill ............... 11,040 11,040 11,040
---------- ---------- ----------
Operating income ....................... 60,141 98,240 123,150
Interest income ........................ 1,390 2,473 4,378
Interest expense ....................... 6,869 7,315 11,814
---------- ---------- ----------
Income before income taxes and
extraordinary loss.................. 54,662 93,398 115,714
Income tax provision ................... 25,557 41,035 50,221
---------- ---------- ----------
Income before extraordinary loss ....... 29,105 52,363 65,493
Extraordinary loss (net of income
tax benefit)........................ -- -- 962
---------- ---------- ----------
Net income ......................... $ 29,105 $ 52,363 $ 64,531
========== ========== ==========
Basic earnings per share:
Basic earnings per share before
extraordinary loss ............... $ 1.01 $ 1.83 $ 2.25
Extraordinary loss per share ....... -- -- 0.03
---------- ---------- ----------
Basic earnings per share ........... $ 1.01 $ 1.83 $ 2.22
========== ========== ==========
Diluted earnings per share:
Diluted earnings per share before
extraordinary loss ............... $ 1.00 $ 1.76 $ 2.08
Extraordinary loss per share ....... -- -- 0.03
---------- ---------- ----------
Diluted earnings per share ......... $ 1.00 $ 1.76 $ 2.05
========== ========== ==========
See accompanying notes to consolidated financial statements.
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30
ANNTAYLOR STORES CORPORATION
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
February 2, February 3,
2002 2001
--------- ---------
ASSETS (in thousands, except
per share amounts)
Current assets
Cash and cash equivalents ........................ $ 30,037 $ 31,962
Accounts receivable, net ......................... 65,296 57,989
Merchandise inventories .......................... 180,117 170,631
Prepaid expenses and other current assets......... 50,403 53,227
--------- ---------
Total current assets ......................... 325,853 313,809
Property and equipment, net ........................ 250,735 220,032
Goodwill, net ...................................... 286,579 297,619
Deferred financing costs, net ...................... 5,044 4,281
Other assets ....................................... 14,775 12,374
--------- ---------
Total assets ................................. $ 882,986 $ 848,115
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................. $ 59,482 $ 65,903
Accrued tenancy .................................. 10,151 9,800
Gift certificates and merchandise
credits redeemable ............................. 21,806 20,375
Accrued expenses ................................. 43,925 43,564
Current portion of long-term debt ................ 1,250 1,400
--------- ---------
Total current liabilities .................... 136,614 141,042
Long-term debt, net ................................ 118,280 116,210
Deferred lease costs and other liabilities.......... 15,963 16,834
Stockholders' equity
Common stock, $.0068 par value; 120,000,000
shares authorized; 32,183,971 and 31,834,088
shares issued, respectively .................... 219 216
Additional paid-in capital ....................... 484,582 475,393
Retained earnings ................................ 218,709 190,093
Deferred compensation on restricted stock ........ (9,296) (1,723)
--------- ---------
694,214 663,979
Treasury stock, 2,806,821 and 3,011,519 shares
respectively, at cost ..................... (82,085) (89,950)
--------- ---------
Total stockholders' equity ................... 612,129 574,029
--------- ---------
Total liabilities and stockholders' equity ... $ 882,986 $ 848,115
========= =========
See accompanying notes to consolidated financial statements.
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31
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended February 2, 2002, February 3, 2001 and January 29,
2000
(in thousands)
Common Stock Additional Warrants Restricted Treasury
--------------- Paid-In ---------------- Retained Stock -------------------
Shares Amount Capital Shares Amount Earnings Awards Shares Amount
------- ------ ------- ------ ------ ---------- --------- ------ ------
Balance at January 30, 1999 ....... 26,035 $177 $359,805 3 $ 46 $ 73,295 $ (272) 17 $ (352)
Net income ........................ -- -- -- -- -- 64,531 -- -- --
Exercise of stock options and
related tax benefit ............ 352 2 10,039 -- -- -- -- 1 (55)
Amortization of discount on
preferred securities .......... -- -- -- -- -- (96) -- -- --
Activity related to common
stock issued as employee
incentives ..................... 94 1 3,850 -- -- -- (1,974) -- --
Exercise and expiration of warrants -- -- 28 (3) (46) -- -- (3) 18
Repurchase of common stock ........ -- -- -- -- -- -- -- 3,013 (89,995)
Conversion of preferred
securities .................... 5,117 35 96,585 -- -- -- -- -- --
------- ------ -------- ------- ----- ------- ------- ------ ------
Balance at January 29, 2000 ....... 31,598 215 470,307 -- -- 137,730 (2,246) 3,028 (90,384)
Net income ........................ -- -- -- -- -- 52,363 -- -- --
Exercise of stock options and
related tax benefit ............ 110 1 2,912 -- -- -- -- -- --
Activity related to common
stock issued as employee
incentives ..................... 18 -- 144 -- -- -- 523 (16) 434
Issuance of common stock pursuant
to Associate Discount Stock
Purchase Plan .................. 108 -- 2,030 -- -- -- -- -- --
------- ------ -------- ------- ----- ------- ------- ------ ------
Balance at February 3, 2001 ....... 31,834 216 475,393 -- -- 190,093 (1,723) 3,012 (89,950)
Net income ........................ -- -- -- -- -- 29,105 -- -- --
Exercise of stock options and
related tax benefit ............ 176 1 4,535 -- -- (430) -- (38) 1,386
Activity related to common
stock issued as employee
incentives ..................... 104 1 2,941 -- -- (59) (7,573) (167) 6,479
Issuance of common stock pursuant
to Associate Discount Stock
Purchase Plan .................. 70 1 1,713 -- -- -- -- -- --
------- ------ -------- ------- ----- ------- ------- ------ ------
Balance at February 2, 2002 ....... 32,184 $219 $484,582 -- $ -- $218,709 $(9,296) 2,807 $ (82,085)
======= ====== ======== ======= ===== ======= ======= ====== ======
See accompanying notes to consolidated financial statements.
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32
ANNTAYLOR STORES CORPORATION
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 3, 2001 AND JANUARY 29,
2000
Fiscal Years Ended
------------------------------------------
February 2, February 3, January 29,
2002 2001 2000
--------- --------- ---------
(in thousands)
Operating activities:
Net income ........................................... $ 29,105 $ 52,363 $ 64,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss ............................... --- --- 1,603
Provision for loss on accounts receivable ........ 1,443 1,154 1,032
Depreciation and amortization .................... 43,529 35,033 30,347
Amortization of goodwill ......................... 11,040 11,040 11,040
Amortization of deferred compensation ............ 1,841 1,133 1,877
Non-cash interest ................................ 4,140 4,247 3,026
Deferred income taxes ............................ (5,115) (3,864) (3,843)
Loss on disposal and write-down of property
and equipment ................................ 9,483 1,884 1,219
Tax benefit from exercise of stock options ....... 981 797 3,483
Changes in assets and liabilities:
Accounts receivable ............................ (8,750) (457) (1,154)
Merchandise inventories ........................ (9,486) (30,605) (3,278)
Prepaid expenses and other current assets ...... 6,948 (12,106) (1,601)
Other non-current assets and liabilities, net .. (2,303) (3,918) 3,131
Accounts payable and accrued liabilities ....... (4,277) 20,721 (9,631)
--------- --------- ---------
Net cash provided by operating activities ............ 78,579 77,422 101,782
--------- --------- ---------
Investing activities:
Purchases of property and equipment .................. (83,693) (83,310) (53,409)
--------- --------- ---------
Net cash used by investing activities ................ (83,693) (83,310) (53,409)
--------- --------- ---------
Financing activities:
Payment of financing costs ........................... (1,583) (45) (4,150)
Payments of mortgage ................................. (1,401) (1,300) (1,206)
Proceeds from issuance of Convertible Debentures ...... --- --- 110,000
Redemption of 8-3/4% Notes ........................... --- --- (101,375)
Redemption of Company Obligated Mandatorily Redeemable
Convertible Preferred Securities ................... --- --- (100)
Issuance of common stock pursuant to Associate
Discount Stock Purchase Plan ........................ 1,714 2,030 ---
Repurchase of common stock ........................... --- --- (89,995)
Proceeds from exercise of stock options .............. 4,459 2,084 6,503
--------- --------- ---------
Net cash provided by (used by) financing activities .. 3,189 2,769 (80,323)
--------- --------- ---------
Net decrease in cash .................................... (1,925) (3,119) (31,950)
Cash, beginning of year ................................. 31,962 35,081 67,031
--------- --------- ---------
Cash, end of year ....................................... $ 30,037 $ 31,962 $ 35,081
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ............... $ 2,504 $ 2,418 $ 9,405
========= ========= =========
Cash paid during the year for income taxes ........... $ 19,170 $ 43,393 $ 51,222
========= ========= =========
See accompanying notes to consolidated financial statements.
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33
ANNTAYLOR STORES CORPORATION
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a leading national specialty retailer of better quality
women's apparel, shoes and accessories sold principally under the Ann Taylor
and Ann Taylor Loft brand names. Its principal market consists of the United
States. The Company sells its products through traditional retail stores and
over the Internet, through its Online Store.
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 2000 and Fiscal 1999 amounts have been reclassified to
conform to the Fiscal 2001 presentation.
FISCAL YEAR
The Company follows the standard fiscal year of the retail industry,
which is a 52-or 53-week period ending on the Saturday closest to January 31
of the following calendar year. All fiscal years presented include 52 weeks,
except the fiscal year ended February 3, 2001, which included 53 weeks.
REVENUE RECOGNITION
The Company records revenue as merchandise is sold. The Company's
policy with respect to gift certificates is to record revenue as the
certificates are redeemed for merchandise. Prior to their redemption, the
certificates are recorded as a liability.
CASH AND CASH EQUIVALENTS
Cash and short-term highly liquid investments with original maturity
dates of three months or less are considered cash or cash equivalents.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of average cost or
market. The majority of the Company's inventory represents finished goods
available for sale. A provision for potentially slow-moving inventory is
made based upon Management's analysis of inventory levels and future sales
projections.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives of the assets (3 to 40 years) or, in the case of leasehold
improvements, over the lives of the respective leases, if shorter.
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34
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the interest method
over the term of the related debt. Accumulated amortization at February 2,
2002 and February 3, 2001 was $3,569,000 and $2,750,000, respectively.
FINANCE SERVICE CHARGE INCOME
Income from finance service charges relating to customer receivables,
which is deducted from selling, general and administrative expenses, amounted
to $9,354,000 for Fiscal 2001, $8,614,000 for Fiscal 2000 and $8,650,000 for
Fiscal 1999.
GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill relating to the 1989 acquisition of Ann Taylor by the Company
has been amortized on a straight-line basis over 40 years. Goodwill relating
to the 1996 acquisition of the operations comprising the Company's sourcing
division has been amortized on a straight-line basis over 25 years.
Accumulated amortization at February 2, 2002 and February 3, 2001 was
$132,011,000 and $120,971,000, respectively.
In July 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets". The Company will adopt SFAS No. 142
in Fiscal 2002. In connection with its annual evaluation of long-lived
assets for impairment, Management has determined that the fair value of the
Company exceeds the carrying value of its recorded net assets, including
goodwill, as of February 2, 2002. Management estimates that adoption of SFAS
No. 142 will add approximately $11,000,000 and $0.35 to Fiscal 2002 net
income and earnings per share, respectively.
ADVERTISING
Costs associated with the production of advertising, such as printing
and other costs, are expensed as incurred. Costs associated with
communicating advertising that has been produced, such as magazine ads, are
expensed when the advertising first takes place. Costs of direct mail
catalogs and postcards are expensed when the advertising arrives in
customers' homes. Advertising costs were $31,600,000, $30,900,000 and
$25,700,000 in Fiscal 2001, 2000 and 1999, respectively.
STOCK-BASED AWARDS
The Company accounts for stock-based awards using the intrinsic
value-based method of accounting, under which no compensation cost is
recognized for stock option awards granted at fair market value and
employees' purchase rights under the Associate Discount Stock Purchase Plan
(see Note 8). Restricted stock awards result in the recognition of deferred
compensation. Deferred compensation is shown as a reduction of stockholders'
equity and is amortized to operating expenses over the vesting period of the
stock award.
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35
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires an asset and liability method
of accounting for deferred income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized, and income or
expense is recorded, for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The Company and its
domestic subsidiaries file a consolidated Federal income tax return, while
the Company's foreign subsidiaries file in their respective local
jurisdictions.
SEGMENTS
The Company has one reportable segment given the economic
characteristics of the store formats, the similar nature of the products
sold, the type of customer and method of distribution.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
Management to make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of Effective Date
of FASB Statement No. 133", which establishes accounting and reporting
standards for derivatives, derivative instruments embedded in other contracts
and for hedging activities. In 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for certain derivatives,
derivative instruments embedded in other contracts and for certain hedging
activities. These statements were effective for the Company's Fiscal 2001
financial statements. The adoption of these standards had no impact on the
Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
SFAS No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001 and clarifies the criteria for recognition of intangible
assets separately from goodwill. Management has determined that the adoption
of SFAS No. 141 will have no impact on the Company's consolidated financial
statements.
As discussed above, SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and
that intangible assets, other than goodwill, which have determinable useful
lives be amortized over that period. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. Management will adopt SFAS No. 142
in Fiscal 2002, and has determined that the fair value of the Company exceeds
the carrying value of its recorded net assets, including goodwill, as of
February 2, 2002. Management further estimates that adoption of SFAS No. 142
will add approximately $11,000,000 and $0.35 to Fiscal 2002 net income and
earnings per share, respectively.
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36
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SFAS No. 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. Management does not believe that
the adoption of SFAS No. 143 will have a significant impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
accounting and reporting for the impairment or disposal of long-lived assets,
other than goodwill, including discontinued operations. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management has
determined that the adoption of SFAS No. 144 will have no impact on the
Company's consolidated financial statements.
2. LONG-TERM DEBT
The following table summarizes long-term debt outstanding at February 2,
2002 and February 3, 2001:
FEBRUARY 2, 2002 FEBRUARY 3, 2001
------------------- --------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------- ------- ------- ------
(IN THOUSANDS)
Mortgage .................. $ 1,250 $ 1,250 $ 2,650 $ 2,650
Convertible Debentures, net 118,280 115,084 114,960 97,048
------- ------- ------- ------
Total debt ......... 119,530 116,334 117,610 99,698
Less current portion ...... 1,250 1,250 1,400 1,400
------- ------- ------- ------
Total long-term debt $118,280 $115,084 $116,210 $ 98,298
======= ======= ======= ======
In accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments", the Company determined the estimated
fair value of its financial instruments using quoted market information, as
available. As judgment is involved, the estimates are not necessarily
indicative of the amounts the Company could realize in a current market
exchange.
On April 30, 2001, Ann Taylor entered into an Amended and Restated
$175,000,000 senior secured revolving Credit Facility (the "Credit Facility")
with Bank of America N.A. and a syndicate of lenders. This Credit Facility
was further amended on December 20, 2001 to adjust certain ratio provisions,
and amend certain definitions used in the calculation of ratios required in
the Credit Facility. The Credit Facility matures on April 29, 2004.
Maximum availability for loans and letters of credit under the Credit
Facility is governed by a monthly borrowing base, determined by the
application of specified advance rates against certain eligible assets.
Based on this calculation, the maximum amount available for loans and letters
of credit under the Credit Facility at February 2, 2002 was $175,000,000.
Commercial and standby letters of credit outstanding under the Credit
Facility as of February 2, 2002 were approximately $77,934,000. Loans
outstanding under the Credit Facility at any time may not exceed
$75,000,000. There were no loans outstanding at fiscal year end. In
addition, the Credit Facility requires that the outstanding loan balance be
reduced to zero for a 30-day period each calendar year. This "cleandown"
period was achieved in January 2002.
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37
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. LONG-TERM DEBT (CONTINUED)
Amounts outstanding under the Credit Facility bear interest at a rate
equal to, at Ann Taylor's option, the Bank of America Base Rate, defined as
the higher of (a) the Federal Funds Rate plus one-half of 1% and (b) the
Prime Rate for such day, or Eurodollar Rate; plus, in either case, a margin
ranging from 0.25% to 2.00%. Ann Taylor is also required to pay the lenders
a quarterly commitment fee on the unused revolving loan commitment amount at
a rate ranging from 0.30% to 0.50% per annum. Fees for outstanding
commercial and standby letters of credit range from 0.50% to 0.875% and from
1.25% to 2.00%, respectively. Premiums ranging from 0.125% to 0.50% may
apply to all interest and commitment fees, depending on the calculated
Leverage ratio.
The Credit Facility contains financial and other covenants, including
limitations on indebtedness, liens and investments, restrictions on dividends
or other distributions to stockholders and maintenance of certain financial
ratios including specified levels of tangible net worth.
The lenders have been granted a pledge of the common stock of 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 of Fiscal 1999 of
$962,000, or $0.03 per share on a diluted basis, net of income tax benefit.
Ann Taylor and its wholly owned subsidiary AnnTaylor Distribution
Services, Inc. are parties to a $7,000,000 seven-year mortgage loan maturing
in Fiscal 2002. The loan is secured by the Company's distribution center
land and building in Louisville, Kentucky. The mortgage loan bears interest
at 7.5% and is payable in monthly installments of approximately $130,000.
The mortgage loan balance at February 2, 2002 was $1,250,000.
The aggregate principal payments for the next five years of all
long-term obligations at February 2, 2002 are as follows:
Fiscal Year (in thousands)
-----------
2002..................................... $ 1,250
2003..................................... ---
2004..................................... ---
2005..................................... ---
2006..................................... ---
-------
Total.................................... $ 1,250
=======
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38
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, the Trust redeemed all of the outstanding
preferred securities. All but $100,000 of the liquidation amount of the
preferred securities was tendered for conversion into an aggregate of
5,116,717 shares of 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 February 2, 2002, February 3, 2001 and January 29, 2000 is
as follows:
FISCAL YEARS ENDED
------------------------------
FEB. 2, FEB.3, JAN. 29,
2002 2001 2000
------ ------ ------
(IN THOUSANDS)
Balance at beginning of year ............ $ 621 $ 666 $ 820
Provision for loss on accounts receivable 1,443 1,154 1,032
Accounts written off .................... (1,501) (1,199) (1,186)
------ ------ ------
Balance at end of year .................. $ 563 $ 621 $ 666
====== ====== ======
5. COMMITMENTS AND CONTINGENCIES
RENTAL COMMITMENTS
The Company occupies its retail stores and administrative facilities
under operating leases, most of which are non-cancelable. Some leases
contain renewal options for periods ranging from one to ten years under
substantially the same terms and conditions as the original leases. Most of
the store leases require payment of a specified minimum rent, plus a
contingent rent based on a percentage of the store's net sales in excess of a
specified threshold. In addition, most of the leases require payment of real
estate taxes, insurance and certain common area and maintenance costs in
addition to the future minimum lease payments shown below.
Future minimum lease payments under non-cancelable operating leases as
of February 2, 2002 are as follows:
FISCAL YEAR (IN THOUSANDS)
-----------
2002..................................$ 133,305
2003.................................. 131,232
2004.................................. 126,691
2005.................................. 117,674
2006.................................. 97,100
2007 and thereafter................... 401,470
---------
Total.................................$1,007,472
=========
-38-
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39
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for the fiscal years ended February 2, 2002, February 3,
2001 and January 29, 2000 was as follows:
FISCAL YEARS ENDED
-----------------------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Minimum rent ........ $107,858 $ 91,482 $ 73,363
Percentage rent...... 2,006 3,534 3,131
-------- -------- --------
Total .......... $109,864 $ 95,016 $ 76,494
======== ======== ========
LITIGATION
The Company has been named as a defendant in several legal actions
arising from its normal business activities. Although the amount of any
liability that could arise with respect to these actions cannot be accurately
predicted, in the opinion of the Company, any such liability will not have a
material adverse effect on the consolidated financial position, consolidated
results of operations, or liquidity of the Company.
In addition, the Company settled the purported class action lawsuit
pending in the United States District Court for the Southern District of New
York against the Company, its wholly-owned subsidiary and certain former
officers and directors. Finalization of the settlement is subject to Court
approval. The complaint alleged that the defendants made false and
misleading statements about the Company and its subsidiary from February 3,
1994 through May 4, 1995. The net cost to the Company, after application of
insurance proceeds, will be approximately $3.3 million. The decision to
settle this action was not an admission of any wrongdoing, but reflected the
significant legal fees, other expenses and management time that would have to
be devoted to continue to vigorously defend it in the courts.
6. NET INCOME PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share assumes the issuance of additional shares of
common stock, that are issuable by the Company upon the conversion of all
outstanding warrants, stock options, restricted stock and convertible
securities if the effect is dilutive. Basic and diluted earnings per share
calculations follow:
FISCAL YEARS ENDED
--------------------------------------------------------------------------------
FEBRUARY 2, 2002 FEBRUARY 3, 2001 JANUARY 29, 2000
------------------------ ------------------------ --------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC EARNINGS PER SHARE
- ------------------------
Income available
to common stockholders
before extraordinary loss $29,105 28,883 $1.01 $52,363 28,608 $1.83 $65,493 29,021 $2.25
===== ===== =====
EFFECT OF DILUTIVE
SECURITIES
- ------------
Warrants ................... -- -- -- -- -- -- 1
Stock options and
restricted stock ........ -- 224 -- 209 -- 269
Preferred securities ....... -- -- -- -- 1,123 2,083
Convertible Debentures -- -- 2,644 2,404 1,570 1,475
------- ------ ------- ------ ------- ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available
to common stockholders
before extraordinary loss $29,105 29,107 $1.00 $55,007 31,221 $1.76 $68,186 32,849 $2.08
======= ====== ===== ======= ====== ===== ======= ====== =====
-39-
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40
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. NET INCOME PER SHARE (CONTINUED)
Options to purchase 2,075,440, 960,340, and 830,500 shares of common
stock were excluded from the above computations of weighted average shares
for diluted earnings per share for Fiscal 2001, Fiscal 2000, and Fiscal 1999,
respectively. This was due to the antidilutive effect of the options'
exercise prices as compared to the average market price of the common shares
during those periods. Additionally, conversion of the Convertible Debentures
into common stock is excluded from the computation of diluted earnings per
share for Fiscal 2001, due to the antidilutive effect of the conversion for
that period.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
FISCAL YEARS ENDED
------------------
FEB. 2, FEB. 3,
2002 2001
-------- --------
(IN THOUSANDS)
Land and building ............................ $ 9,415 $ 8,774
Leasehold improvements ....................... 161,210 132,537
Furniture and fixtures ....................... 247,145 213,195
Construction in progress ..................... 20,181 25,279
-------- --------
437,951 379,785
Less accumulated depreciation and amortization 187,216 159,753
-------- --------
Net property and equipment ............... $250,735 $220,032
======== ========
8. OTHER EQUITY AND STOCK OPTION PLANS
COMMON STOCK
During Fiscal 1999, the number of authorized shares of common stock was
increased from 40,000,000 to 120,000,000.
PREFERRED STOCK
At February 2, 2002, February 3, 2001 and January 29, 2000, 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.
-40-
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41
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. 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 "Stock Purchase Plan") through which participating
eligible employees may purchase shares of the Company's common stock
semiannually, at a price equal to the lower of 85% of the closing price of
the Company's common stock on the grant date or the purchase date of each
semi-annual stock purchase period. Participating employees pay for their
stock purchases under the Stock Purchase Plan by authorizing limited payroll
deductions of up to a maximum of 15% of their compensation. During Fiscal
2001 and Fiscal 2000, 70,021 and 107,938 shares respectively were issued
pursuant to the Stock Purchase Plan, at an average price per share of $24.49
and $18.80, respectively. No shares of common stock were previously issued
pursuant to the Stock Purchase Plan. At February 2, 2002, there were 72,041
shares available for future issuance under this Stock Purchase Plan.
STOCK OPTION PLANS
In 1989 and 1992 the Company established stock option plans. In Fiscal
2000 and Fiscal 2001, the Company established stock option and restricted
award plans (the "2000 Plan" and "2002 Plan" respectively). Under the 2000
Plan, the number of shares of common stock as to which options and restricted
stock may be granted from time to time may not exceed 1,000,000, of which no
more than 250,000 may be granted as restricted stock. Under the 2002 Plan,
the number of shares of common stock as to which options and restricted stock
may be granted from time to time may not exceed 2,000,000 shares, of which no
more than 350,000 may be granted as restricted stock. Both the 2000 and 2002
Plans also include an acceleration clause by which all options not
exercisable by their terms will, upon the occurrence of certain events,
become exercisable. At February 2, 2002, there were no shares reserved for
issuance under the 1989 plan, 2,013,301 shares reserved for issuance under
the 1992 plan, 962,375 shares reserved for issuance under the 2000 Plan, and
2,000,000 shares reserved for issuance under the 2002 Plan. Under the terms
of all plans, the exercise price of any option may not be less than 100% of
the fair market value of the common stock on the date of grant.
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. In
general, stock options granted under all of the plans expire ten years from
the date of grant. At February 2, 2002, there were no shares under the 1989
or 1992 plans, 65,148 shares under the 2000 Plan, and 994,900 shares under
the 2002 Plan available for future grant.
The following table summarizes stock option transactions for the fiscal
years ended February 2, 2002, February 3, 2001 and January 29, 2000:
WEIGHTED NUMBER
OPTION PRICES AVERAGE PRICE OF SHARES
--------------- ------------- ---------
Outstanding Options January 30, 1999 $ 6.80 - $44.13 $20.67 1,391,898
Granted..................... $22.81 - $47.69 $43.56 882,500
Exercised................... $ 6.80 - $42.50 $18.65 (351,737)
Canceled.................... $11.00 - $44.25 $25.41 (123,980)
---------
Outstanding Options January 29, 2000 $11.50 - $47.69 $31.98 1,798,681
Granted..................... $16.88 - $38.63 $23.72 870,900
Exercised................... $14.19 - $36.25 $19.22 (110,059)
Canceled.................... $14.19 - $44.81 $26.11 (303,193)
---------
Outstanding Options February 3, 2001 $11.50 - $47.69 $30.21 2,256,329
Granted..................... $25.04 - $37.95 $33.65 1,884,100
Exercised................... $14.19 - $35.38 $21.13 (213,570)
Canceled.................... $15.50 - $45.00 $30.93 (268,378)
---------
Outstanding Options February 2, 2002 $11.50 - $47.69 $32.48 3,658,481
=========
-41-
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42
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. OTHER EQUITY AND STOCK OPTION PLANS
STOCK OPTION PLANS (CONTINUED)
Options for 729,985, 631,787 and 558,321 shares were exercisable as of
February 2, 2002, February 3, 2001 and January 29, 2000, respectively, and
had a weighted average exercise price of $26.96, $24.54 and $20.74 per share,
respectively.
The following table summarizes information concerning options
outstanding and exercisable at February 2, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE(YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- ----------- ----- ----------- -----
$11.50-$14.31 19,583 5.8 $14.12 15,833 $14.11
$14.32-$19.08 270,105 5.0 $16.27 230,303 $16.38
$19.09-$23.84 270,394 6.6 $21.66 137,394 $21.19
$23.85-$28.61 978,959 8.1 $25.53 101,707 $24.23
$28.62-$33.38 212,420 7.0 $31.19 33,828 $32.58
$33.39-$38.15 1,158,520 9.1 $37.76 8,003 $35.82
$38.16-$42.92 63,000 7.7 $40.57 27,750 $40.93
$42.93-$47.69 685,500 6.7 $44.31 175,167 $44.43
------------------------------------------------------
$11.50-$47.69 3,658,481 7.2 $32.48 729,985 $26.96
======================================================
The Company accounts for the stock options and the employees' purchase
rights under the Stock Purchase Plan using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, under which no
compensation costs have been recognized for stock option awards and shares
purchased under the Stock Purchase Plan. Had compensation costs of option
awards and employees' purchase rights been determined under a fair value
alternative method as stated in SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company would have been required to prepare a fair value
model for such options and employees' purchase rights, and record such amount
in the consolidated financial statements as compensation expense. Pro forma
net income before extraordinary loss and net income per share before
extraordinary loss, on a diluted basis, after taking into account such
expense, would have been as follows:
FISCAL YEARS ENDED
-------------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income:
As reported......... $29,105 $52,363 $64,531
Pro forma........... $26,831 $49,964 $63,917
Basic earnings per share:
As reported......... $ 1.01 $ 1.83 $ 2.25
Pro forma........... $ 0.93 $ 1.75 $ 2.20
Diluted earnings per share:
As reported......... $ 1.00 $ 1.76 $ 2.08
Pro forma........... $ 0.92 $ 1.69 $ 2.03
-42-
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43
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. OTHER EQUITY AND STOCK OPTION PLANS
STOCK OPTION PLANS (CONTINUED)
The fair value of each option grant is estimated at the date of the
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
FISCAL YEARS ENDED
-----------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------ ------- -------
Expected volatility.... 82.2% 69.7% 49.1%
Risk-free interest rate 5.6% 5.9% 4.9%
Expected life (years).. 4.5 4.0 4.0
Dividend yield......... --- --- ---
In 1994, the Company's 1992 stock option plan was amended and restated
to include restricted stock and unit awards. A unit represents the right to
receive the cash value of a share of common stock on the date the
restrictions on the unit lapse. The restrictions on grants generally lapse
over a four year period from the date of the grant. In the event a grantee
terminates employment with the Company, any restricted stock or restricted
units remaining subject to restrictions are forfeited. During Fiscal 1999,
2000 and 2001, 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.
STOCKHOLDER RIGHTS PLAN
On May 18, 2000, the Board of Directors of the Company adopted a
Stockholder Rights Plan, pursuant to which Rights were distributed as a
dividend at the rate of one Right for each share of common stock of the
Company held by stockholders of record as of the close of business on May 30,
2000. Each Right entitles stockholders to buy one unit of a share of a new
series of preferred stock for $125. The Rights generally will be exercisable
only if a person or group acquires beneficial ownership of 15% or more of the
Voting Power of the Company as represented by the Company's common stock or
commences a tender or exchange offer upon consummation of which such person
or group would beneficially own 15% or more of the Voting Power of the
Company, as represented by the Company's common stock. The Rights will
expire on May 18, 2010.
9. EXTRAORDINARY ITEM
On July 22, 1999, the Company applied the proceeds received from the
issuance of its Convertible Debentures to redeem the outstanding 8-3/4% Notes.
This resulted in an extraordinary charge to earnings in Fiscal 1999 of
$962,000, net of income tax benefit of $641,000.
-43-
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44
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES
The provision for income taxes for the fiscal years ended February 2,
2002, February 3, 2001, and January 29, 2000 consists of the following:
FISCAL YEARS ENDED
--------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Federal:
Current.......................$27,492 $38,082 $41,682
Deferred...................... (4,359) (3,047) (3,033)
------- ------- -------
Total federal............... 23,133 35,035 38,649
------- ------- -------
State and local:
Current....................... 2,589 6,476 11,856
Deferred...................... (756) (817) (809)
------- ------- -------
Total state and local....... 1,833 5,659 11,047
------- ------- -------
Foreign:
Current....................... 591 471 525
Deferred...................... --- (130) ---
------- ------- -------
Total foreign............... 591 341 525
------- ------- -------
Total.........................$25,557 $41,035 $50,221
======= ======= =======
The reconciliation between the provision for income taxes and the
provision for income taxes at the federal statutory rate for the fiscal years
ended February 2, 2002, February 3, 2001 and January 29, 2000 is as follows:
FISCAL YEARS ENDED
-------------------------------------
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Income before income taxes and
extraordinary loss ................... $ 54,662 $ 93,398 $ 115,714
========= ========= =========
Federal statutory rate .................. 35% 35% 35%
========= ========= =========
Provision for income taxes at
federal statutory rate................ $ 19,132 $ 32,689 $ 40,500
State and local income taxes,
net of federal income tax benefit .... 2,916 4,751 6,278
Non-deductible amortization of goodwill . 3,500 3,500 3,500
Earnings of foreign subsidiaries ........ 29 78 79
Other ................................... (20) 17 (136)
--------- --------- ---------
Provision for income taxes .............. $ 25,557 $ 41,035 $ 50,221
========= ========= =========
The tax effects of significant items comprising the Company's deferred
tax assets as of February 2, 2002 and February 3, 2001 are as follows:
FEB. 2, FEB. 3,
2002 2001
-------- --------
(IN THOUSANDS)
Current:
Inventory............................ $ 5,929 $ 4,375
Accrued expenses..................... 6,666 3,364
Real estate.......................... (2,819) (2,087)
------- -------
Total current......................... $ 9,776 $ 5,652
======= =======
Noncurrent:
Accrued expenses..................... $ --- $ 983
Depreciation and amortization........ (1,970) (2,616)
Rent expense......................... 6,057 5,510
Other................................ 765 (16)
------- -------
Total noncurrent...................... $ 4,852 $ 3,861
======= =======
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45
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES (CONTINUED)
Income taxes provided reflect the current and deferred tax consequences
of events that have been recognized in the Company's consolidated financial
statements or tax returns. U.S. federal income taxes are provided on
unremitted foreign earnings, except those that are considered permanently
reinvested, which at February 2, 2002 amounted to approximately $6,803,000.
However, if these earnings were not considered permanently reinvested, under
current law, the incremental tax on such undistributed earnings would be
approximately $2,148,000.
11.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
2001, Fiscal 2000 and Fiscal 1999 were $950,000, $792,000 and $697,000,
respectively.
PENSION PLAN. Substantially all full-time employees of Ann Taylor and
its subsidiaries are covered under a noncontributory defined benefit pension
plan. The pension plan calculates benefits based on a career average
formula. 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.
The following table provides information for the pension plan at
February 2, 2002, February 3, 2001 and January 29, 2000:
FISCAL YEARS ENDED
-----------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation, beginning of year ....... $ 6,782 $ 4,954 $ 4,642
Service cost ................................ 1,524 1,206 1,129
Interest .................................... 523 442 340
Actuarial loss .............................. 1,135 912 19
Benefits paid ............................... (941) (732) (1,176)
------- ------- -------
Benefit obligation, end of year ............. 9,023 6,782 4,954
------- ------- -------
Change in plan assets:
Fair value of plan assets, beginning of year 9,644 9,489 7,486
Actual return on plan assets ................ (1,414) 887 763
Employer contribution ....................... 1,838 -- 2,416
Benefits paid ............................... (941) (732) (1,176)
------- ------- -------
Fair value of plan assets, end of year ...... 9,127 9,644 9,489
------- ------- -------
Funded status (fair value of plan assets less
benefit obligation) ...................... 104 2,862 4,535
Unrecognized net actuarial (gain)/loss ...... 2,710 (763) (1,621)
Unrecognized prior service cost ............. 51 57 63
------- ------- -------
Prepaid benefit cost ........................ $ 2,865 $ 2,156 $ 2,977
======= ======= =======
-45-
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46
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. RETIREMENT PLANS (CONTINUED)
Net pension cost includes the following components:
FISCAL YEARS ENDED
------------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Service cost ....................... $ 1,524 $ 1,206 $ 1,129
Interest cost ...................... 523 442 340
Expected return on assets .......... (924) (831) (776)
Amortization of prior gains ........ -- (1) (22)
Amortization of prior service cost . 6 6 6
------- ------- -------
Net periodic pension cost .......... $ 1,129 $ 822 $ 677
======= ======= =======
For the fiscal years ended February 2, 2002, February 3, 2001 and January
29, 2000, the following actuarial assumptions were used:
FISCAL YEARS ENDED
------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------- ------- --------
Discount rate ......................... 7.50% 7.75% 8.25%
Long-term rate of return on assets .... 9.00% 9.00% 9.00%
Rate of increase in future compensation 4.00% 4.00% 4.00%
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
---------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 2001
Net sales ....................... $307,090 $310,292 $310,804 $371,387
Gross profit .................... 159,652 152,003 167,875 168,235
Net income (loss) ............... $ 10,944 $ 6,399 $ 12,094 $ (332)
Basic earnings (loss) per share . $ 0.38 $ 0.22 $ 0.42 $ (0.01)
Diluted earnings (loss) per share $ 0.37 $ 0.22 $ 0.40 $ (0.01)
FISCAL 2000
Net sales ....................... $277,068 $306,252 $305,876 $343,580
Gross profit .................... 148,596 143,808 170,438 147,898
Net income ...................... $ 11,282 $ 13,426 $ 23,877 $ 3,778
Basic earnings per share ........ $ 0.39 $ 0.47 $ 0.83 $ 0.13
Diluted earnings per share ...... $ 0.38 $ 0.45 $ 0.78 $ 0.13
The sum of the quarterly per share data may not equal the annual amounts
due to changes in the weighted average shares and share equivalents outstanding.
Conversion of the Convertible Debentures into common stock is not included in
the computation of diluted earnings per share for the second and fourth quarters
of Fiscal 2001 and the fourth quarter of Fiscal 2000 due to the antidilutive
effect of the conversion.
-46-
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47
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. SUBSEQUENT EVENT
On February 4, 2002, the Company sold the assets associated with its Ann
Taylor credit card accounts to World Financial Network National Bank (the
"Bank"). In connection with the sale, the Company contracted with Alliance Data
Systems Corporation ("ADS"), the Bank's affiliated servicer, to provide private
label credit card services to proprietary Ann Taylor credit card customers.
Under the terms of the transaction, ADS will manage the Ann Taylor credit card
program, and pay the Company a percentage of all collected finance charges. The
Company believes that having ADS provide these services rather than continuing
to handle this program in-house will further strengthen the Company's
relationship with its clients, and aid in the growth of the Ann Taylor credit
card.
-47-