10-Q 1 atinc1qq.txt ANNTAYLOR, INC. ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- 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 May 5, 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 June 1, 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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ================================================================================ 2 INDEX TO FORM 10-Q ------------------ PAGE NO. ------- PART I. FINANCIAL INFORMATION ----------------------------- Item 1.Financial Statements Condensed Consolidated Statements of Income for the Quarters Ended May 5, 2001 and April 29, 2000.................................... 3 Condensed Consolidated Balance Sheets at May 5, 2001 and February 3, 2001...................... 4 Condensed Consolidated Statements of Cash Flows for the Quarters Ended May 5, 2001 and April 29, 2000........................................ 5 Notes to Condensed Consolidated Financial Statements.... 6 Item 2.Management's Discussion and Analysis of 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 INCOME ------------------------------------------- FOR THE QUARTERS ENDED MAY 5, 2001 AND APRIL 29, 2000 (unaudited) QUARTERS ENDED --------------------------- May 5, 2001 April 29, 2000 ----------- -------------- (in thousands) Net sales........................................... $307,090 $277,068 Cost of sales....................................... 147,438 128,472 ------- ------- Gross profit........................................ 159,652 148,596 Selling, general and administrative expenses........ 135,718 124,103 Amortization of goodwill............................ 2,760 2,760 ------- ------- Operating income.................................... 21,174 21,733 Interest income..................................... 335 464 Interest expense.................................... 1,780 1,796 ------- ------- Income before income taxes.......................... 19,729 20,401 Income tax provision................................ 8,785 9,119 ------- ------- Net income....................................... $ 10,944 $ 11,282 ======= ======= See accompanying notes to condensed consolidated financial statements. -3- ================================================================================ 4 ANNTAYLOR, INC. --------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- MAY 5, 2001 AND FEBRUARY 3, 2001 (unaudited) May 5, Feb. 3, 2001 2001 ------- ------- ASSETS (in thousands) Current assets Cash and cash equivalents .............................. $ 10,123 $ 31,962 Accounts receivable, net ............................... 67,869 57,989 Merchandise inventories ................................ 171,559 170,631 Prepaid expenses and other current assets .............. 51,635 53,227 ------- ------- Total current assets ............................... 301,186 313,809 Property and equipment, net .............................. 229,893 220,032 Goodwill, net ............................................ 294,859 297,619 Deferred financing costs, net ............................ 4,956 4,281 Other assets ............................................. 12,121 12,374 ------- ------- Total assets ....................................... $843,015 $848,115 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Accounts payable ....................................... $ 51,135 $ 65,903 Accrued salaries and bonus ............................. 12,427 12,960 Accrued tenancy ........................................ 9,864 9,800 Gift certificates and merchandise credits redeemable ... 16,854 20,375 Accrued expenses ....................................... 32,278 30,604 Current portion of mortgage ............................ 1,427 1,400 ------- ------- Total current liabilities .......................... 123,985 141,042 Note Payable to ATSC ..................................... 115,761 114,960 Other long-term debt ..................................... 883 1,250 Deferred lease costs and other liabilities ............... 16,078 16,834 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 ............................. 384,534 383,199 Retained earnings ...................................... 201,773 190,829 ------- ------- Total stockholder's equity ......................... 586,308 574,029 ------- ------- Total liabilities and stockholder's equity ......... $843,015 $848,115 ======= ======= See accompanying notes to condensed consolidated financial statements. -4- ================================================================================ 5 ANNTAYLOR, INC. --------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- FOR THE QUARTERS ENDED MAY 5, 2001 AND APRIL 29, 2000 (unaudited) QUARTERS ENDED ---------------------------- May 5, 2001 April 29, 2000 ----------- -------------- (in thousands) Operating activities: Net income ...................................... $ 10,944 $ 11,282 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loss on accounts receivable ..... 407 121 Depreciation and amortization ................. 9,778 8,219 Amortization of goodwill ...................... 2,760 2,760 Amortization of deferred compensation ......... 476 655 Non-cash interest ............................. 1,077 1,057 Loss on disposal of property and equipment .... 139 93 Changes in assets and liabilities: Receivables ................................. (10,287) (4,762) Merchandise inventories ..................... (928) (24,471) Prepaid expenses and other current assets ... 1,592 244 Accounts payable ............................ (14,768) 8,552 Accrued liabilities ......................... (2,315) 2,537 Other non-current assets and liabilities, net (501) 2,010 ------- ------- Net cash provided (used) by operating activities (1,626) 8,297 ------- ------- Investing activities: Purchases of property and equipment ............. (19,780) (16,857) ------- ------- Net cash used by investing activities ........... (19,780) (16,857) ------- ------- Financing activities: Payments of mortgage ............................ (341) (316) Payment of financing costs ...................... (951) (19) Parent company activity ......................... 859 992 ------- ------- Net cash provided (used) by financing activities (433) 657 ------- ------- Net decrease in cash .............................. (21,839) (7,903) Cash and cash equivalents, beginning of period .... 31,962 35,081 ------- ------- Cash and cash equivalents, end of period .......... $ 10,123 $ 27,178 ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest ........ $ 373 $ 333 ======= ======= Cash paid during the period for income taxes .... $ 58 $ 867 ======= ======= 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 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 May 5, 2001 and April 29, 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 2001 Annual Report on Form 10-K. 2. LONG-TERM DEBT On April 30, 2001, the Company entered into an Amended and Restated $175,000,000 senior secured revolving credit facility (the "Credit Facility") with Bank of America N.A. and a syndicate of lenders. This facility amended the Company's then-existing $125,000,000 bank credit agreement that was scheduled to expire in June 2001. The Credit Facility, which matures on April 29, 2004, will be used by the Company for the issuance of commercial and standby letters of credit and to provide revolving loans for other general corporate purposes. Loans outstanding under the Credit Facility at any time may not exceed $75,000,000. Maximum availability for loans and letters of credit under the Credit Facility is governed by a monthly borrowing base, determined by the application of specified advance rates against certain eligible assets. The outstanding loan balance is required to be reduced to zero for a thirty-day period each fiscal year. -6- ================================================================================ 7 ANNTAYLOR, INC. --------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (unaudited) 2. LONG-TERM DEBT (CONTINUED) Amounts outstanding under the Credit Facility bear interest at a rate equal to, at the Company's option, the Bank of America 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 0.30% to 0.50% per annum. Fees for outstanding commercial and standby letters of credit range from 0.50% to 0.875% and from 1.25% to 2.00%, respectively. The Credit Facility contains financial and other covenants, including limitations on indebtedness, liens and investments, restrictions on dividends or other distributions to stockholders and maintenance of certain financial ratios including specified levels of tangible net worth. The lenders have been granted a pledge of the common stock of the Company 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 following summarizes long-term debt outstanding at May 5, 2001: (in thousands) Note Payable to ATSC................. $115,761 ------- Mortgage............................. 2,310 Less current portion................. 1,427 ------- Mortgage, long-term.................. 883 ------- Total long-term debt............. $116,644 ======= -7- ================================================================================ 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS RESULTS OF OPERATIONS Quarters Ended -------------- May 5, April 29, 2001 2000 ----- ----- Number of Stores: Open at beginning of period............... 478 405 Opened during period...................... 11 17 Expanded or remodeled during period*...... 4 2 Closed during period...................... 1 1 Open at end of period..................... 488 421 Type of Stores Open at End of Period: Ann Taylor stores......................... 334 320 Ann Taylor Loft stores.................... 141 88 Ann Taylor Factory Stores................. 13 13 --------------- * Expanded stores are excluded from comparable store sales for the first year following expansion. QUARTER ENDED MAY 5, 2001 COMPARED TO QUARTER ENDED APRIL 29, 2000 The Company's net sales in the first quarter of 2001 increased to $307,090,000 from $277,068,000 in the first quarter of 2000, an increase of $30,022,000 or 10.8%. Comparable store sales for the first quarter of 2001 decreased 3.5%, compared to a decrease of 0.5% in the first quarter of 2000. Comparable sales by division were down 4.8% for Ann Taylor stores and up 4.9% for Ann Taylor Loft stores. The Loft comparable sales percentage does not include 21 Ann Taylor Loft outlet stores and 12 Ann Taylor Factory Stores. The sales increase was primarily attributable to the opening of new stores offset, in part, by the net decrease in comparable store sales. Management believes that the net decrease in comparable store sales was the result of customer dissatisfaction with certain of the Company's product offerings and merchandise assortment in the first quarter of Fiscal 2001. Gross profit as a percentage of net sales decreased to 52.0% in the first quarter of 2001 from 53.6% in the first quarter of 2000. This decrease in gross margin reflects a higher markdown rate on goods sold below full price and the sale of a greater amount of goods below full price as a percentage of sales, compared to the prior year, offset, in part, by higher gross margins achieved on merchandise that was sold at full price. Selling, general and administrative expenses represented 44.2% of net sales in the first quarter of 2001, compared to 41.7% of net sales in the first quarter of 2000, excluding a pre-tax nonrecurring charge of approximately $8,500,000, or 3.1% of net sales, in connection with an extensive review conducted with the Company's financial and legal advisors of -8- ================================================================================ 9 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 lower comparable store sales and also from increases in tenancy expenses, and increases in Ann Taylor Loft store operations. As a result of the foregoing, the Company had operating income of $21,174,000, or 6.9% of net sales, in the first quarter of 2001, compared to operating income of $21,733,000, or 7.8% of net sales, in the first quarter of 2000, after taking into account the nonrecurring charge. Amortization of goodwill was $2,760,000 in both the first quarter of 2001 and the first quarter of 2000. Operating income, without giving effect to goodwill amortization in either year, was $23,934,000, or 7.8% of net sales, in the first quarter of 2001 and $24,493,000, or 8.8% of net sales, in the first quarter of 2000. Interest income was $335,000 in the first quarter of 2001 compared to $464,000 in the first quarter of 2000. The decrease was primarily attributable to lower cash on hand and lower interest rates during the first quarter of Fiscal 2001, compared to the first quarter of Fiscal 2000. Interest expense was $1,780,000 in the first quarter of 2001 compared to $1,796,000 in the first quarter of 2000. The income tax provision was $8,785,000, or 44.5% of income before income taxes, in the first quarter of 2000 compared to $9,119,000, or 44.7% of income before income taxes, in the first quarter of 2000. The effective income tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. As a result of the foregoing factors, the Company had net income of $10,944,000, or 3.6% of net sales, for the first quarter of 2001, compared to net income of $11,282,000, or 4.1% of net sales, for the first quarter of 2000. -9- ================================================================================ 10 PART II. OTHER INFORMATION -------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.18.1 Amendment to the Employment Agreement, dated June 1, 2001, between ATSC and Barry Erdos. Incorporated by reference to Exhibit 10.17.1 to the Quarterly Report on Form 10-Q of ATSC for the Quarter ended May 5, 2001 filed on June 18, 2001. 10.19 Amended and Restated Credit Agreement, dated as of April 30, 2001 among the Company, Bank of America, N.A. ("Bank of America"), JP Morgan and First Union National Bank, as Syndication Agents, the financial institutions from time to time party thereto, Bank of America Securities LLC, as Arranger, and Bank of America, as Administrative Agent. Incorporated by reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q of AnnTaylor Stores Corporation ("ATSC") for the Quarter ended May 5, 2001 filed on June 18, 2001. 10.20 Employment Agreement, dated as of April 24, 2001, between ATSC and Kim Roy. Incorporated by reference to Exhibit 10.19 to the Quarterly Report on Form 10-Q of ATSC for the Quarter ended May 5, 2001 filed on June 18, 2001. 10.21 Employment Agreement, dated as of May 3, 2001 between ATSC and Katherine Lawther Krill. Incorporated by reference to Exhibit 10.20 to the Quarterly Report on Form 10-Q of ATSC for the Quarter ended May 5, 2001 filed on June 18, 2001. (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: June 18, 2001 By: /s/ J. Patrick Spainhour ---------------- ------------------------- J. Patrick Spainhour Chairman and Chief Executive Officer Date: June 18, 2001 By: /s/ James M. Smith ---------------- ------------------------- James M. Smith Senior Vice President, Chief Financial Officer and Treasurer -11-