-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NF8UWwK3b0AplaMAJZUdu2J2laoadzNdR+SqHWnUkHwDb2KNk4CRij6FWeiZCaqn QhFB0VM8W8wlrIoyVuz9iQ== 0000850090-00-000002.txt : 20000419 0000850090-00-000002.hdr.sgml : 20000419 ACCESSION NUMBER: 0000850090-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000418 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANNTAYLOR INC CENTRAL INDEX KEY: 0000850090 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 510297083 STATE OF INCORPORATION: DE FISCAL YEAR END: 0128 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11980 FILM NUMBER: 604254 BUSINESS ADDRESS: STREET 1: 142 W 57TH ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125413300 10-K 1 ANNTAYLOR, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K --------- (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 . For the fiscal year ended January 29, 2000 ------------------------------------------ OR -- |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File No. 1-11980 --------------------------- ANNTAYLOR, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 51-0297083 - ------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 142 West 57th Street, New York, NY 10019 --------------------------------------- --------- (Address of principal executive offices) (Zip Code) (212) 541-3300 --------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: ----------------------------------------------------------- None. ----- 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__. As of February 25, 2000, 1 share of Common Stock was outstanding. Documents Incorporated by Reference: ------------------------------------ None The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format. - -------------------------------------------------------------------------------- PART I ------ ITEM 1. BUSINESS GENERAL AnnTaylor, Inc. (the "Company" or "AnnTaylor") is a leading national specialty retailer of better quality women's apparel, shoes and accessories sold primarily under the Ann Taylor brand name. The Company believes that "Ann Taylor" is a highly recognized national brand that defines a distinct fashion point of view. Ann Taylor merchandise represents classic styles, updated to reflect current fashion trends. The Company's stores offer a full range of career and casual separates, dresses, tops, weekend wear, shoes and accessories, coordinated as part of a total wardrobing strategy. This total wardrobing strategy is reinforced by an emphasis on customer service. Ann Taylor sales associates are trained to assist customers in merchandise selection and wardrobe coordination, helping them achieve the "Ann Taylor look" while reflecting the customers' personal styles. As of January 29, 2000, the Company operated 405 retail stores in 42 states, the District of Columbia and Puerto Rico under the names Ann Taylor, Ann Taylor Loft and Ann Taylor Factory Store. The Company's 319 Ann Taylor stores compete in the "better"-priced market. These stores represent the Company's core merchandise line. Approximately three-quarters of these stores are located in regional malls and upscale specialty retail centers, with the balance located in downtown and village locations. The Company believes that the customer base for its Ann Taylor stores consists primarily of relatively affluent, fashion-conscious women from the ages of 25 to 55, and that the majority of its customers are working women with limited time to shop, who are attracted to Ann Taylor by its focused merchandising and total wardrobing strategies, personalized customer service, efficient store layouts and continual flow of new merchandise. As of January 29, 2000, the Company operated 75 Ann Taylor Loft stores. Ann Taylor Loft stores compete in the "upper-moderate"-priced market. Ann Taylor Loft is designed for women with a more relaxed lifestyle, who appreciate the Ann Taylor style but are more price sensitive. Merchandise is created uniquely for these stores and is sold under the Ann Taylor Loft label. The first Ann Taylor Loft stores opened by the Company were located in factory outlet centers, including some Ann Taylor Factory Stores that, in 1996, were converted to Loft stores after the introduction of the Loft concept. In 1998, the Company began opening Ann Taylor Loft stores outside the factory outlet environment, in regional malls and strip shopping centers. At January 29, 2000, over 40 Ann Taylor Loft stores were located in these venues. Management believes that Ann Taylor Loft represents a significant opportunity for the Company to compete in the upper-moderate-priced women's apparel market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Statement Regarding Forward Looking Disclosures" below. At January 29, 2000, the Company also operated 11 Ann Taylor Factory stores in factory outlet centers. These stores serve primarily as a clearance vehicle for merchandise from Ann Taylor stores. Many of these stores also offer a limited selection of original priced Ann Taylor Loft merchandise. From time to time, the Company introduces new product categories to its merchandise assortment. The Company believes that product extensions support the Company's total wardrobing strategy and provide existing and new customers with additional reasons to shop at the Company's stores. Product extensions introduced over the last several years include petite sizes in the Company's apparel offerings, and fragrance and personal care products in both Ann Taylor and Ann Taylor Loft stores. In Fall of 2000, the Company intends to test market its own line of color cosmetics in a select group of Ann Taylor stores. The Company was incorporated under the laws of the state of Delaware in 1986. All of the outstanding capital stock of the Company, consisting of one share of common stock, is owned by AnnTaylor Stores Corporation ("ATSC"). Ann Taylor was acquired by ATSC in a leveraged buyout transaction in 1989. -1- - -------------------------------------------------------------------------------- STATEMENT REGARDING FORWARD LOOKING DISCLOSURES Sections of this Annual Report on Form 10-K contain various forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve certain risks and uncertainties, and no assurance can be given that any of such matters will be realized. Actual results may differ materially from those contemplated by such forward looking statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Statement Regarding Forward Looking Disclosures". ITEM 2. PROPERTIES As of January 29, 2000, the Company operated 405 stores, all of which were leased. The store leases typically provide for initial terms of ten years, although some leases have shorter or longer initial periods, and grant the Company the right to extend the term for one or two additional five-year periods. Most of the store leases require Ann Taylor to pay a specified minimum rent, plus a contingent rent based on a percentage of the store's net sales in excess of a specified threshold. Most of the leases also require Ann Taylor to pay real estate taxes, insurance and certain common area and maintenance costs. Ann Taylor leases corporate offices at 142 West 57th Street in New York City and office space at 1372 Broadway in New York City. The Company also leases office space in New Haven, Connecticut. Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution Services, Inc., owns its 256,000 square foot distribution center located in Louisville, Kentucky. Nearly all Ann Taylor merchandise is distributed to the Company's stores through this facility. The parcel on which the Louisville distribution center is located comprises approximately 20 acres and could accommodate possible future expansion of the facility. ITEM 3. LEGAL PROCEEDINGS On April 26, 1996, certain alleged stockholders of ATSC filed a purported class action lawsuit in the United States District Court Southern District of New York, against ATSC, the Company, certain officers and directors of ATSC and the Company, Merrill Lynch & Co. ("ML&Co.") and certain affiliates of ML&Co. (Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The complaint alleged causes of action under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended, by alleging that ATSC and the other defendants engaged in a fraudulent scheme and course of business that operated a fraud or deceit on purchasers of ATSC's common stock during the period commencing February 3, 1994 through May 4, 1995, due to alleged false and misleading statements about the Company and ATSC. The complaint sought, among other things, certification as a class action on behalf of all purchasers of common stock during the period commencing February 3, 1994 through May 4, 1995, the awarding of compensatory damages to the plaintiffs and purported members of the class, the awarding of costs, including pre-judgment and post-judgment interest, reasonable attorneys' fees and expert witness fees to the plaintiffs and purported members of the class and equitable and/or injunctive relief. On November 9, 1998, the District Court issued an order granting the defendants' motion to dismiss the amended complaint with prejudice, for its failure to plead fraud with particularity. On or about December 15, 1998, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Second Circuit, seeking review of the District court's order. The Court heard oral argument on this appeal on September 15, 1999. ML&Co., its affiliates and the two directors who previously served on the Company's Board of Directors as representatives of certain affiliates of ML&Co. (the "settling defendants"), reached a settlement with the plaintiffs, which provides, among other things, for the establishment of a settlement fund in the amount of $3,000,000 plus interest. On or about -2- - -------------------------------------------------------------------------------- December 14, 1999, the District Court entered an Order and Final Judgment approving this partial settlement, dismissing the amended complaint with prejudice as to the settling defendants, and barring and enjoining any future claims by, among others, the remaining defendants against the settling defendants for contribution. The appeal as against the remaining defendants, including the Company, is pending before the Second Circuit Court of Appeals. As a result, any liability that may arise from this action cannot be predicted at this time. The Company believes that the amended complaint is without merit and intends to continue to defend the action vigorously. The Company is also a party to routine litigation incident to its business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position, results of operations or liquidity of the Company. -3- - -------------------------------------------------------------------------------- PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no public market for the common stock of the Company. All of the outstanding stock of the Company, consisting of one share of common stock is owned by ATSC. The payment of dividends by Ann Taylor to ATSC is subject to certain restrictions under the Company's Credit Facility described below under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". From time to time, the Company pays dividends to ATSC in amounts sufficient to fund ATSC's operating expenses. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES The following table sets forth certain sales and store data for the periods indicated: Fiscal Year ----------------------------------- 1999 1998 1997 ---- ---- ---- Net sales ($000)...................$1,084,519 $911,939 $ 781,028 Total net sales increase (decrease) percentage............ 18.9% 16.8% (2.1)% Comparable store sales increase (decrease) percentage............ 8.4% 7.9% (5.5)% Net sales per average square foot..$ 502 $ 474 $ 445 Total store square footage at end of period................. 2,280,000 2,038,000 1,808,000 Number of New stores....................... 47 45 27 Expanded stores.................. 8 8 9 Closed stores.................... 7 4 12 Total stores open at end of period. 405 365 324 The Company's net sales do not show significant seasonal variation, although net sales in the fourth quarter have historically been moderately higher than in the other quarters. As a result, the Company has not had significant overhead and other costs generally associated with large seasonal variations. -4- - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS The following table sets forth income statement data expressed as a percentage of net sales for the periods indicated: Fiscal Year --------------------------------- 1999 1998 1997 ---- ---- ---- Net sales............................ 100.0% 100.0% 100.0% Cost of sales........................ 49.4 50.0 52.7 ---- ---- ---- Gross profit..................... 50.6 50.0 47.3 Selling, general and administrative expenses........................... 38.1 38.4 39.5 Retirement of assets................. --- 0.4 --- Amortization of goodwill............. 1.0 1.2 1.4 ---- --- ---- Operating income................. 11.5 10.0 6.4 Interest income...................... 0.4 0.2 0.1 Interest expense..................... 1.1 2.2 2.7 Other expense, net................... 0.1 --- --- ---- --- ---- Income before income taxes and extraordinary loss................. 10.7 8.0 3.8 Income tax provision................. 4.6 3.7 2.3 ---- --- ---- Income before extraordinary loss..... 6.1 4.3 1.5 Extraordinary loss................... 0.1 --- --- ---- --- ---- Net income........................... 6.0% 4.3% 1.5% ==== ==== ==== FISCAL 1999 COMPARED TO FISCAL 1998 The Company's net sales increased to $1,084,519,000 over $911,939,000 in Fiscal 1998, an increase of $172,580,000, or 18.9%. Comparable store sales for Fiscal 1999 increased 8.4%, compared to an increase of 7.9% in Fiscal 1998. The sales increase was primarily attributable to the opening of new stores, the expansion of existing stores and the net increase in comparable store sales in 1999. Management believes that the increase in comparable store sales was the result of improved customer acceptance of the Company's product offerings and merchandise assortment. Gross profit as a percentage of net sales increased to 50.6% in 1999 from 50.0% in 1998. This increase in gross margin reflects a higher initial markup rate, reflecting on-going improvements achieved by the Company's sourcing division, offset in part by a higher markdown rate on goods that were sold below full price. Selling, general and administrative expenses were $413,058,000, or 38.1% of net sales, in 1999, compared to $349,955,000, or 38.4% of net sales, in 1998. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily attributable to increased leverage on fixed expenses resulting from increased comparable store sales and improved operating efficiencies. The benefits of this leverage were partially offset by an increase in marketing expenditures in support of the Company's strategic initiatives to enhance the Ann Taylor brand and increased investment in infrastructure, including in the Company's stores organization, to support the planned expansion of the Company's Ann Taylor Loft business. Operating income increased to $124,407,000, or 11.5% of net sales, in 1999 from $91,587,000, or 10.0% of net sales, in 1998. Amortization of goodwill was $11,040,000, or 1.0% of net sales, in 1999 compared to $11,040,000, or 1.2% of net sales, in 1998. Operating income without giving effect to such amortization was $135,447,000, or 12.5 % of net sales, in 1999 and $102,627,000, or 11.2% of net sales, in 1998. Interest income was $4,378,000 in 1999 compared to $2,241,000 in 1998. The increase was primarily attributable to interest income earned on increased cash on hand for the portion of the fiscal year prior to execution, in the second half of 1999, of ATSC's securities repurchase program described below under "Liquidity and Capital Resources". -5- - -------------------------------------------------------------------------------- Interest expense was $11,814,000 in 1999 compared to $20,358,000 in 1998. The decrease in interest expense is attributable to the forgiveness during the second quarter of 1999 of a note (the "intercompany note") payable by the Company to ATSC in August 1998 referred to below and the redemption during the second quarter of 1999 of the Company's 8 3/4% Subordinated Notes due 2000 (the "8 3/4% Notes") referred to below, offset in part by interest expense on a promissory note to ATSC (the "Note Payable to ATSC") that was issued in the second quarter of 1999. The weighted average interest rate on the Company's outstanding indebtedness at January 29, 2000 was 3.88% compared to 8.60% at January 30, 1999. The income tax provision was $50,221,000, or 43.4% of income before income taxes and extraordinary loss, in the 1999 period, compared to $33,579,000, or 46.1% of income before income taxes in 1998. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. On July 22, 1999, the Company redeemed its outstanding 8 3/4% Notes. This resulted in an extraordinary charge to earnings in Fiscal 1999 of $962,000, net of income tax benefit. As a result of the foregoing factors, the Company had net income of $64,531,000, or 6.0% of net sales, for 1999, compared to net income of $39,324,000, or 4.3% of net sales, for 1998. FISCAL 1998 COMPARED TO FISCAL 1997 The Company's net sales increased to $911,939,000 in Fiscal 1998 over $781,028,000 in Fiscal 1997, an increase of $130,911,000, or 16.8%. Comparable store sales for Fiscal 1998 increased 7.9%, compared to a decrease of 5.5% in Fiscal 1997. The sales increase was primarily attributable to the opening of new stores, the expansion of existing stores and the net increase in comparable store sales in 1998. Management believes that the net increase in comparable store sales was the result of improved customer acceptance of the Company's product offerings and merchandise assortment. Gross profit as a percentage of net sales increased to 50.0% in 1998 from 47.3% in 1997. As discussed in Note 1 to the Consolidated Financial Statements, the Company elected in Fiscal 1998 to change the method by which the Company accounts for inventory, from the retail method to the average cost method. The effect of this accounting change on Fiscal 1998 net income was an increase of $1,272,000. Under the retail method, gross margin as a percentage of net sales would have been approximately 49.8%. The increase in gross margin reflects continued merchandise margin improvements resulting from the maturation of the Company's sourcing organization, since the acquisition of the Company's sourcing joint venture in September 1996, as well as a reduction in markdowns as a percentage of sales. Selling, general and administrative expenses were $349,955,000, or 38.4% of net sales, in 1998, compared to $308,232,000, or 39.5% of net sales, in 1997. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily attributable to increased leverage on fixed expenses resulting from increased comparable store sales. The benefits of this leverage were partially offset by an increase in the provision for management performance bonus expense, and an increase in marketing expenditures in support of the Company's strategic initiatives to enhance the Ann Taylor brand. Operating income increased to $91,587,000, or 10.0% of net sales, in 1998 from $50,000,000, or 6.4% of net sales, in 1997. Operating income in 1998 was reduced by $3,633,000, or 0.4% of net sales, for the retirement of certain assets in connection with the renovation of the Company's corporate offices. Amortization of goodwill was $11,040,000, or 1.2% of net sales, in 1998 compared to $11,040,000, or 1.4% of net sales, in 1997. Operating income without giving effect to such amortization was $102,627,000, or 11.2% of net sales, in 1998 and $61,040,000, or 7.8% of net sales, in 1997. Interest income was $2,241,000 in 1998 compared to $1,157,000 in 1997. The increase was primarily attributable to interest income earned on increased cash on hand. -6- - -------------------------------------------------------------------------------- Interest expense was $20,358,000 in 1998 compared to $21,146,000 in 1997. The decrease in interest expense was primarily attributable to a decrease in the Company's outstanding long-term debt, resulting in part from the prepayment in July 1997 of a $24,500,000 term loan. The weighted average interest rate on the Company's outstanding indebtedness at January 30, 1999 was 8.60% compared to 8.59% at January 31, 1998. The income tax provision was $33,579,000, or 46.1% of income before income taxes, in the 1998 period, compared to $17,466,000, or 59.3% of income before income taxes and extraordinary loss, in 1997. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. Without giving effect to such non-deductible goodwill amortization, the Company's effective income tax rate was 40% of income before income taxes in the 1998 period, compared to 43% before income taxes and extraordinary loss in the 1997 period. The decrease in the effective income tax rate resulted primarily from the implementation of additional state tax planning and from an increase in the amount of income earned outside the United States by the Company's non-U.S. sourcing subsidiaries. As a result of the foregoing factors, the Company had net income of $39,324,000, or 4.3% of net sales, for 1998, compared to net income of $11,824,000, or 1.5% of net sales, for 1997. CHANGES IN FINANCIAL POSITION Accounts receivable decreased to $67,092,000 at the end of 1999 from $71,049,000 at the end of 1998, a decrease of $3,957,000, or 5.6%. This decrease was primarily attributable to construction allowance receivables, which decreased $4,079,000 to $8,406,000 in 1999. Merchandise inventories increased to $140,026,000 at January 29, 2000 from $136,748,000 at January 30, 1999, an increase of $3,278,000, or 2.4%. The increase in merchandise inventories is primarily due to inventory purchased for new store square footage. Merchandise inventories at January 29, 2000 and January 30, 1999 included approximately $22,959,000 and $32,329,000, respectively, of inventory associated with the Company's sourcing division, which is principally finished goods in transit from factories. Total square footage increased to approximately 2,280,000 square feet at January 29, 2000 from approximately 2,038,000 square feet at January 30, 1999. Merchandise inventory on a per square foot basis, excluding inventory associated with the Company's sourcing division, was approximately $51 at the end of 1999 as well as 1998. Inventory turned 4.8 times in 1999 compared to 5.0 times in 1998, excluding inventory associated with the Company's sourcing division. Inventory turnover is determined by dividing cost of sales by the average of the cost of inventory at the beginning and end of the period (excluding inventory associated with the sourcing division). LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of working capital are cash flow from operations. The following table sets forth material measures of the Company's liquidity: Fiscal Year ---------------------------- 1999 1998 1997 ---- ---- ---- (dollars in thousands) Cash provided by operating activities....... $ 98,299 $ 75,535 $ 71,589 Working capital............................. $151,368 $168,708 $122,181 Current ratio............................... 2.26:1 2.30:1 2.39:1 Debt to equity ratio........................ .22:1 .48:1 .28:1 Cash provided by operating activities, as presented on the consolidated statements of cash flows, increased in 1999 principally as a result of earnings, noncash charges and decreases in net long term assets and receivables partially offset by decreases in accounts payable and accrued liabilities and increases in deferred income taxes, prepaid expenses and other current assets and merchandise inventories. -7- - -------------------------------------------------------------------------------- The Company's principal credit facility is a bank credit facility that it entered into in June 1998 with a syndicate of lenders (the "Credit Facility"). The Company uses the Credit Facility for the issuance of commercial and standby letters of credit and to provide funds for other general corporate purposes. The lenders' commitment under the Credit Facility was originally $150,000,000. The Credit Facility had an original maturity date of June 30, 2000, subject to extension upon the satisfaction of certain conditions. Effective September 3, 1999, the Company elected to reduce the commitment of the lenders under the Credit Facility by $25,000,000 to $125,000,000 and extended the term of the Credit Facility to June 30, 2001. Loans outstanding under the Credit Facility at any time may not exceed $50,000,000. The Company did not make any borrowings under the loan provisions of the Credit Facility during Fiscal 1999, and there were no loans outstanding at fiscal year end. The outstanding loan balance is required to be reduced to zero for the thirty-day period commencing January 1 each year. This cleandown period was achieved for January 2000. Maximum availability for loans and letters of credit under the Credit Facility is governed by a monthly borrowing base, determined by the application of specified advance rates against certain eligible assets. Based on this calculation, the maximum amount available for loans and letters of credit under the Credit Facility at January 29, 2000 was $125,000,000. Commercial and standby letters of credit outstanding under the Credit Facility at January 29, 2000 were approximately $69,649,000. Amounts outstanding under the Credit Facility bear interest at a rate equal to, at the Company's option, the lead lender's Base Rate or Eurodollar Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%, respectively. In addition, the Company is required to pay the lenders a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%, respectively. The Credit Facility contains financial and other covenants, including limitations on indebtedness, liens and investments, restrictions on dividends or other distributions to stockholders and maintenance of certain financial ratios including a specified fixed charge ratio and specified levels of net worth. The lenders have been granted a pledge of the common stock of ATSC and certain of its subsidiaries, and a security interest in substantially all other tangible and intangible assets, including accounts receivable, trademarks, inventory, store furniture and fixtures, of the Company and its subsidiaries, as collateral for the Company's obligations under the Credit Facility. The Company had outstanding an intercompany note payable of $100,625,000 to ATSC. During the second quarter of Fiscal 1999, the Company made a prepayment on the intercompany note in the amount of $100,000, and the balance was forgiven by ATSC. This forgiveness of debt constitutes a contribution of capital by ATSC to the Company. In the second quarter of Fiscal 1999, the Company issued a promissory note, as amended, to ATSC of an aggregate of $199,072,000 principal amount at maturity. The Note Payable to ATSC was issued, as amended, by the Company during the second quarter of 1999 for value received and has interest and payment terms substantially similar to the terms of the Convertible Debentures Due 2019 ("Convertible Debentures") that were issued in 1999 by ATSC. ATSC has pledged the Note Payable to ATSC to the lenders under the Company's bank Credit Facility as collateral for ATSC's guarantee of the Company's performance of its obligations under the Credit Facility. On July 22, 1999, the Company redeemed all of the outstanding 8 3/4% Notes, at a redemption price of 101.375% of principal amount, plus accrued unpaid interest to the redemption date. The redemption of the 8 3/4% Notes resulted in an extraordinary charge to earnings in the second quarter and year to date period of $962,000, net of income tax benefit. -8- - -------------------------------------------------------------------------------- The Company and its wholly owned subsidiary, AnnTaylor Distribution Services, Inc., are parties to a $7,000,000 seven-year mortgage loan maturing in Fiscal 2002. The loan is secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $130,000. The mortgage loan balance at January 29, 2000 was $3,950,000. The Company's capital expenditures totaled $53,409,000, $45,131,000, and $22,945,000, in Fiscal 1999, 1998 and 1997, respectively. Capital expenditures were primarily attributable to the Company's store expansion, renovation and refurbishment programs, as well as the investment the Company made in certain information systems and, in Fiscal 1999 and 1998, the Company's corporate offices. The Company expects its total capital expenditure requirements in Fiscal 2000 will be approximately $78,000,000, including capital for new store construction for a planned square footage increase of approximately 460,000 square feet, or 20%, as well as capital to support continued investments in 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. On September 9, 1999, the Company announced its participation in a securities repurchase program of ATSC, authorized by its Board of Directors, pursuant to which ATSC and the Company were authorized to purchase up to $40,000,000 of ATSC's common stock and/or Convertible Debentures, through open market purchases and privately negotiated transactions. In January 2000, the Board of Directors authorized a $50,000,000 increase in the securities repurchase program, bringing the total amount of securities that may be repurchased under the program to $90,000,000. In the third and fourth quarters of 1999, ATSC 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 of ATSC and may be used for general corporate and other purposes. No Convertible Debentures were repurchased. In order to finance its operations and capital requirements, the Company expects to use internally generated funds, trade credit and funds available to it under the Credit Facility. The Company believes that cash flow from operations and funds available under the Credit Facility are sufficient to enable it to meet its on-going cash needs for its business, as presently conducted, for the foreseeable future. Effective February 1, 1998, the Company elected to change its method of inventory valuation from the retail method to the average cost method. The Company believes the average cost method, which traces each inventory unit and its cost, is a preferable method for matching the cost of merchandise with the revenues generated. The retail method does not provide for individual unit cost information. The cumulative effect of this accounting change on February 1, 1998 was not material. The effect of this accounting change on Fiscal 1998 net income was an increase of $1,272,000. It is not possible to determine the effect of the change on income in fiscal periods ending prior to February 1, 1998 as no cost information was available. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133". This statement establishes accounting and reporting standards for derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is currently evaluating the impact of this statement and believes its adoption will not affect the Company's consolidated financial position, results of operations or cash flows. -9- - -------------------------------------------------------------------------------- STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES Sections of this Annual Report on Form 10-K, including the preceding Management's Discussion and Analysis of Financial Condition and Results of Operations, contain various forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations and business of the Company. Examples of forward-looking statements are statements that use the words "expect", "anticipate", "plan", "intend", "project", "believe" and similar expressions. These forward looking statements involve certain risks and uncertainties, and no assurance can be given that any of such matters will be realized. Actual results may differ materially from those contemplated by such forward-looking statements as a result of, among other things, failure by the Company to predict accurately customer fashion preferences; a decline in the demand for merchandise offered by the Company; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of the Company's brand awareness and marketing programs; lack of sufficient customer acceptance of the Ann Taylor Loft concept in the upper-moderate-priced women's apparel market; general economic conditions that are less favorable than expected or a downturn in the retail industry; the inability of the Company to locate new store sites or negotiate favorable lease terms for additional stores or for the expansion of existing stores; lack of sufficient consumer interest in an Ann Taylor Internet Website; a significant change in the regulatory environment applicable to the Company's business; an increase in the rate of import duties or export quotas with respect to the Company's merchandise; financial or political instability in any of the countries in which the Company's goods are manufactured; or an adverse outcome of the litigation referred to in "Legal Proceedings" that materially and adversely affects the Company's financial condition. The Company assumes no obligation to update or revise any such forward looking statements, which speak only as of their date, even if experience or future events or changes make it clear that any projected financial or operating results implied by such forward-looking statements will not be realized. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company maintains the majority of its cash and cash equivalents in financial instruments with original maturities of three months or less. These financial instruments are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of these financial instruments, a change of 100 basis points in interest rates would not have a material effect on the Company's financial condition. The Company's outstanding long-term debt as of January 29, 2000 bears interest at fixed rates; therefore, the Company's results of operations would only be affected by interest rate changes to the extent that fluctuating rate loans are outstanding under the Credit Facility. As of January 29, 2000, the Company has no such amounts outstanding. Future borrowings would be affected by interest rate changes; however, the Company does not believe that a change of 100 basis points in interest rates would have a material effect on the Company's financial condition. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company for the years ended January 29, 2000, January 30, 1999 and January 31, 1998 are included as a part of this Report (See Item 14): Consolidated Statements of Income for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998. Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999. Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998. Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. -10- - -------------------------------------------------------------------------------- PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of documents filed as part of this Annual Report: The following consolidated financial statements of the Company are included on pages 17 through 34 and are filed as part of this Annual Report: Independent Auditors' Report; Consolidated Statements of Income for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998; Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999; Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998; Notes to Consolidated Financial Statements. (b) Reports on Form 8-K None (c) Exhibits The exhibits listed below are filed as a part of this Annual Report. Exhibit Number -------------- 3.1 Certificate of Incorporation of the Company, as amended. Incorporated by reference to Exhibit 3.3 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.4 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 4.1 Indenture, dated as of June 18, 1999, between the Company, ATSC and the Bank of New York, as Trustee. Incorporated by reference to Exhibit 4.01 to the Registration Statement of ATSC filed on September 13, 1999. 10.1 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.1.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.15.1 to the Annual Report on Form 10-K of the Company filed on April 30, 1993. 10.2 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th Street headquarters. Incorporated by reference to Exhibit 10.21 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.2.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.1 to the Registration Statement of ATSC filed on April 11, 1991 (Registration No. 33-39905). 10.2.2 Second Amendment to Lease, dated as of February 28, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.2 to the Annual Report on Form 10-K of ATSC filed on April 29, 1993. 10.2.3 Extension and Amendment to Lease dated as of October 1, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.11 to the Form 10-Q of the Company for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.2.4 Modification of Amendment and Extension to Lease, dated as of April 14, 1994 between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995. -11- - -------------------------------------------------------------------------------- Exhibit Number - -------------- 10.2.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.5 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995. 10.2.6 Sixth Amendment to Lease, dated as of January 5, 1996, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.6 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.2.7 Seventh Amendment to Lease, dated as of June 5, 1996, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.7 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.2.8 Eighth Amendment to Lease, undated, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.8 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.2.9 Ninth Amendment to Lease, dated as of May 13, 1997, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.9 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.2.10 Tenth Amendment to Lease, dated as of May 21, 1997, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.10 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.2.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.3.11 to the Annual Report on Form 10-K of ATSC filed on March 29, 1999. 10.2.12 Sublease Agreement, dated as of February 23, 1999, between Societe Air France (formerly known as Compagnie Nationale Air France) and the Company. Incorporated by reference to Exhibit 10.2.12 to the Annual Report on Form 10-K of ATSC filed on April 18, 2000. 10.3 Tax Sharing Agreement, dated as of July 13, 1989, between ATSC and Ann Taylor. Incorporated by reference to Exhibit 10.24 to Amendment No. 2 to the Registration Statement of ATSC and Ann Taylor filed on July 13, 1989 (Registration No. 33-28522). 10.4 Employment Agreement dated as of February 1, 1994 between ATSC and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of ATSC for the Quarter ended October 29, 1994 filed on December 9, 1994. 10.5 Employment Agreement dated February 16, 1996 between ATSC and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K of ATSC filed on April 8, 1996. 10.5.1 Amendment to the Employment Agreement, dated August 23, 1996, between ATSC and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.11.1 to the Annual Report on Form 10-K of ATSC filed on May 1, 1997. 10.5.2 Amendment #2 to the Employment Agreement, dated August 12, 1999, between ATSC and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.6.2 to the Form 10-Q of ATSC for the Quarter ended July 31, 1999 filed on September 14, 1999. Confidential treatment has been granted with respect to certain portions of this exhibit. 10.5.3 Amendment #3 to the Employment Agreement, dated March 10, 2000, between ATSC and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.5.3 to the Annual Report on Form 10-K of ATSC filed on April 18, 2000. -12- - -------------------------------------------------------------------------------- Exhibit Number - -------------- 10.6 Employment Agreement dated November 25, 1996 between ATSC and Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to Form 10-Q of ATSC for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.6.1 Amendment #1 to the Employment Agreement, dated February 16, 2000, between ATSC and Patricia DeRosa. Confidential treatment has been requested with respect to certain portions of this exhibit. Incorporated by reference to Exhibit 10.6.1 to the Annual Report on Form 10-K of ATSC filed on April 18, 2000. 10.7 Employment Agreement dated September 20, 1996 between Ann Taylor and Dwight F. Meyer. Incorporated by reference to Exhibit 10.4 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.8 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan, Amended and Restated as of February 23, 1994. Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of ATSC 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 ATSC 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 ATSC filed on March 12, 1998. 10.8.3 Amendment to the AnnTaylor Stores Corporation Amended and Restated 1992 Stock Option and Restricted Stock and Unit Award Plan dated as of May 2, 1998. Incorporated by reference to Exhibit 10.16.3 to the Form 10-Q of ATSC 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 ATSC filed on April 18, 2000. 10.9 AnnTaylor Stores Corporation Amended and Restated Management Performance Compensation Plan, as approved by stockholders on June 18, 1997. Incorporated by reference to Exhibit 10.16 to the Form 10-Q of ATSC for the Quarter Ended August 2, 1997 filed on September 12, 1997. 10.9.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated Management Performance Compensation Plan dated as of March 12, 1998. Incorporated by reference to Exhibit 10.17.1 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.9.2 Amendment to the AnnTaylor Stores Corporation Amended and Restated Management Performance Compensation Plan dated as of March 10, 2000. Incorporated by reference to Exhibit 10.9.2 to the Annual Report on Form 10-K of ATSC filed on April 18, 2000. 10.10 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Form 10-Q of ATSC for the Quarter Ended October 31, 1992 filed on December 15, 1992. 10.11 AnnTaylor Stores Corporation Deferred Compensation Plan. Incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995. -13- - -------------------------------------------------------------------------------- Exhibit Number - -------------- 10.11.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation Plan as approved by the Board of Directors on August 11, 1995. Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of ATSC for the Quarter Ended July 29, 1995 filed on September 11, 1995. 10.12 Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Financing Statement dated November 20, 1995, between AnnTaylor Distribution Services, Inc., as Mortgagor, and General Electric Capital Assurance Company, as Mortgagee. Incorporated by reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.13 Promissory Note dated November 20, 1995 from Ann Taylor and AnnTaylor Distribution Services, Inc., collectively as Borrower, to General Electric Capital Assurance Company, as Lender. Incorporated by reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.14 Commitment Letter dated as of May 7, 1998 among the Company, Bank of America National Trust and Savings Association, BancAmerica Robertson Stephens, Citicorp USA and CoreStates Bank, N.A. Incorporated by reference to Exhibit 10.27 to the Form 10-Q of ATSC for the Quarter Ended May 2, 1998 filed on June 16, 1998. 10.15 Credit Agreement, dated as of June 30, 1998 among the Company, 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 ATSC for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.15.1 Trademark Security Agreement, dated as of June 30, 1998, made by Ann Taylor in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.1 to the Form 10-Q of ATSC for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.15.2 Guaranty, dated as of June 30, 1998, made by the Company in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.2 to the Form 10-Q of ATSC for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.15.3 Security and Pledge Agreement, dated as of June 30, 1998, made by ATSC in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.3 to the Form 10-Q of ATSC for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.15.4 Security and Pledge Agreement, dated as of June 30, 1998 made by Ann Taylor in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.4 to the Form 10-Q of ATSC for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.15.5 Subsidiary Guaranty, dated as of June 30, 1998 made by AnnTaylor Distribution Services in favor of Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.28.5 to the Form 10-Q of ATSC for the Quarter Ended August 1, 1998 filed on September 14, 1998. 10.15.6 First Amendment to the Credit Agreement, dated as of September 7, 1999, among the Company, 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 10.17.6 to the Form 10-Q of ATSC for the Quarter Ended July 31, 1999 filed on September 14, 1999. -14- - -------------------------------------------------------------------------------- Exhibit Number - -------------- 10.15.7 Second Amendment to the Credit Agreement, dated December 1999, among the Company, 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 ATSC filed on April 18, 2000. 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 Inventive Compensation Plan, dated as of March 10, 2000. Incorporated by reference to Exhibit 10.16.1 to the Annual Report on Form 10-K of ATSC filed on April 18, 2000. 10.17 Separation Agreement dated March 25, 1999 between the Company and Walter Parks. Incorporated by reference to Exhibit 10.21 to the Form 10-Q of ATSC for the Quarter Ended May 1, 1999 filed on June 1, 1999. 10.18 AnnTaylor Stores Corporation Special Severance Plan, dated as of March 10, 2000. Incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K of ATSC filed on April 18, 2000. 18 Preferability letter relating to the change in accounting principle. Incorporated by reference to Exhibit 18 to the Form 10-Q of ATSC for the Quarter Ended May 2, 1998 filed on June 16, 1998. 23 Consent of Deloitte & Touche LLP 27 Financial Data Schedule. -15- - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANNTAYLOR, INC. By: /s/ J. Patrick Spainhour --------------------------- J. Patrick Spainhour Chairman and Chief Executive Officer Date: April 18, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ J. Patrick Spainhour Chairman and Chief Executive April 18, 2000 --------------------------- Officer and Director J. Patrick Spainhour /s/ Patricia DeRosa President and Chief Operating April 18, 2000 --------------------------- Officer and Director Patricia DeRosa /s/ Barry Erdos Executive Vice President - April 18, 2000 -------------------------- Chief Financial Officer Barry Erdos and Treasurer /s/ James M. Smith Vice President and Controller April 18, 2000 -------------------------- Principal Accounting Officer James M. Smith /s/ Gerald S. Armstrong Director April 18, 2000 -------------------------- Gerald S. Armstrong /s/ James J. Burke, Jr. Director April 18, 2000 -------------------------- James J. Burke, Jr. /s/ Wesley E. Cantrell Director April 18, 2000 -------------------------- Wesley E. Cantrell /s/ Robert C. Grayson Director April 18, 2000 -------------------------- Robert C. Grayson /s/ Ronald W. Hovsepian Director April 18, 2000 -------------------------- Ronald W. Hovsepian /s/ Rochelle B. Lazarus Director April 18, 2000 -------------------------- Rochelle B. Lazarus /s/ Hanne M. Merriman Director April 18, 2000 -------------------------- Hanne M. Merriman -16- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No. -------- Independent Auditors' Report...................................... 18 Consolidated Financial Statements: Consolidated Statements of Income for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998... 19 Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999.......................................... 20 Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998.......................................... 21 Notes to Consolidated Financial Statements................... 22 -17- - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT To the Stockholder of ANNTAYLOR, INC.: We have audited the accompanying consolidated financial statements of AnnTaylor, Inc. and its subsidiaries, listed in the accompanying index. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at January 29, 2000 and January 30, 1999 and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 29, 2000 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, during the fiscal year ended January 30, 1999, the Company changed its method of inventory valuation to the average cost method from the retail method. DELOITTE & TOUCHE LLP New York, New York March 6, 2000 -18- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. CONSOLIDATED STATEMENTS OF INCOME For the Fiscal Years Ended January 29, 2000, January 30, 1999 and January 31, 1998 Fiscal Years Ended ----------------------------------- January 29, January 30, January 31, 2000 1999 1998 ----------- ----------- ----------- (in thousands) Net sales.............................. $1,084,519 $ 911,939 $ 781,028 Cost of sales.......................... 536,014 455,724 411,756 -------- -------- -------- Gross profit........................... 548,505 456,215 369,272 Selling, general and administrative expenses............................. 413,058 349,955 308,232 Retirement of assets................... --- 3,633 --- Amortization of goodwill............... 11,040 11,040 11,040 -------- -------- -------- Operating income....................... 124,407 91,587 50,000 Interest income........................ 4,378 2,241 1,157 Interest expense....................... 11,814 20,358 21,146 Other expense, net..................... 1,257 567 548 -------- -------- -------- Income before income taxes and extraordinary loss.................. 115,714 72,903 29,463 Income tax provision................... 50,221 33,579 17,466 -------- -------- -------- Income before extraordinary loss....... 65,493 39,324 11,997 Extraordinary loss (net of income tax benefit of $641,000, $0 and $130,000, respectively).............. 962 --- 173 -------- -------- ------- Net income......................... $ 64,531 $ 39,324 $ 11,824 ======== ======== ======== See accompanying notes to consolidated financial statements. -19- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. CONSOLIDATED BALANCE SHEETS January 29, 2000 and January 30, 1999 January 29, January 30, 2000 1999 -------- -------- ASSETS (in thousands) Current assets Cash and cash equivalents............................... $ 35,081 $ 67,031 Accounts receivable, net ............................... 67,092 71,049 Merchandise inventories ................................ 140,026 136,748 Prepaid expenses and other current assets .............. 29,390 23,637 -------- -------- Total current assets ............................... 271,589 298,465 Property and equipment, net .............................. 173,639 151,785 Goodwill, net ............................................ 308,659 319,699 Deferred financing costs, net ............................ 5,358 2,627 Other assets ............................................. 5,872 2,841 -------- -------- Total assets........................................ $765,117 $775,417 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Accounts payable........................................ $ 56,175 $ 65,419 Accrued salaries and bonus ............................. 23,297 17,132 Accrued tenancy ........................................ 7,800 8,465 Gift certificates and merchandise credits redeemable ... 15,618 12,102 Accrued expenses ....................................... 16,031 25,433 Current portion of long-term debt ...................... 1,300 1,206 -------- -------- Total current liabilities .......................... 120,221 129,757 Long-term debt, net ...................................... 114,485 204,576 Deferred lease costs and other liabilities ............... 14,789 12,386 Commitments and contingencies Stockholder's equity Common stock, $1.00 par value; 1,000 shares authorized; 1 share issued and outstanding ........................ 1 1 Additional paid-in capital ............................. 377,155 354,762 Retained earnings ...................................... 138,466 73,935 -------- -------- Total stockholder's equity ......................... 515,622 428,698 -------- -------- Total liabilities and stockholder's equity.......... $765,117 $775,417 ======== ======== See accompanying notes to consolidated financial statements. -20- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended January 29, 2000, January 30, 1999 and January 31, 1998
Fiscal Years Ended ------------------------------------------- January 29, January 30, January 31, 2000 1999 1998 --------- --------- --------- (in thousands) Operating activities: Net income ..................................................... $ 64,531 $ 39,324 $ 11,824 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss ........................................ 1,603 -- 303 Provision for loss on accounts receivable ................. 1,032 1,476 1,795 Depreciation and amortization ............................. 30,347 28,783 27,803 Amortization of goodwill .................................. 11,040 11,040 11,040 Amortization of deferred compensation ..................... 1,877 465 1,065 Non-cash interest ......................................... 3,026 1,290 1,419 Deferred income taxes ..................................... (3,843) 3,966 (2,687) Loss on disposal of property and equipment ................ 1,219 4,175 248 Changes in assets and liabilities: Decrease (increase) in receivables .................. 2,925 (12,314) 1,599 Decrease (increase) in merchandise inventories ...... (3,278) (39,514) 3,003 Decrease (increase) in prepaid expenses and other current assets ............................ (5,680) (5,581) 1,894 Decrease in other non-current assets and liabilities, net ............................................. 3,131 679 2,861 Increase (decrease) in accounts payable and and accrued liabilities .............................. (9,631) 41,746 9,422 --------- --------- --------- Net cash provided by operating activities ...................... 98,299 75,535 71,589 --------- --------- --------- Investing activities: Purchases of property and equipment ............................ (53,409) (45,131) (22,945) --------- --------- --------- Net cash used by investing activities .......................... (53,409) (45,131) (22,945) --------- --------- --------- Financing activities: Parent company activity ........................................ 29,891 9,036 869 Repayment of term loan ......................................... -- -- (24,500) Term loan prepayment penalty ................................... -- -- (184) Payments of mortgage ........................................... (1,206) (1,119) (416) Redemption of 8 3/4% Notes ..................................... (101,375) -- -- Payment of deferred financing costs ............................ (4,150) (2,659) (69) --------- --------- --------- Net cash provided (used by) financing activities ............... (76,840) 5,258 (24,300) --------- --------- --------- Net increase (decrease) in cash ................................... (31,950) 35,662 24,344 Cash, beginning of year ........................................... 67,031 31,369 7,025 --------- --------- --------- Cash, end of year ................................................. $ 35,081 $ 67,031 $ 31,369 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for interest ......................... $ 9,405 $ 18,582 $ 19,251 ========= ========= ========= Cash paid during the year for income taxes ..................... $ 51,222 $ 33,934 $ 17,220 ========= ========= =========
See accompanying notes to consolidated financial statements. -21- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading national specialty retailer of better quality women's apparel, shoes and accessories sold principally under the Ann Taylor brand name. All of the outstanding capital stock of the Company, consisting of one share of common stock, is owned by AnnTaylor Stores Corporation ("ATSC"). BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts have been eliminated in consolidation. Certain Fiscal 1998 and 1997 amounts have been reclassified to conform to the Fiscal 1999 presentation. FISCAL YEAR The Company follows the standard fiscal year of the retail industry, which is a 52 or 53 week period ending on the Saturday closest to January 31 of the following calendar year. All fiscal years presented include 52 weeks. REVENUE RECOGNITION The Company records revenue as merchandise is sold. The Company's policy with respect to gift certificates is to record revenue as the certificates are redeemed for merchandise. Prior to their redemption, the certificates are recorded as a liability. CASH EQUIVALENTS Cash and short-term highly liquid investments with original maturities of three months or less are considered cash or cash equivalents. MERCHANDISE INVENTORIES Merchandise inventories are stated at the lower of average cost or market. Effective February 1, 1998, the Company elected to change its method of inventory valuation from the retail method to the average cost method. The Company believes the average cost method is a preferable method for matching the cost of merchandise with the revenues generated. This is principally because the average cost method traces each individual unit sold during a period and its individual cost, while the retail method estimates the cost value of the inventory sold, instead of using the actual cost of each individual unit. The cumulative effect of this accounting change on February 1, 1998 was not material. The effect of this accounting change on Fiscal 1998 net income was an increase of $1,272,000. It is not possible to determine the effect of the change on income in any previously reported fiscal years as no cost information was available. The majority of the Company's inventory represents finished goods available for sale. -22- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets (3 to 40 years) or, in the case of leasehold improvements, over the lives of the respective leases, if shorter. DEFERRED FINANCING COSTS Deferred financing costs are being amortized using the interest method over the term of the related debt. Accumulated amortization at January 29, 2000 and January 30, 1999 was $1,628,000 and $3,119,000, respectively. FINANCE SERVICE CHARGE INCOME Income from finance service charges relating to customer receivables, which is deducted from selling, general and administrative expenses, amounted to $8,650,000 for Fiscal 1999, $8,422,000 for Fiscal 1998 and $8,568,000 for Fiscal 1997. GOODWILL AND OTHER LONG-LIVED ASSETS Goodwill relating to the 1989 acquisition of Ann Taylor by ATSC is being amortized on a straight-line basis over 40 years. Goodwill relating to the acquisition, in 1996, of the operations comprising the Company's sourcing division, is being amortized on a straight-line basis over 25 years. Accumulated amortization at January 29, 2000 and January 30, 1999 was $109,931,000 and $98,891,000, respectively. The Company evaluates its long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company compares the carrying value of its long-lived assets to an estimate of their expected future cash flows (undiscounted and without interest charges) to evaluate the reasonableness of the carrying value and remaining depreciation or amortization period. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. ADVERTISING Costs associated with the production of advertising, such as printing and other costs, are expensed as incurred. Costs associated with communicating advertising that has been produced, such as magazine ads, are expensed when the advertising first takes place. Costs of direct mail catalogs and postcards are expensed when the advertising arrives in customers' homes. Advertising costs were $25,700,000, $17,800,000 and $10,500,000 in Fiscal 1999, 1998 and 1997, respectively. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires an asset and liability method of accounting for deferred income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized, and income or expense is recorded, for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. -23- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES (CONTINUED) Pursuant to a Tax Sharing Agreement, ATSC and the Company have agreed to elect to file consolidated income tax returns for federal income tax purposes and may elect to file such returns in states and other relevant jurisdictions that permit such an election, for income tax purposes. With respect to such consolidated income tax returns, the Tax Sharing Agreement generally requires the Company to pay to ATSC the entire tax shown to be due on such consolidated returns, provided that the amount paid by the Company shall not exceed the amount of taxes that would have been owed by the Company on a stand-alone basis. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133". This statement establishes accounting and reporting standards for derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is currently evaluating the impact of this statement and believes its adoption will not affect the Company's consolidated financial position, results of operations or cash flows. 2. LONG-TERM DEBT The following table summarizes long-term debt outstanding at January 29, 2000 and January 30, 1999:
January 29, 2000 January 30, 1999 -------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- -------- -------- -------- (in thousands) Mortgage........................................... $ 3,950 $ 3,950 $ 5,157 $ 5,157 8 3/4% Notes ...................................... -- -- 100,000 101,875 Intercompany note ................................. -- -- 100,625 100,625 Note payable to ATSC, net ......................... 111,835 111,835 -- -- -------- -------- -------- -------- Total debt ................................. 115,785 115,785 205,782 207,657 Less current portion .............................. 1,300 1,300 1,206 1,206 -------- -------- -------- -------- Total long-term debt........................ $114,485 $114,485 $204,576 $206,451 ======== ======== ======== ========
-24- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. LONG-TERM DEBT (CONTINUED) In accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the Company determined the estimated fair value of its financial instruments using quoted market information, as available. As judgement is involved, the estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. The Company's principal credit facility is a bank credit facility that it entered into in June 1998 with a syndicate of lenders (the "Credit Facility"). The Company uses the Credit Facility for the issuance of commercial and standby letters of credit and to provide funds for other general corporate purposes. The lenders' commitment under the Credit Facility was originally $150,000,000. The Credit Facility had an original maturity date of June 30, 2000, subject to extension upon the satisfaction of certain conditions. Effective September 3, 1999, the Company elected to reduce the commitment of the lenders under the Credit Facility by $25,000,000 to $125,000,000 and extended the term of the Credit Facility to June 30, 2001. Loans outstanding under the Credit Facility at any time may not exceed $50,000,000. The Company did not make any borrowings under the loan provisions of the Credit Facility during Fiscal 1999, and there were no loans outstanding at fiscal year end. The outstanding loan balance is required to be reduced to zero for the thirty-day period commencing January 1 each year. This cleandown period was achieved for January 2000. Maximum availability for loans and letters of credit under the Credit Facility is governed by a monthly borrowing base, determined by the application of specified advance rates against certain eligible assets. Based on this calculation, the maximum amount available for loans and letters of credit under the Credit Facility at January 29, 2000 was $125,000,000. Commercial and standby letters of credit outstanding under the Credit Facility at January 29, 2000 were approximately $69,649,000. Amounts outstanding under the Credit Facility bear interest at a rate equal to, at the Company's option, the lead lender's Base Rate or Eurodollar Rate, plus a margin ranging from 0.25% to 1.00% and from 1.25% to 2.00%, respectively. In addition, the Company is required to pay the lenders a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.375% to 0.5% per annum. Fees for outstanding commercial and standby letters of credit range from 0.625% to 1.0% and from 1.25% to 2.0%, respectively. The Credit Facility contains financial and other covenants, including limitations on indebtedness, liens and investments, restrictions on dividends or other distributions to stockholders and maintenance of certain financial ratios including a specified fixed charge coverage ratio and specified levels of net worth. The lenders have been granted a pledge of the common stock of ATSC and certain of its subsidiaries, and a security interest in substantially all other tangible and intangible assets, including accounts receivable, trademarks, inventory, store furniture and fixtures, of the Company and its subsidiaries, as collateral for the Company's obligations under the Credit Facility. -25- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. LONG-TERM DEBT (CONTINUED) In the second quarter of Fiscal 1999, the Company issued a promissory note, as amended, to ATSC of an aggregate of $199,072,000 principal amount at maturity (the "Note Payable to ATSC"). The Note Payable to ATSC was issued, as amended, by the Company during the second quarter of 1999 for value received and has interest and payment terms substantially similar to the terms of the Convertible Debentures Due 2019 ("Convertible Debentures") that were issued in 1999 by ATSC. ATSC has pledged the Note Payable to ATSC to the lenders under the Company's bank Credit Facility as collateral for ATSC's guarantee of the Company's performance of its obligations under the Credit Facility. On July 22, 1999, the Company redeemed all of its outstanding 8 3/4% Subordinated Notes due 2000 (the "8 3/4% Notes"), at a redemption price of 101.375% of principal amount, plus accrued unpaid interest to the redemption date. The redemption of the 8 3/4% Notes resulted in an extraordinary charge to earnings in the second quarter and year to date period of $962,000, net of income tax benefit. The Company had outstanding a note (the "intercompany note") payable of $100,625,000 to ATSC. The intercompany note was issued by the Company on August 28, 1998 and had interest and payment terms substantially similar to the terms of the 8 1/2% Convertible Subordinated Debentures Due 2016 that were issued in 1996 by ATSC to AnnTaylor Finance Trust. ATSC had pledged the intercompany note to the lenders as collateral for ATSC's guarantee of the Company's performance of its obligations under the Credit Facility. During the second quarter of Fiscal 1999, the Company made a prepayment on the intercompany note in the amount of $100,000 and the balance was forgiven by ATSC. The forgiveness of debt constituted a contribution of capital by ATSC to the Company. The Company and its wholly owned subsidiary AnnTaylor Distribution Services, Inc. are parties to a $7,000,000 seven-year mortgage loan maturing in Fiscal 2002. The loan is secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $130,000. The mortgage loan balance at January 29, 2000 was $3,950,000. The aggregate principal payments for the next five years of all long-term obligations at January 29, 2000 are as follows : Fiscal Year (in thousands) ----------- 2000............................................$ 1,300 2001............................................ 1,400 2002............................................ 1,250 2003............................................ --- 2004............................................ --- ------ Total...........................................$ 3,950 ====== 3. PREFERRED SECURITIES In April and May of Fiscal 1996, ATSC completed the sale of an aggregate of $100,625,000 of 8 1/2% Company-Obligated Mandatorily Redeemable Convertible Preferred Securities (the "preferred securities") issued by its financing vehicle, AnnTaylor Finance Trust, a Delaware business trust (the "Trust"). On June 29, 1999, AnnTaylor Finance Trust redeemed all of the outstanding preferred -26- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. PREFERRED SECURITIES (CONTINUED) securities. All but $100,000 of the liquidation amount of the preferred securities were tendered for conversion into an aggregate of 5,116,717 shares of ATSC common stock prior to the redemption date, at a conversion price of $19.65 per share of ATSC common stock, or 2.545 shares of ATSC common stock per $50 liquidation amount of the security. Holders of preferred securities that were not tendered for conversion received 105.95% of the liquidation amount of the preferred securities redeemed, plus accrued distributions. 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS A summary of activity in the allowance for doubtful accounts for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998 is as follows: Fiscal Years Ended --------------------------------- January 29, January 30, January 31, 2000 1999 1998 ------- ------- ------- (in thousands) Balance at beginning of year ............ $ 820 $ 812 $ 811 Provision for loss on accounts receivable 1,032 1,476 1,795 Accounts written off .................... (1,186) (1,468) (1,794) ------- ------- ------- Balance at end of year .................. $ 666 $ 820 $ 812 ======= ======= ======= 5. COMMITMENTS AND CONTINGENCIES RENTAL COMMITMENTS The Company occupies its retail stores and administrative facilities under operating leases, most of which are non-cancelable. Some leases contain renewal options for periods ranging from one to ten years under substantially the same terms and conditions as the original leases. Most of the store leases require payment of a specified minimum rent, plus a contingent rent based on a percentage of the store's net sales in excess of a specified threshold. In addition, most of the leases require payment of real estate taxes, insurance and certain common area and maintenance costs in addition to the future minimum lease payments shown below. Future minimum lease payments under non-cancelable operating leases at January 29, 2000 are as follows: Fiscal Year (in thousands) ----------- 2000.........................................$ 95,655 2001......................................... 94,422 2002......................................... 91,391 2003......................................... 85,413 2004......................................... 81,065 2005 and thereafter.......................... 288,433 ------- Total........................................$ 736,379 ======= -27- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) Rent expense for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998 was as follows: Fiscal Years Ended ---------------------------------------- January 29, January 30, January 31, 2000 1999 1998 ---- ---- ---- (in thousands) Minimum rent..................... $72,763 $66,358 $59,495 Percentage rent.................. 3,131 2,414 1,671 ----- ----- ----- Total....................... $75,894 $68,772 $61,166 ====== ====== ====== LITIGATION The Company has been named as a defendant in several legal actions arising from its normal business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position, results of operations or liquidity of the Company. In addition, ATSC, Ann Taylor, certain directors and former officers and directors of ATSC and Ann Taylor, Merrill Lynch & Co. ("ML&Co.") and certain affiliates of ML&Co. have been named as defendants in a purported class action lawsuit filed in April 1996 by certain alleged stockholders, alleging that ATSC and the other defendants engaged in a fraudulent scheme and course of business that operated a fraud or deceit on purchasers of ATSC's common stock during the period from February 3, 1994 through May 4, 1995. On November 9, 1998, the District Court issued an order granting the defendants' motion to dismiss the amended complaint with prejudice for its failure to plead fraud with particularity. On or about December 15, 1998, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Second Circuit, seeking review of the District court's order. The Court heard oral argument on this appeal on September 15, 1999. ML&Co., its affiliates and the two directors who previously served on the Company's Board of Directors as representatives of certain affiliates of ML&Co. (the "settling defendants") reached a settlement with the plaintiffs, which provides, among other things, for the establishment of a settlement fund in the amount of $3,000,000 plus interest. On or about December 14, 1999, the District Court entered an Order and Final Judgment approving this partial settlement, dismissing the amended complaint with prejudice as to the settling defendants, and barring and enjoining any future claims by, among others, the remaining defendants against the settling defendants for contribution. The appeal as against the remaining defendants, including the Company, is pending before the Second Circuit Court of Appeals. As a result, any liability that may arise from this action cannot be predicted at this time. The Company believes that the amended complaint is without merit and intends to continue to defend the action vigorously. 6. ENTERPRISE-WIDE OPERATING INFORMATION In Fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information", which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, major customers and the material countries in which the entity holds assets and reports revenues. -28- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. ENTERPRISE-WIDE OPERATING INFORMATION (CONTINUED) The Company is a specialty retailer of women's apparel, shoes and accessories. Given the economic characteristics of the store formats, the similar nature of the products sold, the type of customer and method of distribution, the operations of the Company are aggregated into one reportable segment. The Company believes that the customer base for its stores consists primarily of relatively affluent, fashion-conscious women from the ages of 25 to 55, and that the majority of its customers are working women with limited time to shop. 7. PROPERTY AND EQUIPMENT Property and equipment consists of the following: Fiscal Years Ended ------------------------- January 29, January 30, 2000 1999 ---- ---- (in thousands) Land and building..........................$ 8,774 $ 8,683 Leasehold improvements..................... 110,573 93,168 Furniture and fixtures..................... 169,521 153,395 Construction in progress................... 23,518 11,059 ------- ------- 312,386 266,305 Less accumulated depreciation and amortization......................... 138,747 114,520 ------- ------- Net property and equipment............$173,639 $151,785 ======= ======= 8. OTHER EQUITY AND STOCK OPTION PLANS REPURCHASE PROGRAM During the third quarter of Fiscal 1999, the Company's Board of Directors authorized the Company's participation in a program under which ATSC and the Company were authorized to purchase up to $40,000,000 of ATSC'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, ATSC had repurchased 3,012,500 shares of its common stock for an aggregate purchase price of $89,900,000 (exclusive of brokerage commissions), completing the securities repurchase program. All of the repurchased shares of ATSC became treasury shares and may be used for general corporate or other purposes. No Convertible Debentures were purchased. ASSOCIATE DISCOUNT STOCK PURCHASE PLAN In Fiscal 1999, ATSC established an Associate Discount Stock Purchase Plan (the "Plan") through which participating eligible employees may purchase shares of ATSC's common stock semiannually, at a price equal to the lower of 85% of the closing price of ATSC's common stock on the grant date or the purchase date of each semiannual stock purchase period. Participating employees pay for their stock purchases under the Plan by authorizing limited payroll deductions of up to a maximum of 15% of their compensation. No shares of ATSC's common stock will be issued pursuant to the Plan until Fiscal 2000. At January 29, 2000, there were 250,000 shares of ATSC common stock available for future issuance under this Plan. -29- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. OTHER EQUITY AND STOCK OPTION PLANS (CONTINUED) STOCK OPTION PLANS ATSC accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, under which no compensation costs have been recognized for stock option awards. Had compensation costs of option awards been determined under a fair value alternative method as stated in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ATSC would have been required to prepare a fair value model for such options and record such amount in the financial statements as compensation expense. Pro forma net income before extraordinary loss, after taking into account such expense would have been $63.9 million, $38.4 million and $11.0 million for Fiscal 1999, 1998 and 1997, respectively. For purposes of this calculation, ATSC arrived at the fair value of each stock grant at the date of grant by using the Black Scholes option pricing model with the following weighted average assumptions used for grants for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998: risk-free interest rate of 4.9%, 5.4% and 6.2%, respectively; expected life of 4.0 years, 4.0 years and 5.0 years, respectively; and expected volatility of 49.1%, 59.4% and 67.9%, respectively. 9. EXTRAORDINARY ITEMS On July 22, 1999, the Company applied the proceeds received from the issuance of its Notes Payable to ATSC to redeem the outstanding 8 3/4% Notes. This resulted in an extraordinary charge to earnings in Fiscal 1999 of $962,000, net of income tax benefit of $641,000. On July 2, 1997, the Company used available cash to prepay $24,500,000, the outstanding balance of its term loan due September 1998, which resulted in an extraordinary charge to earnings in Fiscal 1997 of $173,000, net of income tax benefit of $130,000. 10. NONRECURRING CHARGES RETIREMENT OF ASSETS In the fourth quarter of Fiscal 1998, the Company recorded a $3,633,000 non-cash pre-tax charge for the retirement of certain assets. This charge related to the write-off of the net book value of assets relinquished during the renovation of the Company's corporate offices. -30- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. INCOME TAXES The provision for income taxes for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998 consists of the following: Fiscal Years Ended ---------------------------------- January 29,January 30, January 31, 2000 1999 1998 ---- ---- ---- (in thousands) Federal: Current...........................$ 41,682 $21,589 $14,427 Deferred.......................... (3,033) 2,748 (1,917) ------- ------ ------- Total federal................... 38,649 24,337 12,510 ------ ------ ------ State and local: Current........................... 11,856 7,869 5,538 Deferred.......................... (809) 1,217 (769) ------- ------ ------- Total state and local........... 11,047 9,086 4,769 ------ ------ ------ Foreign: Current........................... 525 156 187 Deferred.......................... --- --- --- ------ ------ ------ Total foreign................... 525 156 187 ------ ------ ------ Total.............................$ 50,221 $33,579 $17,466 ====== ====== ====== The reconciliation between the provision for income taxes and the provision for income taxes at the federal statutory rate for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998 is as follows: Fiscal Years Ended ---------------------------------- January 29,January 30, January 31, 2000 1999 1998 ---- ---- ---- (in thousands) Income before income taxes and exraordinary loss....................$ 115,714 $ 72,903 $ 29,463 ======= ======= ======= Federal statutory rate.................. 35% 35% 35% ====== ======= ======= Provision for income taxes at federal statutory rate...............$ 40,500 $ 25,516 $ 10,312 State and local income taxes, net of federal income tax benefit.......................... 6,278 4,660 3,800 Non-deductible amortization of goodwill. 3,500 3,500 3,500 Earnings of foreign subsidiaries........ 79 (188) (314) Other................................... (136) 91 168 ------- ------- ------- Provision for income taxes..............$ 50,221 $ 33,579 $ 17,466 ====== ======= ======= -31- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. INCOME TAXES (CONTINUED) The tax effects of significant items comprising the Company's deferred tax assets (liabilities) as of January 29, 2000 and January 30, 1999 are as follows: January 29, January 30, 2000 1999 ---- ---- (in thousands) Current: Inventory.................................. $ 2,071 $ 128 Accrued expenses........................... 2,306 3,812 Real estate................................ (2,050) (1,686) Other...................................... --- --- ------- ------- Total current............................... $ 2,327 $ 2,254 ======= ======= Noncurrent: Accrued expenses........................... $ 763 $ --- Depreciation and amortization.............. (2,936) (5,510) Rent expense............................... 5,168 4,786 Other...................................... 327 276 ------- ------- Total noncurrent............................ $ 3,322 $ (448) ======= ======== Income taxes provided reflect the current and deferred tax consequences of events that have been recognized in the Company's financial statements or tax returns. U.S. federal income taxes are provided on unremitted foreign earnings except those that are considered permanently reinvested, which at January 29, 2000 amounted to approximately $6,852,000. However, if these earnings were not considered permanently reinvested, under current law, the incremental tax on such undistributed earnings would be approximately $2,137,000. 12. RETIREMENT PLANS SAVINGS PLAN. The Company maintains a defined contribution 401(k) savings plan for substantially all full-time employees of the Company and its subsidiaries. Participants may contribute to the plan an aggregate of up to 10% of their annual earnings. The Company makes a matching contribution of 50% with respect to the first 3% of each participant's annual earnings contributed to the plan. The Company's contributions to the plan for Fiscal 1999, Fiscal 1998 and Fiscal 1997 were $697,000, $592,000 and $519,000, respectively. PENSION PLAN. Substantially all full-time employees of the Company and its subsidiaries are covered under a noncontributory defined benefit pension plan. Through December 31, 1997, the pension plan was a "cash balance pension plan", under which each participant accrued a benefit based on compensation and years of service with the Company. As of January 1, 1998, the plan was amended and the formula to calculate benefits was changed to a career average formula. The new career average formula was used to determine the funding status of the plan beginning in Fiscal 1997. The Company's funding policy for the plan is to contribute annually the amount necessary to provide for benefits based on accrued service and projected pay increases. Plan assets consist primarily of cash, equity and fixed income securities. In Fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which standardizes the disclosure requirements for pension and other postretirement benefits, eliminates certain disclosures, and requires additional information on the changes in the benefit obligations and fair value of plan assets. -32- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. RETIREMENT PLANS (CONTINUED) The following table provides information for the Pension Plan at January 29, 2000, January 30, 1999 and January 31, 1998: Fiscal Years Ended ------------------------------------ January 29, January 30, January 31, 2000 1999 1998 ---- ---- ---- (in thousands) Change in benefit obligation: Benefit obligation, beginning of year ...... $ 4,642 $ 3,820 $ 3,413 Service cost ............................... 1,129 669 571 Interest ................................... 340 292 250 Plan amendments ............................ -- -- 81 Actuarial loss (gain) ...................... 19 348 (103) Benefits paid .............................. (1,176) (487) (392) ------- ------- ------- Benefit obligation, end of year ............ 4,954 4,642 3,820 ------- ------- ------- Change in plan assets: Fair value of plan assets, beginning of year ........................ 7,486 5,128 4,745 Actual return on plan assets ............... 763 1,205 907 Employer contribution (refund) ............. 2,416 1,640 (132) Benefits paid .............................. (1,176) (487) (392) ------- ------- ------- Fair value of plan assets, end of year ..... 9,489 7,486 5,128 ------- ------- ------- Funded status (fair value of plan assets less benefit obligation) ......... 4,535 2,844 1,308 Unrecognized net actuarial gain ............ (1,621) (1,675) (1,361) Unrecognized prior service cost ............ 63 69 75 ------- ------- ------- Prepaid benefit cost........................ $ 2,977 $ 1,238 $ 22 ======= ======= ======= Net pension cost includes the following components: Fiscal Years Ended ------------------------------------- January 29, January 30, January 31, 2000 1999 1998 ---- ---- ---- (in thousands) Service cost..............................$ 1,129 $ 669 $ 571 Interest cost............................. 340 292 250 Expected return on assets................. (776) (481) (409) Amortization of prior gains............... (22) (61) (42) Amortization of prior service cost........ 6 6 6 ------- ------- -------- Net periodic pension cost.................$ 677 $ 425 $ 376 ======= ======= ======== For the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998, the following actuarial assumptions were used: Fiscal Years Ended ------------------------------------- January 29, January 30, January 31, 2000 1999 1998 ---- ---- ---- Discount rate............................. 8.25% 6.75% 7.50% Long-term rate of return on assets........ 9.00% 9.00% 9.00% Rate of increase in future compensation... 4.00% 4.00% 4.00% -33- - -------------------------------------------------------------------------------- ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. STOCKHOLDER'S EQUITY The following summarizes the changes in stockholder's equity during Fiscal 1999, Fiscal 1998 and Fiscal 1997: Total Additional Stock- Common Paid-in Retained holder's Stock Capital Earnings Equity ------ ---------- -------- -------- (in thousands) Balance at February 1, 1997............$ 1 $443,952 $ 22,787 $466,740 Net income.......................... --- --- 11,824 11,824 Parent company contributions........ --- 1,934 --- 1,934 --- ------ ----- ------- Balance at January 31, 1998............ 1 445,886 34,611 480,498 Net income.......................... --- --- 39,324 39,324 Parent company contributions........ --- 9,501 --- 9,501 Intercompany note................... --- (100,625) --- (100,625) --- -------- ----- ------- Balance at January 30, 1999............ 1 354,762 73,935 428,698 Net income.......................... --- --- 64,531 64,531 Parent company contributions........ --- 31,768 --- 31,768 Forgiveness of intercompany note.... --- 100,625 --- 100,625 Note payable to ATSC................ --- (110,000) --- (110,000) --- -------- ------- ------- Balance at January 29, 2000............$ 1 $377,155 $138,466 $515,622 === ======= ======= ======= -34- EX-23 2 INDEPENDENT AUDITORS CONSENT Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in AnnTaylor, Inc. Registration No. 333-86955 on Form S-3 of our report dated March 6, 2000 (which expresses an unqualified opinion and includes an explanatory paragraph concerning the change in method of inventory valuation) appearing in the Annual Report on Form 10-K of AnnTaylor, Inc. for the year ended January 29, 2000. NEW YORK, NEW YORK April 18, 2000 EX-27 3 FDS --
5 THIS SUMMARY CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000850090 ANNTAYLOR, INC. 1,000 12-MOS JAN-29-2000 JAN-29-2000 35,081 0 67,758 666 140,026 271,589 312,386 138,747 765,117 120,221 111,835 0 0 1 515,621 765,117 1,084,519 1,084,519 536,014 536,014 425,355 0 7,436 115,714 50,221 65,493 0 962 0 64,531 0 0
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