10-Q 1 atinc01q3.txt ANNTAYLOR, INC. FORM 10-Q ------------------------------------------------------------------- ------------------------------------------------------------------- UNITED STATES ------------- SECURITIES AND EXCHANGE COMMISSION ---------------------------------- WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q --------- (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- ------------------------------------------------------- SECURITIES EXCHANGE ACT OF 1934 ------------------------------- FOR THE QUARTERLY PERIOD ENDED NOVEMBER 3, 2001 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- ---------- ------ -------- -- ------- ------------------ SECURITIES EXCHANGE ACT OF 1934 ------------------------------- Commission file number 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) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No [ ]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding as of Class November 30, 2001 ----- ----------------- COMMON STOCK, $1.00 PAR VALUE 1 The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. --------------------------------------------------------------------- --------------------------------------------------------------------- ================================================================================ INDEX TO FORM 10-Q PAGE NO. -------- PART I. FINANCIAL INFORMATION ----------------------------- Item 1.Financial Statements Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended November 3, 2001 and October 28, 2000.................. 3 Condensed Consolidated Balance Sheets at November 3, 2001 and February 3, 2001.................. 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 3, 2001 and October 28, 2000....................................... 5 Notes to Condensed Consolidated Financial Statements..... 6 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 8 PART II.OTHER INFORMATION ------------------------- Item 6.Exhibits and Reports on Form 8-K.........................10 ================================================================================ 3 PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS ANNTAYLOR, INC. --------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- FOR THE QUARTERS AND NINE MONTHS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000 (unaudited) QUARTERS ENDED NINE MONTHS ENDED ------------------- ------------------- NOV. 3, OCT. 28, NOV. 3, OCT. 28, 2001 2000 2001 2000 ------- ------- ------- ------- (in thousands) Net sales ........................ $310,804 $305,876 $928,187 $889,196 Cost of sales .................... 142,929 135,438 448,657 426,354 ------- ------- ------- ------- Gross profit ..................... 167,875 170,438 479,530 462,842 Selling, general and administrative expenses 142,212 125,143 413,763 365,308 Amortization of goodwill ......... 2,760 2,760 8,280 8,280 ------- ------- ------- ------- Operating income ................. 22,903 42,535 57,487 89,254 Interest income .................. 242 464 1,100 1,734 Interest expense ................. 1,516 1,899 5,015 5,525 ------- ------- ------- ------- Income before income taxes ....... 21,629 41,100 53,572 85,463 Income tax provision ............. 9,535 17,223 24,135 36,878 ------- ------- ------- ------- Net income ................... $ 12,094 $ 23,877 $ 29,437 $ 48,585 ======= ======= ======= ======= SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -3- ================================================================================ 4 ANNTAYLOR, INC. --------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- NOVEMBER 3, 2001 AND FEBRUARY 3, 2001 (unaudited) NOV. 3, FEBRUARY 3, 2001 2001 -------- -------- ASSETS (in thousands) Current assets Cash and cash equivalents .......................... $ 3,649 $ 31,962 Accounts receivable, net ........................... 70,752 57,989 Merchandise inventories ............................ 224,810 170,631 Prepaid expenses and other current assets .......... 54,481 53,227 -------- -------- Total current assets ........................... 353,692 313,809 Property and equipment, net .......................... 252,794 220,032 Goodwill, net ........................................ 289,340 297,619 Deferred financing costs, net ........................ 4,721 4,281 Other assets ......................................... 18,250 12,374 -------- -------- Total assets ................................... $918,797 $848,115 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Accounts payable ................................... $ 72,300 $ 65,903 Accrued salaries and bonus ......................... 10,798 12,960 Accrued tenancy .................................... 10,959 9,800 Gift certificates and merchandise credits redeemable 14,936 20,375 Accrued expenses ................................... 49,623 30,604 Current portion of long-term debt .................. 15,731 1,400 -------- -------- Total current liabilities ...................... 174,347 141,042 Note Payable to ATSC ................................. 117,387 114,960 Other long-term debt ................................. 129 1,250 Deferred lease costs and other liabilities ........... 16,456 16,834 Stockholder's equity Common stock, $1.00 par value; 1,000 shares authorized; 1 share issued and outstanding ................. 1 1 Additional paid-in capital ......................... 390,211 383,199 Retained earnings .................................. 220,266 190,829 -------- -------- Total stockholder's equity ..................... 610,478 574,029 -------- -------- Total liabilities and stockholder's equity ..... $918,797 $848,115 ======== ======== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -4- ================================================================================ 5 ANNTAYLOR, INC. --------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- FOR THE NINE MONTHS ENDED NOVEMBER 3, 2001 AND OCTOBER 28,2000 (unaudited) NINE MONTHS ENDED ------------------------ NOVEMBER 3, OCTOBER 28, 2001 2000 ------- ------- (in thousands) Operating activities: Net income ...................................... $ 29,437 $ 48,585 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loss on accounts receivable ..... 1,087 852 Depreciation and amortization ................. 31,330 25,035 Amortization of goodwill ...................... 8,280 8,280 Non-cash interest ............................. 3,021 3,179 Amortization of deferred compensation ......... 998 1,160 Deferred income taxes ......................... 2,025 (2,189) Loss on disposal of property and equipment .... 1,502 1,791 Changes in assets and liabilities: Receivables ................................. (13,850) (13,457) Merchandise inventories ..................... (54,179) (74,893) Prepaid expenses and other current assets ... (2,192) 9,871 Accounts payable ............................ 6,397 20,232 Accrued expenses ............................ 12,577 21,385 Other non-current assets and liabilities, net (7,350) (2,095) ------- ------- Net cash provided by operating activities ....... 19,083 47,736 ------- ------- Investing activities: Purchases of property and equipment ............. (65,586) (64,810) ------- ------- Net cash used by investing activities ........... (65,586) (64,810) ------- ------- Financing activities: Net borrowings under revolving credit facility .. 14,250 --- Payment of deferred financing costs ............. (1,033) (45) Payments on mortgage ............................ (1,040) (965) Parent company activity ......................... 6,013 2,232 ------- ------- Net cash provided by financing activities ....... 18,190 1,222 ------- ------- Net decrease in cash .............................. (28,313) (15,852) Cash and cash equivalents, beginning of period .... 31,962 35,081 ------- ------- Cash and cash equivalents, end of period .......... $ 3,649 $ 19,229 ======== ======== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest ........ $ 1,522 $ 1,563 ======== ======== Cash paid during the period for income taxes .... $ 11,984 $ 28,968 ======== ======== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -5- ================================================================================ 6 ANNTAYLOR, INC. --------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (unaudited) 1. BASIS OF PRESENTATION --------------------- The condensed consolidated financial statements of AnnTaylor, Inc. (the "Company") are unaudited but, in the opinion of management, contain all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for the Fiscal 2001 interim period shown in this report are not necessarily indicative of results to be expected for the fiscal year. The February 3, 2001 condensed consolidated balance sheet amounts have been derived from the previously audited consolidated balance sheet of the Company. Certain Fiscal 2000 amounts have been reclassified to conform to the Fiscal 2001 presentation. Detailed footnote information is not included for the quarters ended November 3, 2001 and October 28, 2000. The financial information set forth herein should be read in conjunction with the Notes to the Company's Consolidated Financial Statements contained in the Company's 2000 Annual Report on Form 10-K. 2. LONG-TERM DEBT -------------- The following summarizes long-term debt outstanding at November 3, 2001: (in thousands) Note Payable to ATSC ......................... $117,387 -------- Mortgage ..................................... 1,610 Net borrowings under revolving credit facility 14,250 -------- Subtotal .................................. 15,860 Less current portion ......................... 15,731 -------- Mortgage, long-term .......................... 129 -------- Total long-term debt ...................... $117,516 ======== -6- ================================================================================ 7 ANNTAYLOR, INC. --------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (unaudited) 3. RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001 and clarifies the criteria for recognition of intangible assets separately from goodwill. Management does not believe that the adoption of SFAS 141 will have an impact on the Company's consolidated financial position or consolidated results of operations. SFAS 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets, other than goodwill, which have determinable useful lives be amortized over that period. SFAS 142 is effective for fiscal years beginning after December 15, 2001. Management intends to adopt SFAS 142 in Fiscal 2002, and estimates that it will add approximately $11,000,000 annually to net income. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses the conditions under which an impairment charge should be recorded related to long-lived assets, other than goodwill, to be held and used, as well as those to be disposed of by sale or otherwise. SFAS 144 is effective for fiscal years beginning after December 15, 2001. Management is currently assessing, but has not yet determined, the impact the adoption of SFAS 144 will have on the Company's consolidated financial position or consolidated results of operations. -7- ================================================================================ 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS RESULTS OF OPERATIONS NINE MONTHS ENDED ----------------- NOVEMBER 3, OCTOBER 28, 2001 2000 ---- ---- Number of Stores: Open at beginning of period ...... 478 405 Opened during period ............. 58 67 Expanded during period* ......... 6 3 Closed during period ............. 4 5 Open at end of period ............ 532 467 Type of Stores Open at End of Period: Ann Taylor stores ................ 341 331 Ann Taylor Loft stores ........... 178 123 Ann Taylor Factory Stores ........ 13 13 --------------- * Expanded stores are excluded from comparable store sales for the first year following expansion. NINE MONTHS ENDED NOVEMBER 3, 2001 COMPARED TO NINE MONTHS ENDED OCTOBER 28, 2000 The Company's net sales in the first nine months of Fiscal 2001 increased to $928,187,000 from $889,196,000, an increase of $38,991,000, or 4.4%. Comparable store sales for the first nine months of Fiscal 2001 decreased 9.1% compared to an increase of 1.0% during the same period in Fiscal 2000. Comparable store sales by division were down 11.9 percent for Ann Taylor and up 2.0 percent for new concept Ann Taylor Loft. The sales increase was primarily attributable to the opening of new stores and the expansion of existing stores offset, in part, by the net decrease in comparable store sales. Management believes that the net decrease in comparable store sales was, in part, the result of customer dissatisfaction with certain of the Company's product offerings and merchandise assortment available in Ann Taylor stores during the first nine months of Fiscal 2001. An overall reduction in client spending caused by the current economic environment, as well as the impact of the events of September 11, 2001, further contributed to the decrease. Gross profit as a percentage of net sales decreased to 51.7% in the first nine months of Fiscal 2001 from 52.0% in the first nine months of Fiscal 2000. -8- ================================================================================ 9 Selling, general and administrative expenses were 44.6% of net sales in the first nine months of Fiscal 2001, compared to 40.1% of net sales in the first nine months of Fiscal 2000, excluding a pre-tax nonrecurring charge of approximately $8,500,000 or 1.0% of net sales, in connection with an extensive review conducted with the Company's financial and legal advisors of various strategic approaches to enhance shareholder value. The increase in selling, general and administrative expenses as a percentage of net sales was primarily attributable to decreased leverage on fixed expenses resulting from negative comparable store sales and increases in tenancy and Ann Taylor Loft store operations expenses due to expansion. As a result of the foregoing, the Company had operating income of $57,487,000, or 6.2% of net sales, in the first nine months of Fiscal 2001, compared to operating income, after taking into account the nonrecurring charge, of $89,254,000, or 10.0% of net sales, in the first nine months of Fiscal 2000. Amortization of goodwill was $8,280,000 in each of the first nine months of Fiscal 2001 and Fiscal 2000. Operating income, without giving effect to goodwill amortization, was $65,767,000, or 7.1% of net sales, in the Fiscal 2001 period and $97,534,000, or 11.0% of net sales, in the Fiscal 2000 period. Interest income was $1,100,000 in the first nine months of Fiscal 2001 compared to $1,734,000 in the first nine months of Fiscal 2000. The decrease was primarily attributable to lower cash on hand and lower interest rates during the first nine months of Fiscal 2001, compared to the first nine months of Fiscal 2000. Interest expense was $5,015,000 in the first nine months of Fiscal 2001 compared to $5,525,000 in the first nine months of Fiscal 2000. The decrease in interest expense was primarily attributable to a decrease in letter of credit fees and a reduction in amortization of deferred financing costs resulting from the Credit Facility entered into in the first quarter of Fiscal 2001. The income tax provision was $24,135,000, or 45.1% of income before income taxes, in the Fiscal 2001 period, compared to $36,878,000, or 43.2% of income before income taxes, in the Fiscal 2000 period. The effective income tax rate for both periods differed from the statutory rate primarily because of non-deductible goodwill amortization. As a result of the foregoing factors, the Company had net income of $29,437,000, or 3.2% of net sales, for the first nine months of Fiscal 2001, compared to net income of $48,585,000, or 5.5% of net sales, for the first nine months of Fiscal 2000. -9- ================================================================================ 10 PART II. OTHER INFORMATION -------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K: None -10- ================================================================================ 11 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANNTAYLOR, INC. Date: December 14, 2001 By: /s/J. Patrick Spainhour -------------------------- -------------------------- J. Patrick Spainhour Chairman and Chief Executive Officer Date: December 14, 2001 By: /s/James M. Smith -------------------------- -------------------------- James M. Smith Senior Vice President, Chief Financial Officer and Treasurer -11-