UNITED STATES
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, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-10738
ANNTAYLOR STORES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 13-3499319 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
7 Times Square, New York, NY | 10036 | |
(Address of principal executive offices) | (Zip Code) |
(212) 541-3300
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of each exchange on which registered | |
Common Stock, $.0068 Par Value | The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x.
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
The aggregate market value of the registrants voting stock held by non-affiliates of the registrant as of July 30, 2010 was $1,000,992,916.
The number of shares of the registrants common stock outstanding as of February 25, 2011 was 54,324,666.
Documents Incorporated by Reference:
Portions of the Registrants Proxy Statement for the Registrants 2011 Annual Meeting of Stockholders to be held on May 18, 2011 are incorporated by reference into Part III.
ANNUAL REPORT ON FORM 10-K INDEX
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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Statement Regarding Forward-Looking Disclosures
This Annual Report on Form 10-K (this Report) includes, and incorporates by reference, certain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements may use the words expect, anticipate, plan, intend, project, may, believe and similar expressions. These forward-looking statements reflect the current expectations of AnnTaylor Stores Corporation concerning future events and actual results may differ materially from current expectations or historical results. Any such forward-looking statements are subject to various risks and uncertainties, including without limitation those discussed in the sections of this Report entitled Business, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations. AnnTaylor Stores Corporation does not assume any obligation to publicly update or revise any forward-looking statements at any time for any reason.
ITEM 1. | Business. |
General
AnnTaylor Stores Corporation, through its wholly-owned subsidiaries, is a leading national specialty retailer of womens apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands. As used in this report, all references to we, our, us and the Company refer to AnnTaylor Stores Corporation and its wholly-owned subsidiaries.
We believe Ann Taylor and LOFT are highly recognized national brands with distinct fashion points of view, though both are equally committed to providing clients with feminine, fashionable, high-quality merchandise that is relevant to all aspects of their lifestyles. Ann Taylor is an aspirational luxury brand that offers modern style while remaining true to its legacy as a destination for every generation of working women, with timeless wear-now and wear-to-work fashion of impeccable quality at compelling prices. LOFT is the go-to destination for accessible and affordable fashion with a relaxed casual appeal that is distinctly feminine.
Our Ann Taylor and LOFT brands offer a full range of career and casual separates, dresses, tops, weekend wear, shoes and accessories, coordinated as part of a strategy to provide modern styles that are versatile across all occasions and needs. We offer updated past season best sellers from the Ann Taylor and LOFT merchandise collections at our Ann Taylor Factory and LOFT Outlet stores, respectively, and our clients can also shop online at www.anntaylor.com and www.LOFT.com (together, our Online Stores) or by phone at 1-800-DIAL-ANN and 1-888-LOFT-444.
We were incorporated in the State of Delaware in 1988 and, as of January 29, 2011, operated 896 retail stores in 46 states, the District of Columbia and Puerto Rico, comprised of 266 Ann Taylor stores, 502 LOFT stores, 92 Ann Taylor Factory stores and 36 LOFT Outlet stores. See Stores and Expansion for further discussion.
We are dedicated to maintaining the right merchandise mix in our stores and plan the timing of our merchandise offerings to address clients needs, anticipating fabric and yarn preferences on a regional and seasonal basis. Our direct marketing efforts are planned to support this merchandising strategy. Our merchandise, marketing and distribution strategies are reinforced by an emphasis on client service, as our sales associates are trained to assist clients in merchandise selection and wardrobe coordination.
Merchandise Design and Production
Substantially all of our merchandise is developed by our in-house product design and development teams, who design merchandise exclusively for us. Our merchandising groups determine inventory needs for the upcoming season, edit the assortments developed by the design teams, plan monthly merchandise flows and arrange for the production of merchandise by independent manufacturers, primarily through our in-house sourcing group. A small percentage of our merchandise is purchased through branded vendors, which is selected to complement our in-house assortment.
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Our production management and quality assurance departments establish the technical specifications for all merchandise and inspect our merchandise for quality, including periodic in-line inspections while goods are in production, to identify potential problems prior to shipment. Upon receipt, merchandise is inspected on a test basis for uniformity of size and color, as well as for conformity with specifications and overall quality of manufacturing.
In Fiscal 2010, we sourced merchandise from approximately 145 manufacturers and vendors in 19 countries, and no single supplier accounted for more than 10% of merchandise purchased on either a unit or cost basis. Approximately 42% of our merchandise unit purchases originated in China (representing approximately 50% of total merchandise cost), 16% in the Philippines (15% of total merchandise cost), 13% in Indonesia (12% of total merchandise cost), 12% in India (11% of total merchandise cost), and 9% in Vietnam (5% of total merchandise cost). Any event causing a sudden disruption of manufacturing or imports from any of these countries, including the imposition of additional import restrictions, could have a material adverse effect on our operations. We generally do not maintain any long-term or exclusive commitments or arrangements to purchase merchandise with any single supplier, but we have taken steps to mitigate sourcing pressures from rising raw material costs by making advance commitments on key core fabrics, leveraging our strong vendor relationships and using country sourcing flexibility. Our foreign purchases are negotiated and paid for in U.S. dollars.
We have a social compliance program that requires our suppliers, factories and subcontractors to comply with our Global Supplier Principles and Guidelines as well as the local laws and regulations in the country of manufacture. We conduct unannounced third-party audits to confirm manufacturer compliance with our compliance standards. We are also a certified and validated member of the United States Customs and Border Protections Customs-Trade Partnership Against Terrorism (C-TPAT) program and expect all of our suppliers shipping to the United States to adhere to our C-TPAT requirements. These include standards relating to facility security, procedural security, personnel security, cargo security and the overall protection of the supply chain. Audits are conducted to confirm supplier compliance with our compliance standards.
We believe we have solid relationships with our suppliers and that, subject to the discussion in Statement Regarding Forward-Looking Disclosures, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources, we will continue to have adequate sources to produce a sufficient supply of quality merchandise in a timely manner and on satisfactory economic terms.
Inventory Control and Merchandise Allocation
Our planning departments analyze relevant historical product demand data (i.e., sales, margins, sales and inventory history of store clusters, etc.) by brand, size and store location, including our Online Stores, to assist in determining the quantity of merchandise to be purchased for, and the allocation of merchandise to, our channels. Merchandise is allocated to achieve an emphasis that is suited to each stores client base, including our Online Stores. Merchandise is typically sold at its original marked price for several weeks, with the length of time varying by individual style or color choice and dependent on client acceptance. We review inventory levels on an ongoing basis to identify slow-moving merchandise styles and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear this merchandise. Markdowns may also be used if inventory exceeds client demand for reasons of design, seasonal adaptation or changes in client preference, or if it is determined that the inventory will not sell at its currently marked price. Most inventory is cleared in-store, including through our Online Stores.
Our core merchandising system is the central repository for inventory data and related business activities that affect inventory levels such as purchasing, receiving, allocation and distribution. Our primary distribution center is located in Louisville, Kentucky. See Properties for further discussion of our Louisville distribution center. The vast majority of our merchandise is processed through our Louisville facility, which is owned and operated by us. Additionally, we contract with a third-party fulfillment vendor and utilize their Bolingbrook, IL facility to fulfill orders for our Online Stores. We also utilize a third-party distribution center bypass facility in Santa Fe Springs, CA. Only select product is processed through this bypass facility, which primarily serves as a disaster recovery facility.
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Stores and Expansion
Our business strategy includes a real estate expansion program designed to reach new clients through the opening of new stores. We open new stores in markets that we believe have a sufficient concentration of our target clients. We also add stores, or optimize the size of existing stores, in markets where we already have a presence, as demographic conditions warrant and sites become available. In addition, we reinvest in our current store base to elevate and modernize the in-store experience we provide to our clients.
Store locations are determined on the basis of various factors, including geographic location, demographic studies, anchor tenants in a mall location, other specialty stores in a mall or specialty center location or in the vicinity of a village location and the proximity to professional offices in a downtown or village location. We open our Ann Taylor Factory and LOFT Outlet stores in outlet centers with co-tenants that generally include a significant number of outlet or discount stores operated under nationally recognized upscale brand names. Store size is determined on the basis of various factors, including merchandise needs, geographic location, demographic studies and space availability.
At Ann Taylor, our focus in 2010 was on optimizing store productivity and enhancing the in-store environment of our existing store fleet, while preparing for future store growth through the testing of prototype stores that are approximately 30-40% smaller in size than the fleet average. We converted four existing Ann Taylor stores to this new format during the second half of Fiscal 2010 in various markets. At LOFT, we moved forward with the planned expansion of the brand by opening 10 new LOFT stores and 14 new LOFT Outlet stores. During Fiscal 2011, we expect to further accelerate our planned store growth in the factory outlet channel during the first half of Fiscal 2011 through the opening of 44 stores in premium factory outlet centers across the United States.
In January 2008, we initiated a multi-year, strategic restructuring program (the Restructuring Program), a component of which provided for the closing of approximately 225 underperforming stores, of which 137 were closed during the three-year period ending January 29, 2011. See Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources for further discussion of our Restructuring Program. In addition, during the past two years, we significantly scaled back our new store growth and aggressively pursued renegotiating or extending existing leases at more favorable occupancy rates. During Fiscal 2011, we plan to open approximately 78 stores, which represents a return to more aggressive store growth than we undertook during the economic downturn experienced over the past two years.
As of January 29, 2011, we operated 896 retail stores throughout the United States, the District of Columbia and Puerto Rico, comprised of 266 Ann Taylor stores, 502 LOFT stores, 92 Ann Taylor Factory stores and 36 LOFT Outlet stores.
An average Ann Taylor store is approximately 5,500 square feet in size. We operate two larger Ann Taylor flagship stores, one located in New York City and one located in Chicago. We converted four existing Ann Taylor stores into a new prototype format during the second half of Fiscal 2010 in various markets. Based on the early success of this format, we plan to open approximately 20 new Ann Taylor stores using this new, smaller format during Fiscal 2011. These stores are expected to average 4,000 square feet.
LOFT stores average approximately 5,800 square feet. We also operate one LOFT flagship store on the ground floor of 7 Times Square, our corporate headquarters, in New York City. In Fiscal 2010, we opened 10 LOFT stores that averaged approximately 5,500 square feet and converted six Ann Taylor stores to LOFT stores that averaged 5,000 square feet. In Fiscal 2011, we plan to open approximately 14 LOFT stores, which are expected to average 5,200 square feet.
Ann Taylor Factory stores average approximately 7,300 square feet. As planned, we did not open any Ann Taylor Factory stores in Fiscal 2010. In Fiscal 2011, we plan to open approximately six Ann Taylor Factory stores, which are expected to average 5,600 square feet.
LOFT Outlet stores average approximately 6,500 square feet. In Fiscal 2010, we continued to grow our fleet of LOFT Outlet stores by opening 14 new stores that averaged approximately 6,000 square feet and converting four existing LOFT stores to LOFT Outlet stores. In Fiscal 2011, we plan to open approximately 38 LOFT Outlet stores in leading factory outlet centers across the United States. These stores are expected to average 7,600 square feet.
Our stores typically have approximately 25% of their total square footage allocated to stockroom and other non-selling space.
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We believe that our stores are located in some of the most productive retail centers in the United States and that our existing store base is a significant strategic asset of our business. During the past five years, we have invested approximately $370 million in our store base and approximately 56% of our stores are either new, expanded or have been remodeled or refurbished in the last five years.
The following table sets forth certain information regarding store openings, expansions and closings for Ann Taylor stores (ATS), LOFT stores (LOFT), Ann Taylor Factory stores (ATF) and LOFT Outlet stores (LOS) over the past five years:
Fiscal Year |
Total Stores Open at Beginning of Fiscal Year |
No. Stores Opened During Fiscal Year |
No. Stores Closed During Fiscal Year |
No.
Stores Converted During Fiscal Year |
No. Stores Open at End of Fiscal Year |
No. Stores Expanded During Fiscal Year |
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ATS | LOFT | ATF | LOS | ATS | LOFT | ATF | ATS | LOFT | LOS | ATS | LOFT | ATF | LOS | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
2006 |
824 | 11 | 52 | 7 | | 20 | 4 | 1 | | | | 348 | 464 | 57 | | 869 | 16 | |||||||||||||||||||||||||||||||||||||||||||||||||||
2007 |
869 | 14 | 52 | 11 | | 13 | 4 | | | | | 349 | 512 | 68 | | 929 | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||||
2008 |
929 | 4 | 25 | 23 | 14 | 33 | 27 | | | | | 320 | 510 | 91 | 14 | 935 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||
2009 |
935 | | 9 | 1 | 4 | 18 | 24 | | -11 | 11 | | 291 | 506 | 92 | 18 | 907 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||
2010 |
907 | | 10 | 0 | 14 | 19 | 16 | | -6 | 2 | 4 | 266 | 502 | 92 | 36 | 896 | 1 |
In Fiscal 2010, our total square footage decreased by approximately 64,000 square feet, or approximately 1%, from Fiscal 2009, but remained relatively constant at approximately 5.3 million square feet. During Fiscal 2011, we plan to open 78 stores, close approximately 30 stores, and optimize the size of existing stores primarily through the roll-out of the new, smaller Ann Taylor store format, resulting in a net increase in total square footage of approximately 230,000 square feet, or approximately 4%.
Capital expenditures related to our Fiscal 2010 new stores totaled approximately $25.4 million and expenditures for store remodeling and refurbishment totaled approximately $14.2 million. We expect that capital expenditures for our Fiscal 2011 store expansion program will be approximately $85 million and expenditures for store renovations and refurbishment will be approximately $20 million.
Our store expansion and refurbishment plans are dependent upon, among other things, general economic and business conditions affecting consumer confidence and spending, the availability of desirable locations and the negotiation of acceptable lease terms. See Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
Information Systems
During Fiscal 2010, we continued our investment in information services and technology, enhancing the systems we use to support our online, merchandise sourcing, back office and in-store management functions. These enhancements are generally aimed at driving online sales and operational efficiencies while providing speed and flexibility in our supply chain.
Brand Building and Marketing
We believe that our Ann Taylor and LOFT brands are among our most important assets and that these brands and their relationship with our clients are key to our competitive advantage. We continuously evolve these brands to appeal to the changing needs of our target clients and to stay competitive in the market.
We control all aspects of brand development for our retail concepts, including product design, store merchandising and design, channels of distribution and marketing and advertising. We continue to invest in the development of these brands through, among other things, client research, advertising, in-store and direct marketing and our online sites and online marketing initiatives. We also make investments to enhance the overall client experience through the opening of new stores, the expansion and remodeling of existing stores and a focus on client service. In addition, we are strategically focusing on building a multi-channel brand strategy and are making investments to support this initiative.
We believe it is strategically important to communicate on a regular basis directly with our current client base and with potential clients, through national and regional advertising, as well as through direct mail marketing and in-store presentation. Marketing expenditures as a percentage of sales were 4.0% in Fiscal 2010, 3.3% in Fiscal 2009 and 2.8% in Fiscal 2008.
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Trademarks, Domain Names and Service Marks
The AnnTaylor®, LOFT® and AnnTaylor Loft® trademarks are registered with the United States Patent and Trademark Office and with the trademark registries of many foreign countries. Our rights in these marks are a significant part of our business, as we believe they are famous and well-known in the womens apparel industry. Accordingly, we intend to maintain our trademarks and related registrations and vigorously protect them against infringement.
In 2009, we acquired the registered trademark in the Peoples Republic of China (PRC) for the Ann Taylor mark (the Mark) in the apparel and footwear class pursuant to a Trademark Assignment Agreement, which assignment was subject to approval by the PRC Trademark Office. Until that approval was received, our existing trademark license agreement permitting our use of the Mark remained in effect. The assignment of the Mark was approved by the PRC Trademark Office in October 2010 and is subject to renewal with the PRC Trademark Office every ten years. The costs of renewal are immaterial, and we intend to renew the Mark indefinitely. In addition, during Fiscal 2010, we obtained ownership of the LOFT.com domain name. See Statement Regarding Forward-Looking Disclosures and Risk Factors.
Competition
The womens retail apparel industry is highly competitive. We compete with certain departments in international, national and local department stores and with other specialty stores, catalog and internet businesses that offer similar categories of merchandise. We believe that our focused merchandise selection, versatile fashions and client service distinguish us from other apparel retailers. Our competitors range from smaller, growing companies to considerably larger players with substantially greater financial, marketing and other resources. There is no assurance that we will be able to compete successfully with them in the future. See Risk Factors and Statement Regarding Forward-Looking Disclosures.
Client Loyalty Programs
We have a credit card program that offers eligible clients the choice of a private label or a co-branded credit card. All new cardholders are automatically enrolled in our exclusive rewards program, which is designed to recognize and promote client loyalty. Both cards can be used at any Ann Taylor or LOFT store location, including Ann Taylor Factory and LOFT Outlet, as well as at our Online Stores. The co-branded credit card can also be used at any other business where the card is accepted. Both cards are offered in an Ann Taylor and LOFT version, depending upon where a client enrolls in the program; however, the core benefits offered to clients are the same for each.
To encourage clients to apply for a credit card, we provide a discount to approved cardholders on all purchases made with a new card in any of our stores on the day of application acceptance. Rewards points are earned on purchases made with the credit card at any of our brands through any of our channels. Co-branded cardholders also earn points on purchases made at other businesses where our card is accepted. Cardholders who accumulate the requisite number of points are issued a Rewards Card redeemable toward a future purchase at Ann Taylor, LOFT, Ann Taylor Factory, LOFT Outlet or either of our Online Stores. In addition to earning points, all participants in the credit card program receive exclusive offers throughout the year. These offers include a Birthday Bonus and exclusive access to shopping events and periodic opportunities to earn bonus points.
Employees
As of January 29, 2011, we had approximately 19,400 employees, of which approximately 1,900 were full-time salaried employees, 1,800 were full-time hourly employees and 15,700 were part-time hourly employees working less than 30 hours per week. None of our employees are represented by a labor union. We believe that our relationship with our employees is good.
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Available Information
We make available free of charge on our website, http://investor.anntaylor.com, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are filed electronically with, or otherwise furnished to, the United States Securities and Exchange Commission. Copies of the charters of each of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines and Business Conduct Guidelines, are also available on our website.
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ITEM 1A. | Risk Factors. |
The following risk factors should be considered carefully in evaluating our business and the forward-looking information in this document. Please also see Statement Regarding Forward-Looking Disclosures in the section immediately preceding Item 1 of this Report. The risks described below are not the only risks our business faces. We may also be adversely affected by additional risks not presently known to us or that we currently deem immaterial.
Our ability to anticipate and respond to changing client preferences and fashion trends in a timely manner
Our success largely depends on our ability to consistently gauge fashion trends and provide a balanced assortment of merchandise that satisfies client demands for each of our brands in a timely manner. Any missteps may affect inventory levels, since we enter into agreements to manufacture and purchase our merchandise well in advance of the applicable selling season. Our failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends and economic conditions could lead to lower sales, missed opportunities, excess inventories and more frequent markdowns, which could have a material adverse impact on our business. Merchandise missteps could also negatively impact our image with our clients and result in diminished brand loyalty.
The effect of fluctuations in sourcing costs
The raw materials, in particular cotton, silk and wool, used to manufacture our merchandise are subject to availability constraints and price volatility caused by high demand for fabrics, labor conditions, transportation or freight costs, currency fluctuations, weather conditions, supply conditions, government regulations, economic climate and other unpredictable factors. We have taken steps to mitigate sourcing pressures from rising raw material costs by making advance commitments on key core fabrics, leveraging our strong vendor relationships and using country sourcing flexibility. Despite these measures, an increase in the demand for, or the price of, and/or a decrease in the availability of the raw materials used to manufacture our merchandise could have a material adverse effect on our cost of sales or our ability to meet our clients needs. Increases in labor costs, especially in China, as well as a shortage of labor in certain areas of China, may also impact our sourcing costs. We may not be able to pass all or a portion of such higher sourcing costs onto our clients, which could negatively impact our profitability.
Our ability to successfully manage store growth and optimize the productivity and profitability of our store portfolio
Our continued growth and success depends, in part, on our ability to successfully open and operate new stores, enhance and remodel existing stores on a timely and profitable basis, and optimize store performance by closing under-performing stores. Accomplishing our store expansion goals depends upon a number of factors, including locating suitable sites and negotiating favorable lease terms. We must also be able to effectively renew and renegotiate lease terms for existing stores. Managing the profitability of our stores and optimizing store productivity will also depend in large part on the continued success and client acceptance of our new Ann Taylor and LOFT store prototypes, as well as our ability to open, achieve and accelerate planned store growth for LOFT Outlet in Fiscal 2011. Hiring and training qualified associates, particularly at the store management level, and maintaining overall good relations with our associates, is also important to our store operations. There is no assurance that we will achieve our store expansion goals, manage our growth effectively or operate our stores profitably.
Our ability to successfully upgrade and maintain our information systems to support the needs of the organization
We rely heavily on information systems to manage our operations, including a full range of retail, financial, sourcing and merchandising systems, and regularly make investments to upgrade, enhance or replace these systems. The reliability and capacity of our information systems is critical. Despite our preventative efforts, our systems are vulnerable from time to time to damage or interruption from, among other things, security breaches, computer viruses, power outages and other technical malfunctions. Any disruptions affecting our information systems, or any delays or difficulties in transitioning to new systems or in integrating them with current systems, could have a material adverse impact on our business. Any failure to maintain adequate system security controls to protect our computer assets and sensitive data, including client data, from unauthorized access, disclosure or use could also damage our reputation with our clients.
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We rely on third parties for the implementation and/or management of certain aspects of our information technology infrastructure. Failure by any of these third parties to implement and/or manage our information technology infrastructure effectively could disrupt our operations, adversely affect our customers shopping experience and negatively impact our profitability.
In addition, our ability to continue to operate our business without significant interruption in the event of a disaster or other disruption depends in part on the ability of our information systems to operate in accordance with our disaster recovery and business continuity plans.
Our reliance on key management and our ability to retain and attract qualified associates
Our success depends to a significant extent upon both the continued services of our current executive and senior management team, as well as our ability to attract, hire, motivate and retain qualified management talent in the future. Competition for key executives in the retail industry is intense, and our operations could be adversely affected if we cannot retain our key executives or if we fail to attract additional qualified individuals.
Our performance also depends in large part on the talents and contributions of engaged and skilled associates in all areas of our organization. If we are unable to identify, hire, develop, motivate and retain talented individuals, we may be unable to compete effectively and our business could be adversely impacted.
Our reliance on third-party manufacturers and key vendors
We do not own or operate any manufacturing facilities and depend on independent third parties to manufacture our merchandise. We cannot be certain that we will not experience operational difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality control and failure to meet production deadlines or increases in manufacturing costs. In addition, we source our merchandise from a select group of manufacturers and we continue to strengthen our relationship with these key vendors. While this strategy has benefits, it also has risks. If one or more of our key vendors were to cease working with us, the flow of merchandise to our stores could be impacted, which could have a material adverse effect on our sales and results of operations. In addition, world-wide economic conditions continue to negatively impact businesses around the world, and the impact of those conditions on our major suppliers cannot be predicted. Our suppliers may be unable to obtain adequate credit or access liquidity to finance their operations. A manufacturers failure to ship merchandise to us on a timely basis or to meet the required product safety and quality standards could cause supply shortages, failure to meet client expectations and damage to our brands.
Risks associated with Internet sales
We sell merchandise over the Internet through our Online Stores, www.anntaylor.com and www.LOFT.com. Our Internet operations are subject to numerous risks, including:
| the successful implementation of new systems and internet platforms; |
| reliance on third-party computer hardware/software; |
| reliance on third-party order fulfillment providers; |
| rapid technological change; |
| diversion of sales from our stores; |
| liability for online content; |
| violations of state or federal laws, including those relating to online privacy; |
| credit card fraud; |
| the failure of the computer systems that operate our websites and their related support systems, including computer viruses; and |
| telecommunications failures and electronic break-ins and similar disruptions. |
There is no assurance that our Internet operations will continue to achieve sales and profitability growth.
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Our reliance on foreign sources of production
We purchase a significant portion of our merchandise from foreign suppliers. As a result, we are subject to the various risks of doing business in foreign markets and importing merchandise from abroad, such as:
| fluctuation in the value of the U.S. dollar against foreign currencies or restrictions on the transfer of funds; |
| imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our merchandise that may be imported into the United States from countries in regions where we do business; |
| significant delays in the delivery of cargo due to port security considerations; |
| imposition of duties, taxes, and other charges on imports; |
| imposition of anti-dumping or countervailing duties in response to an investigation as to whether a particular product being sold in the United States at less than fair value may cause (or threaten to cause) material injury to the relevant domestic industry; |
| financial or political instability in any of the countries in which our merchandise is manufactured; |
| impact of natural disasters and public health concerns on our foreign sourcing offices and vendor manufacturing operations; |
| potential cancellation of orders or recalls of any merchandise that does not meet our quality standards; and |
| disruption of imports by labor disputes and local business practices. |
Any sudden disruptions in the manufacture or import of our merchandise caused by adverse changes in these or any other factors could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition, results of operations and liquidity.
Our ability to maintain the value of our brands
Our success depends on the value of our Ann Taylor and LOFT brands. The Ann Taylor and LOFT names are integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and growing our brands will depend largely on the success of our design, merchandising, and marketing efforts and our ability to provide a consistent, high quality client experience. Our business could be adversely affected if we fail to achieve these objectives for one or both of our brands and our public image and reputation could be tarnished by negative publicity. Any of these events could negatively impact sales and profitability.
Our ability to manage inventory levels and changes in merchandise mix
The long lead times required for a substantial portion of our merchandise make client demand difficult to predict and responding quickly to changes challenging. Though we have the ability to source certain product categories with shorter lead times, we enter into contracts for a substantial portion of our merchandise well in advance of the applicable selling season. Our financial condition could be materially adversely affected if we are unable to manage inventory levels and respond to short-term shifts in client demand patterns. Inventory levels in excess of client demand may result in excessive markdowns and, therefore, lower than planned gross margin. If we underestimate demand for our merchandise, on the other hand, we may experience inventory shortages resulting in missed sales and lost revenues. Either of these events could significantly affect our operating results and brand image. In addition, our margins may be impacted by changes in our merchandise mix and a shift toward merchandise with lower selling prices. These changes could have a material adverse effect on our results of operations.
The effect of competitive pressures from other retailers
The specialty retail industry is highly competitive. We compete with local, national and international department stores, specialty and discount stores, catalogs and internet businesses offering similar categories of merchandise. Many of our competitors are companies with substantially greater financial, marketing and other resources. Increased levels of promotional activity by our competitors, some of which may be able to adopt more aggressive pricing policies than we can, both online and in stores, may negatively impact our sales and profitability. There is no assurance that we can compete successfully with these companies in the future.
10
In addition to competing for sales, we compete for favorable store locations, lease terms and qualified associates. Increased competition in these areas may result in higher costs, which could reduce our sales and margins and adversely affect our results of operations.
The effect of general economic conditions and the recent financial crisis
Our financial performance is subject to world-wide economic conditions and the resulting impact on levels of consumer spending, which may remain depressed for the foreseeable future. Some of the factors impacting discretionary consumer spending include general economic conditions, wages and unemployment, consumer debt, reductions in net worth based on recent severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, consumer confidence and other macroeconomic factors.
Although the recent global financial crisis eased somewhat in the United States during Fiscal 2010 from the unprecedented levels reached during Fiscal 2008 and Fiscal 2009, world-wide economic conditions remain challenging and consumer spending remains depressed as compared to pre-crisis levels. Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. The downturn in the economy may continue to affect consumer purchases of our merchandise and adversely impact our results of operations and continued growth. It is difficult to predict whether recent improvements in the economic, capital and credit markets will continue or whether such conditions will further deteriorate, as well as the impact this might have on our business.
The impact of a privacy breach and the resulting effect on our business and reputation
As part of our normal course of business, we collect, process and retain sensitive and confidential customer information. Despite the robust security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our third-party service providers, could severely damage our reputation and our relationships with our clients, expose us to risks of litigation and liability and adversely affect our business.
Our ability to execute brand extensions and new concepts
Part of our business strategy is to grow our existing brands and identify and develop new growth opportunities. Our success with new merchandise offerings or concepts requires significant capital expenditures and management oversight. Any such plan is subject to risks such as client acceptance, competition and product differentiation. In addition, we face challenges to economies of scale in merchandise sourcing and competition for qualified associates, including management and designers. There is no assurance that these merchandise offerings or concepts will be successful or that our overall profitability will increase as a result. Our failure to successfully execute our growth strategies may adversely impact our financial condition and results of operations.
Uncertain global economic conditions could have a material adverse effect on our liquidity and capital resources
The distress in the financial markets has resulted in extreme volatility in security prices and diminished liquidity and credit availability, and there can be no assurance that our liquidity will not be affected by further volatility in the financial markets and the global economy or that our capital resources will at all times be sufficient to satisfy our liquidity needs. Although we believe that our existing cash and cash equivalents, cash provided by operations and available borrowing capacity under our $250 million Third Amended and Restated Credit Agreement (the Credit Facility) will be adequate to satisfy our capital needs for the foreseeable future, any renewed tightening of the credit markets could make it more difficult for us to access funds, enter into agreements for new indebtedness or obtain funding through the issuance of our securities. Our Credit Facility also has financial covenants which, if not met, may further impede our ability to access funds under the Credit Facility.
In addition, we have significant amounts of cash and cash equivalents invested in deposit accounts at FDIC-insured banks. All of our deposit account balances are currently FDIC insured and will remain so through December 31, 2012 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. We also have a small amount of cash and cash equivalents invested in money market funds that are backed by U.S. Treasury Securities as of January 29, 2011. With the continued uncertainty surrounding financial institutions, we cannot be assured that we will not experience losses on any money market holdings.
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Manufacturer compliance with our social compliance program requirements
We require our independent manufacturers to comply with the Ann Taylor Global Supplier Principles and Guidelines that cover many areas including labor, health and safety and environmental standards. We monitor their compliance with these Guidelines using third-party monitoring firms. Although we have an active program to provide training for our independent manufacturers and monitor their compliance with these standards, we do not control the manufacturers or their practices. Any failure of our independent manufacturers to comply with our Global Supplier Principles and Guidelines or local laws in the country of manufacture could disrupt the shipment of merchandise to us, force us to locate alternative manufacturing sources, reduce demand for our merchandise or damage our reputation.
Our ability to secure and protect trademarks and other intellectual property rights
We believe that our AnnTaylor, LOFT and AnnTaylor Loft trademarks are important to our success. Even though we register and protect our trademarks and other intellectual property rights, there is no assurance that our actions will protect us from the prior registration by others or prevent others from infringing our trademarks and proprietary rights or seeking to block sales of our products as infringements of their trademarks and proprietary rights. Further, the laws of foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. Because we have not registered all of our trademarks in all categories, or in all foreign countries in which we currently manufacture merchandise or may manufacture or sell merchandise in the future, our ability to pursue international expansion and our sourcing of merchandise from international suppliers could be impacted.
Failure to comply with legal and regulatory requirements
Our policies, procedures and internal controls are designed to comply with all applicable laws and regulations, including those imposed by the U.S. Securities and Exchange Commission and the New York Stock Exchange, as well as applicable employment laws. Any changes in regulations, the imposition of additional regulations or the enactment of any new legislation that affects employment and labor, trade, product safety, transportation and logistics, health care, tax, privacy, or environmental issues, among other things, may increase the complexity of the regulatory environment in which we operate and the related cost of compliance. Failure to comply with such laws and regulations could result in damage to our reputation and negatively impact our financial condition and the market price of our stock.
Our dependence on our Louisville distribution center and third-party transportation companies
Although we have contracted with a third-party distribution service to help manage the flow of inventory to our stores, we handle the majority of merchandise distribution to our stores primarily from our distribution center in Louisville, Kentucky. Independent third-party transportation companies deliver merchandise to our stores and our clients. Any significant interruption in the operation of our Louisville distribution center or the domestic transportation infrastructure due to natural disasters, accidents, inclement weather, system failures, work stoppages, slowdowns or strikes by employees of the transportation companies, or other unforeseen causes could delay or impair our ability to distribute merchandise to our stores, which could result in lower sales, a loss of loyalty to our brands and excess inventory. Furthermore, we are susceptible to increases in fuel and other transportation costs that we may not be able to pass onto our clients, which could adversely affect our results of operations.
The impact on our stock price of fluctuations in our level of sales and earnings growth
A variety of factors have historically affected, and will continue to affect, our comparable sales results and profit margins. These factors include fashion trends and client preferences, changes in our merchandise mix, competition, economic conditions, weather, effective inventory management and new store openings. There is no assurance that we will achieve positive levels of sales and earnings growth, and any decline in our future growth or performance could have a material adverse effect on the market price of our common stock.
Our stock price has experienced, and could continue to experience in the future, substantial volatility as a result of many factors, including global economic conditions, broad market fluctuations, our operating performance and public perception of the prospects for the womens apparel industry. Failure to meet market expectations, particularly with respect to comparable sales, net revenue, operating margins and earnings per share, would likely result in a decline in the market value of our stock.
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Effects of war, terrorism, public health concerns or other catastrophes
Threat of terrorist attacks or actual terrorist events in the United States and world-wide could cause damage or disruption to international commerce and the global economy, disrupt the production, shipment or receipt of our merchandise or lead to lower client traffic in regional shopping centers. Natural disasters and public health concerns, including severe infectious diseases, could also impact our ability to open and run our stores in affected areas and negatively impact our foreign sourcing offices and the manufacturing operations of our vendors. Lower client traffic due to security concerns, war or the threat of war, natural disasters and public health concerns could result in decreased sales that could have a material adverse impact on our business, financial condition and results of operations.
Our ability to sustain the benefits of our restructuring program
Our multi-year, strategic restructuring program, which was initiated in January 2008, was designed to enhance our profitability and improve our overall operating effectiveness. While we have realized significant benefits from our restructuring program to date, our ability to sustain these benefits over time may depend on various factors, in particular our ability to maintain discipline in our approach to new store openings, variations in which could impose unexpected costs and/or delays. Further, to the extent we are unable to improve our financial performance, further restructuring measures may be required in the future. In addition, as part of our store fleet optimization plan, we have, and may continue to, sublease certain closing store locations to third parties. If our sub-lessees default in their rental payment obligations under the sublease agreements, we may be adversely impacted.
Our ability to realize deferred tax assets
If our business does not perform well, we may be required to establish a valuation allowance against our deferred tax assets, which could have a material adverse effect on our results of operations and financial condition. Deferred tax assets represent the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in managements determination consist of the performance of the business, including the ability to generate taxable income from operations, and tax planning strategies. If, based on available information, it is more likely than not that a deferred tax asset will not be realized, then a valuation allowance would be required with a corresponding charge to income tax expense, thereby reducing net income.
The effect of external economic factors on our Pension Plan
Our future funding obligations with respect to our defined benefit Pension Plan, which was frozen in 2007, will depend upon the future performance of assets set aside for this Pension Plan, interest rates used to determine funding levels, actuarial data and experience and any changes in government laws and regulations. Our Pension Plan holds mutual funds which invest in equity securities. If the market values of these securities decline, our pension expense would increase and, as a result, could adversely affect our business. Decreases in interest rates or asset returns could also increase our obligations under the Pension Plan. Although no additional benefits have been earned under the Pension Plan since it was frozen, depending on the Pension Plans funded status, there may be ongoing contribution obligations and those obligations could be material.
Our dependence on shopping malls and other retail centers to attract customers to our stores
Many of our stores are located in shopping malls and other retail centers. Sales at these stores benefit from the ability of anchor retail tenants, generally large department stores, and other attractions to generate sufficient levels of consumer traffic in the vicinity of our stores. Any declines in the volume of consumer traffic at shopping centers, whether because of the slowdown in the economy, a falloff in the popularity of shopping centers or otherwise, may result in reduced sales at our stores and leave us with excess inventory. We may have to respond by increasing markdowns or initiating marketing promotions to reduce excess inventory, which could materially adversely impact our margins and operating results.
The impact of potential consolidation of commercial and retail landlords
Continued consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future. Should significant consolidation continue, a large proportion of our store base could be concentrated with one or a few entities that could then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. If we are unable to negotiate favorable rental terms with these entities, this could affect our ability to profitably operate our stores, which could adversely impact our business, financial condition and results of operations.
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ITEM 1B. | Unresolved Staff Comments. |
None.
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ITEM 2. | Properties. |
As of January 29, 2011, we operated 896 retail stores in 46 states, the District of Columbia and Puerto Rico, all of which were leased. Store leases typically provide for initial terms of ten years, although some leases have shorter or longer initial periods. Some of the leases grant us the right to extend the term for one or two additional five-year periods. Some leases also contain early termination options, which can be exercised by us under specific conditions. Most of the store leases require us to pay a specified minimum rent, plus a contingent rent based on a percentage of the stores net sales in excess of a specified threshold. Most of the leases also require us to pay real estate taxes, insurance and certain common area and maintenance costs. The current terms of our leases expire as follows:
Fiscal Years Lease Terms Expire |
Number of Stores |
|||
2011 - 2013 |
370 | |||
2014 - 2016 |
306 | |||
2017 - 2019 |
187 | |||
2020 and later |
33 |
We lease our corporate offices at 7 Times Square in New York City (approximately 297,000 square feet) under a lease expiring in 2020. In addition, in Milford, Connecticut, we maintain 42,000 square feet of office space under a lease which expires in 2019.
The Companys wholly owned subsidiary, AnnTaylor Distribution Services, Inc., owns our 256,000 square foot distribution center located in Louisville, Kentucky. The distribution center is located on approximately 27 acres, which could accommodate possible future expansion of the facility. Nearly all our merchandise is distributed to stores, including our Online Stores, through this facility.
ITEM 3. | Legal Proceedings. |
We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although the amount of any liability that could arise with respect to these actions cannot be determined with certainty, in our opinion, any such liability will not have a material adverse effect on our consolidated financial position, consolidated results of operations or liquidity.
ITEM 4. | (Removed and Reserved). |
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ITEM 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock is listed and traded on the New York Stock Exchange under the symbol ANN. The number of holders of record of common stock at February 25, 2011 was 603. The following table sets forth the high and low sale prices per share of our common stock on the New York Stock Exchange for the periods indicated:
Market Price | ||||||||
High | Low | |||||||
Fiscal Year 2010 |
||||||||
Fourth quarter |
$ | 28.24 | $ | 20.97 | ||||
Third quarter |
23.81 | 14.59 | ||||||
Second quarter |
25.24 | 15.14 | ||||||
First quarter |
24.75 | 12.57 | ||||||
Fiscal Year 2009 |
||||||||
Fourth quarter |
$ | 16.26 | $ | 11.59 | ||||
Third quarter |
17.50 | 11.41 | ||||||
Second quarter |
12.26 | 6.33 | ||||||
First quarter |
7.58 | 2.41 |
STOCK PERFORMANCE GRAPH
The following graph compares the percentage changes in the cumulative total stockholder return on the Companys Common Stock for the five-year period ended January 29, 2011, with the cumulative total return on the Standard & Poors 500 Stock Index (S&P 500) and the Dow Jones U.S. Retailers, Apparel Index for the same period. In accordance with the rules of the Securities and Exchange Commission, the returns are indexed to a value of $100 at January 27, 2006 and assume that all dividends, if any, were reinvested. This performance graph shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act.
16
We have never paid cash dividends on our common stock. Any determination to pay cash dividends is at the discretion of our Board of Directors, which considers it on a periodic basis. In addition, as a holding company, our ability to pay dividends is dependent upon the receipt of dividends or other payments from our subsidiaries, including our wholly owned subsidiary AnnTaylor, Inc. The payment of dividends by AnnTaylor, Inc. to us is subject to certain restrictions under its Credit Facility. We are also subject to certain restrictions contained in the Credit Facility on the payment of cash dividends on our common stock. See Managements Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.
The following table sets forth information concerning purchases of our common stock for the periods indicated, which upon repurchase, are classified as treasury shares available for general corporate purposes:
Total Number of Shares Purchased (1) |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Program (2) |
Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Program |
|||||||||||||
(in thousands) | ||||||||||||||||
October 31, 2010 to November 27, 2010 |
6,561 | $ | 23.48 | | $ | 239,299 | ||||||||||
November 28, 2010 to January 1, 2011 |
2,188,414 | 26.93 | 2,187,500 | 180,387 | ||||||||||||
January 2, 2011 to January 29, 2011 |
814,631 | 26.18 | 813,504 | 159,083 | ||||||||||||
3,009,606 | 3,001,004 | |||||||||||||||
(1) | Includes a total of 8,602 shares of restricted stock purchased in connection with employee tax withholding obligations under employee equity compensation plans, which are not purchases under the Companys publicly announced program. |
(2) | On August 19, 2010, our Board of Directors approved a $100 million expansion of our existing securities repurchase program (the Repurchase Program) to a total of $400 million, increasing the remaining amount then available for share repurchases under the Repurchase Program to approximately $259.1 million. The Repurchase Program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors. We repurchased 3,001,004 shares under the Repurchase Program during the fourth quarter of Fiscal 2010. On March 8, 2011, our Board of Directors approved an additional $200 million expansion of the Repurchase Program, bringing the total authorized under the Repurchase Program to $600 million. As of the date of this filing, approximately $259.1 million remained available under the Repurchase Program. |
The information called for by this item relating to Securities Authorized for Issuance under Equity Compensation Plans is provided in Item 12.
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ITEM 6. | Selected Financial Data. |
The following historical Consolidated Statements of Operations and Consolidated Balance Sheet information has been derived from our audited consolidated financial statements. The information set forth below should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included elsewhere in this document. All references to years are to our fiscal year, which ends on the Saturday nearest January 31 in the following calendar year. All fiscal years for which financial information is set forth below contain 52 weeks, except for the fiscal year ended February 3, 2007, which includes 53 weeks.
Fiscal Year Ended | ||||||||||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
February 2, 2008 |
February 3, 2007 |
||||||||||||||||
(in thousands, except per share, per square foot and number of stores data) | ||||||||||||||||||||
Consolidated Statements of Operations Information: |
||||||||||||||||||||
Net sales |
$ | 1,980,195 | $ | 1,828,523 | $ | 2,194,559 | $ | 2,396,510 | $ | 2,342,907 | ||||||||||
Cost of sales |
876,201 | 834,188 | 1,139,753 | 1,145,246 | 1,085,897 | |||||||||||||||
Gross margin |
1,103,994 | 994,335 | 1,054,806 | 1,251,264 | 1,257,010 | |||||||||||||||
Selling, general and administrative expenses |
978,580 | 966,603 | 1,050,560 | 1,061,869 | 1,031,341 | |||||||||||||||
Restructuring charges |
5,624 | 36,368 | 59,714 | 32,255 | | |||||||||||||||
Asset impairment charges |
| 15,318 | 29,590 | 1,754 | 1,832 | |||||||||||||||
Goodwill impairment charge |
| | 286,579 | | | |||||||||||||||
Operating income/(loss) |
119,790 | (23,954 | ) | (371,637 | ) | 155,386 | 223,837 | |||||||||||||
Interest income |
964 | 935 | 1,677 | 7,826 | 17,174 | |||||||||||||||
Interest expense |
1,632 | 3,091 | 1,462 | 2,172 | 2,230 | |||||||||||||||
Income/(loss) before income taxes |
119,122 | (26,110 | ) | (371,422 | ) | 161,040 | 238,781 | |||||||||||||
Income tax provision/(benefit) |
45,725 | (7,902 | ) | (37,516 | ) | 63,805 | 95,799 | |||||||||||||
Net income/(loss) |
$ | 73,397 | $ | (18,208 | ) | $ | (333,906 | ) | $ | 97,235 | $ | 142,982 | ||||||||
Basic earnings/(loss) per share (1) |
$ | 1.26 | $ | (0.32 | ) | $ | (5.82 | ) | $ | 1.52 | $ | 1.98 | ||||||||
Diluted earnings/(loss) per share (1) |
$ | 1.24 | $ | (0.32 | ) | $ | (5.82 | ) | $ | 1.51 | $ | 1.96 | ||||||||
Weighted average shares outstanding |
57,203 | 56,782 | 57,366 | 62,753 | 70,993 | |||||||||||||||
Weighted average shares outstanding, assuming dilution |
58,110 | 56,782 | 57,366 | 63,212 | 71,721 | |||||||||||||||
Consolidated Operating Information: |
||||||||||||||||||||
Percentage increase/(decrease) in comparable sales (2) |
10.7 | % | (17.4 | )% | (13.4 | )% | (2.2 | )% | 4.5 | % | ||||||||||
Net sales per square foot (3) |
$ | 337 | $ | 311 | $ | 372 | $ | 435 | $ | 458 | ||||||||||
Number of stores: |
||||||||||||||||||||
Open at beginning of period |
907 | 935 | 929 | 869 | 824 | |||||||||||||||
Opened during the period |
24 | 14 | 66 | 77 | 70 | |||||||||||||||
Closed during the period |
35 | 42 | 60 | 17 | 25 | |||||||||||||||
Open at the end of the period |
896 | 907 | 935 | 929 | 869 | |||||||||||||||
Expanded during the period |
1 | 1 | 5 | 14 | 16 | |||||||||||||||
Total store square footage at end of period |
5,284 | 5,348 | 5,492 | 5,410 | 5,079 | |||||||||||||||
Capital expenditures (4) |
$ | 64,367 | $ | 35,736 | $ | 100,195 | $ | 145,852 | $ | 165,129 | ||||||||||
Depreciation and amortization |
$ | 95,523 | $ | 104,351 | $ | 122,222 | $ | 116,804 | $ | 105,890 | ||||||||||
Working capital turnover (5) |
8.0 | x | 10.5 | x | 14.0 | x | 8.2 | x | 5.8 | x | ||||||||||
Inventory turnover (6) |
4.8 | x | 4.9 | x | 5.4 | x | 4.7 | x | 5.0 | x | ||||||||||
Consolidated Balance Sheet Information: |
||||||||||||||||||||
Working capital |
$ | 268,005 | $ | 229,521 | $ | 118,013 | $ | 195,015 | $ | 391,187 | ||||||||||
Goodwill |
| | | 286,579 | 286,579 | |||||||||||||||
Total assets |
926,820 | 902,141 | 960,439 | 1,393,755 | 1,568,503 | |||||||||||||||
Total debt |
5,180 | 2,642 | 7,039 | | | |||||||||||||||
Total stockholders equity |
423,445 | 417,186 | 416,512 | 839,484 | 1,049,911 |
(Footnotes on following page)
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(Footnotes for preceding page)
(1) | We adopted amendments to Accounting Standards Codification (ASC) 260-10 on February 1, 2009, which impacted the determination and reporting of earnings per share by requiring the inclusion of restricted stock and performance restricted stock as participating securities, since they have the right to share in dividends, if declared, equally with common shareholders. During periods of net income, participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (the two-class method). During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. Including these shares in our earnings per share calculation during periods of net income has the effect of diluting both basic and diluted earnings per share. As a result of adopting the amendments to ASC 260-10, prior period basic and diluted shares outstanding, as well as the related per share amounts presented in the preceding table, were adjusted retroactively. |
The retroactive application of the two-class method resulted in a change to previously reported basic earnings per share for Fiscal 2007 and Fiscal 2006 from $1.55 to $1.52 and from $2.01 to $1.98, respectively. There was no change to previously reported basic earnings per share for Fiscal 2008 due to the net loss for the period.
The retroactive application of the two-class method resulted in a change to previously reported diluted earnings per share for Fiscal 2007 and Fiscal 2006 from $1.53 to $1.51 and from $1.98 to $1.96, respectively. There was no change to previously reported diluted earnings per share for Fiscal 2008 due to the net loss for the period.
(2) | Comparable sales provides a measure of existing store sales performance. A store is included in comparable sales in its thirteenth month of operation. A store with a square footage change greater than 15% is treated as a new store for the first year following its reopening. In addition, in a year with 53 weeks, sales in the last week of that year are excluded from comparable sales. During Fiscal 2010, we began including sales from our Online Stores in comparable sales. All prior year comparable sales figures were adjusted retroactively. |
(3) | Net sales per average gross square foot is determined by dividing net sales for the period by the average monthly gross square footage for the period. Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space. Sales from our Online Stores are excluded from the net sales per average gross square foot calculations. |
During Fiscal 2010, we revised the calculation of net sales per average gross square foot from one that calculated the average of the gross square feet at the beginning and end of each period to one using the average monthly gross square footage for the period. All prior period amounts have been adjusted to conform to the current period presentation.
(4) | Capital expenditures are accounted for on the accrual basis and include net non-cash transactions totaling $3.2 million, $(2.8) million, $(10.1) million, $5.9 million, and $(0.8) million in Fiscal 2010, 2009, 2008, 2007 and 2006, respectively. The non-cash transactions are primarily related to the purchase of property and equipment on account. |
(5) | Working capital turnover is determined by dividing net sales by the average of the amount of working capital at the beginning and end of the period. |
(6) | 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. |
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ITEM 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
Management Overview
Our key priorities in Fiscal 2010 included delivering top-line growth at both our Ann Taylor and LOFT brands and maximizing gross margin performance. To drive this growth, we continued to focus on delivering compelling and relevant product assortments at both brands. In addition, we also developed and tested new store formats at both brands, designed to reflect our evolved product aesthetic, maximize store sales productivity and provide our clients with a more engaging in-store experience. These efforts paid off, and despite continued economic pressures, our results for Fiscal 2010 reflected substantial improvement in operating profit. This was due to the combined impact of profitable sales growth, particularly at Ann Taylor stores and in our e-commerce and factory outlet channels at both brands, as well as the benefit of increased SG&A cost leverage and continued expense management across the Company. Our focus on improving top-line productivity resulted in net sales growth of 8.3% to $1.98 billion, which contributed to a record gross margin rate of 55.8% for the fiscal year. Net income also increased significantly, to $73.4 million for Fiscal 2010.
At the Ann Taylor brand, we experienced building sales momentum throughout the year. Our merchandise assortments in 2010 leveraged the success and learnings from our 2009 evolution of the brand and, as a result, were chic, relevant and compelling. This, combined with a highly-effective marketing strategy, resulted in strong full-price sell-through and consistent double-digit comparable sales growth each quarter during Fiscal 2010, which contributed to strong gross margin performance throughout the year. Comparable sales for the brand increased 18.7% in Fiscal 2010, with a 19.3% increase at Ann Taylor stores, a 54.3% increase at anntaylor.com and a 9.3% increase at Ann Taylor Factory stores.
At LOFT, we continued to focus on delivering our client feminine, casual fashion at great value. Our merchandise assortments were well-received at LOFT.com and LOFT Outlet, which contributed to significant sales growth in these channels. At our LOFT stores channel, we experienced some pressure beginning in the second quarter, due to a merchandise mix that lacked balance between fashion and key items. In addition, consumers in the middle-income bracket continued to struggle under macroeconomic pressures and remained highly selective and more incentive-driven in their purchases, which further impacted our business. As a result of these factors, we were more promotional at LOFT stores, particularly in the latter half of Fiscal 2010, which impacted gross margin performance. Comparable sales for the brand were up 5.0% in Fiscal 2010, with a 0.5% increase at LOFT stores, a 65.3% increase at LOFTonline.com and a 21.2% increase at LOFT Outlet.
Throughout the year, we remained committed to maintaining a healthy balance sheet and cash position and, as a result, closed the year with $227 million in cash and no bank debt. In addition, during the second half of Fiscal 2010, we repurchased 4.2 million shares of our stock, at a cost of $100 million, to further return value to our shareholders. We also continued to closely manage our inventory levels throughout the year, with an intent to keep inventories approximately in-line with our comparable sales expectations. We were successful in this regard, and ended the year with total inventory per square foot up 14%, excluding e-commerce, in line with our comparable sales performance and also reflecting incremental inventory build to support our plans to open 44 factory outlet stores in the first half of Fiscal 2011. Fiscal 2010 also marked the last year of our multi-year strategic restructuring program, and our results reflect the benefit of approximately $125 million in ongoing, annualized cost savings, of which approximately $20 million were first realized in Fiscal 2010.
Our Fiscal 2010 real estate growth strategy remained focused on supporting our brand objectives, while we continued to enhance the overall productivity of our fleet through the execution of selective store closures associated with our restructuring program. At the Ann Taylor brand, our 2010 goals focused on optimizing store productivity and enhancing the in-store environment of our existing fleet. To this end, the brand opened four prototype stores during Fiscal 2010, which were approximately 30-40% smaller than the fleet average and had an updated aesthetic. At LOFT, we moved forward with the 2010 expansion of the LOFT brand store fleet, opening 10 new LOFT stores, 14 new LOFT Outlet stores, and converting 4 LOFT stores to LOFT Outlet stores.
Overall, our businesses experienced substantial improvement in both sales and profitability during Fiscal 2010 as compared to last year. Looking ahead, we expect our performance in Fiscal 2011 will benefit from continued momentum at the Ann Taylor brand and improved top-line and bottom-line results at the LOFT brand, mainly due to improvements to the merchandise mix at LOFT stores.
20
Key Performance Indicators
In evaluating our performance, senior management reviews certain key performance indicators, including:
| Comparable sales Comparable sales provide a measure of existing store sales performance. A store is included in comparable sales in its thirteenth month of operation. A store with a square footage change of greater than 15% is treated as a new store for the first year following its reopening. During Fiscal 2010, we began including sales from our Online Stores in comparable sales. All prior year comparable sales figures were adjusted retroactively. |
| Gross margin Gross margin measures our ability to control the direct costs of merchandise sold during the period. Gross margin is the difference between net sales and cost of sales, which is comprised of direct inventory costs for merchandise sold, including all costs to transport merchandise from third-party suppliers to our distribution center. Buying and occupancy costs are excluded from cost of sales. |
| Operating income Because retailers do not uniformly record supply chain costs as a component of cost of sales or selling, general and administrative expenses, operating income allows us to benchmark our performance relative to other retailers. Operating income represents earnings before interest and income taxes and measures our earnings power from ongoing operations. |
| Store productivity Store productivity, including sales per square foot, average unit retail price (AUR), units per transaction (UPT), dollars per transaction (DPT), traffic and conversion, is evaluated by management in assessing our operating performance. |
| Inventory turnover Inventory turnover measures our ability to sell our merchandise and how many times it is replaced over time. This ratio is important in determining the need for markdowns, planning future inventory levels and assessing client response to our merchandise. |
| Quality of merchandise offerings To monitor and maintain client acceptance of our merchandise offerings, we monitor sell-through levels, inventory turnover, gross margin, returns and markdown rates at a class and style level. This analysis helps identify merchandise issues at an early date and helps us plan future product development and buying. |
Results of Operations
The following table sets forth data from our Consolidated Statements of Operations expressed as a percentage of net sales. All fiscal years presented contain 52 weeks:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of sales |
44.2 | 45.6 | 51.9 | |||||||||
Gross margin |
55.8 | 54.4 | 48.1 | |||||||||
Selling, general and administrative expenses |
49.4 | 52.9 | 47.8 | |||||||||
Restructuring |
0.3 | 2.0 | 2.7 | |||||||||
Asset impairment charges |
0.0 | 0.8 | 1.4 | |||||||||
Goodwill impairment charge |
0.0 | 0.0 | 13.1 | |||||||||
Operating income/(loss) |
6.1 | (1.3 | ) | (16.9 | ) | |||||||
Interest income |
0.0 | 0.1 | 0.1 | |||||||||
Interest expense |
0.1 | 0.2 | 0.1 | |||||||||
Income/(loss) before income taxes |
6.0 | (1.4 | ) | (16.9 | ) | |||||||
Income tax provision/(benefit) |
2.3 | (0.4 | ) | (1.7 | ) | |||||||
Net income/(loss) |
3.7 | % | (1.0 | )% | (15.2 | )% | ||||||
21
The following table sets forth selected data from our Consolidated Statements of Operations expressed as a percentage change from the prior period. All fiscal years presented contain 52 weeks:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
increase (decrease) | ||||||||||||
Net sales |
8.3 | % | (16.7 | )% | (8.4 | )% | ||||||
Operating income/(loss) |
600.1 | % | (93.6 | )% | (339.2 | )% | ||||||
Net income/(loss) |
503.1 | % | (94.5 | )% | (443.4 | )% |
Sales and Store Data
During the first quarter of Fiscal 2010, we revised the presentation of certain sales and store data from an approach which focused mainly on our Ann Taylor and LOFT stores to a brand approach, which incorporates the various channels of distribution within each brand. All figures presented for the fiscal years ended January 30, 2010 and January 31, 2009 have been adjusted to conform to the current year presentation.
The following table sets forth certain sales and store data for Fiscal 2010, Fiscal 2009 and Fiscal 2008. All fiscal years presented contain 52 weeks:
Fiscal Year Ended | ||||||||||||||||||||||||
January 29, 2011 | January 30, 2010 | January 31, 2009 | ||||||||||||||||||||||
Sales | Comp % (1) | Sales | Comp % (1) | Sales | Comp % (1) | |||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Sales and Comparable Sales |
||||||||||||||||||||||||
Ann Taylor brand |
||||||||||||||||||||||||
Ann Taylor Stores |
$ | 503,099 | 19.3 | % | $ | 461,966 | (30.0 | )% | $ | 694,813 | (19.9 | )% | ||||||||||||
Ann Taylor e-commerce |
92,571 | 54.3 | % | 61,371 | (15.2 | )% | 70,162 | 7.9 | % | |||||||||||||||
Subtotal |
595,670 | 23.5 | % | 523,337 | (28.6 | )% | 764,975 | (17.9 | )% | |||||||||||||||
Ann Taylor Factory |
268,016 | 9.3 | % | 247,967 | (9.9 | )% | 254,919 | (13.3 | )% | |||||||||||||||
Total Ann Taylor brand |
863,686 | 18.7 | % | 771,304 | (23.8 | )% | 1,019,894 | (17.0 | )% | |||||||||||||||
LOFT brand |
||||||||||||||||||||||||
LOFT Stores |
943,331 | 0.5 | % | 947,761 | (12.7 | )% | 1,098,186 | (11.4 | )% | |||||||||||||||
LOFT e-commerce |
96,915 | 65.3 | % | 60,203 | (5.7 | )% | 61,774 | 18.1 | % | |||||||||||||||
Subtotal |
1,040,246 | 4.2 | % | 1,007,964 | (12.3 | )% | 1,159,960 | (10.2 | )% | |||||||||||||||
LOFT Outlet |
76,263 | 21.2 | % | 49,255 | 19.3 | % | 14,705 | N/A | % | |||||||||||||||
Total LOFT brand |
1,116,509 | 5.0 | % | 1,057,219 | (11.9 | )% | 1,174,665 | (10.2 | )% | |||||||||||||||
Total Company |
$ | 1,980,195 | 10.7 | % | $ | 1,828,523 | (17.4 | )% | $ | 2,194,559 | (13.4 | )% | ||||||||||||
22
Sales and Store Data (Continued)
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
Sales Related Metrics |
||||||||||||
Average Dollars Per Transaction |
||||||||||||
Ann Taylor brand |
$ | 80.22 | $ | 73.77 | $ | 78.50 | ||||||
LOFT brand |
60.17 | 60.02 | 62.65 | |||||||||
Average Units Per Transaction |
||||||||||||
Ann Taylor brand |
2.29 | 2.23 | 2.33 | |||||||||
LOFT brand |
2.40 | 2.44 | 2.43 | |||||||||
Average Unit Retail Sold |
||||||||||||
Ann Taylor brand |
$ | 35.03 | $ | 33.08 | $ | 33.69 | ||||||
LOFT brand |
25.07 | 24.60 | 25.78 | |||||||||
Net Sales Per Average Gross Square Foot (2) |
||||||||||||
Ann Taylor Stores |
$ | 331 | $ | 273 | $ | 378 | ||||||
Ann Taylor Factory |
401 | 372 | 416 | |||||||||
LOFT Stores |
318 | 315 | 360 | |||||||||
LOFT Outlet |
464 | 421 | 323 |
(1) | A store is included in comparable sales in its thirteenth month of operation. A store with a square footage change of greater than 15% is treated as a new store for the first year following its reopening. During Fiscal 2010, we began including sales from our Online Stores in comparable sales. All prior year comparable sales figures were adjusted retroactively. |
(2) | Net sales per average gross square foot is determined by dividing net sales for the period by the average monthly gross square footage for the period. Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space. Sales from our Online Stores are excluded from the net sales per average gross square foot calculations. During Fiscal 2010, we revised the calculation of net sales per average gross square foot from one that calculated the average of the gross square feet at the beginning and end of each period to one using the average monthly gross square footage for the period. All prior period amounts have been adjusted to conform to the current period presentation. |
23
Sales and Store Data (Continued)
Fiscal Year Ended | ||||||||||||||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||||||||||||||
Stores | Square Feet | Stores | Square Feet | Stores | Square Feet | |||||||||||||||||||
(square feet in thousands) | ||||||||||||||||||||||||
Stores and Square Footage |
||||||||||||||||||||||||
Ann Taylor brand |
||||||||||||||||||||||||
Ann Taylor Stores |
266 | 1,453 | 291 | 1,581 | 320 | 1,724 | ||||||||||||||||||
Ann Taylor Factory |
92 | 668 | 92 | 668 | 91 | 662 | ||||||||||||||||||
Total Ann Taylor brand |
358 | 2,121 | 383 | 2,249 | 411 | 2,386 | ||||||||||||||||||
LOFT brand |
||||||||||||||||||||||||
LOFT Stores |
502 | 2,930 | 506 | 2,976 | 510 | 3,010 | ||||||||||||||||||
LOFT Outlet |
36 | 233 | 18 | 123 | 14 | 96 | ||||||||||||||||||
Total LOFT brand |
538 | 3,163 | 524 | 3,099 | 524 | 3,106 | ||||||||||||||||||
Total Company |
896 | 5,284 | 907 | 5,348 | 935 | 5,492 | ||||||||||||||||||
Number of: |
||||||||||||||||||||||||
Stores open at beginning of period |
907 | 5,348 | 935 | 5,492 | 929 | 5,410 | ||||||||||||||||||
New stores |
24 | 138 | 14 | 83 | 66 | 412 | ||||||||||||||||||
Expanded/(downsized) stores (1) |
| (14 | ) | | | | (2 | ) | ||||||||||||||||
Closed stores |
(35 | ) | (188 | ) | (42 | ) | (227 | ) | (60 | ) | (328 | ) | ||||||||||||
Stores open at end of period |
896 | 5,284 | 907 | 5,348 | 935 | 5,492 | ||||||||||||||||||
Converted stores (2) |
10 | | 11 | | | |
(1) | During Fiscal 2010, we downsized five Ann Taylor stores and two LOFT stores and expanded one Ann Taylor store. During Fiscal 2009, we downsized one Ann Taylor store. During Fiscal 2008, we expanded five Ann Taylor stores and downsized one LOFT store. |
(2) | During Fiscal 2010, we converted six Ann Taylor stores to LOFT stores and four LOFT stores to LOFT Outlet stores. During Fiscal 2009, we converted 11 Ann Taylor stores to LOFT stores. No stores were converted during Fiscal 2008. |
Net sales increased approximately $151.7 million, or 8.3%, in Fiscal 2010 as compared to Fiscal 2009 with comparable sales increasing 10.7%. By brand, Ann Taylors net sales increased approximately $92.4 million, or 12.0%, in Fiscal 2010 as compared to Fiscal 2009, with comparable sales increasing 18.7%. The Ann Taylor brand experienced a significant increase in DPTs during Fiscal 2010 compared to Fiscal 2009, primarily due to the impact of higher AURs driven by less promotional activity across all channels, and across merchandise categories, particularly in suits, dresses, pants, and skirts. At the LOFT brand, net sales increased $59.3 million, or 5.6%, in Fiscal 2010 as compared to Fiscal 2009, with comparable sales increasing 5.0%. Overall, the LOFT brand experienced a slight increase in DPTs during Fiscal 2010 compared to Fiscal 2009 due to slightly higher AURs. However, sales at the LOFT stores channel were down slightly due to a merchandise assortment that lacked an appropriate balance between fashion and key items.
Net sales decreased approximately $366.0 million, or 16.7%, in Fiscal 2009 as compared to Fiscal 2008. By brand, Ann Taylors net sales decreased approximately $248.6 million, or 24.4%, in Fiscal 2009 as compared to Fiscal 2008, with comparable sales decreasing 23.8%. At the LOFT brand, net sales decreased $117.4 million, or 10.0%, in Fiscal 2009 as compared to Fiscal 2008, with comparable sales decreasing 11.9%. The decrease in net sales was primarily due to lower traffic and fewer stores due to store closings as part of our strategic restructuring program, combined with lower DPTs across both brands as well as lower AURs at LOFT. These results reflect the continued effect of the recessionary environment and its impact on discretionary retail spending, particularly for womens specialty retailers, as well as product misses at Ann Taylor during the spring season.
Our net sales do not show significant seasonal variation. As a result, we have not had significant overhead and other costs generally associated with large seasonal variations.
24
Cost of Sales and Gross Margin
Because retailers do not uniformly record supply chain costs as cost of sales or selling, general and administrative expenses, our gross margin and selling, general and administrative expenses as a percentage of net sales may not be comparable to certain other retailers. For additional information regarding costs classified in Cost of sales and Selling, general and administrative expenses, on our Consolidated Statements of Operations, refer to Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
The following table presents cost of sales and gross margin in dollars and the related gross margin percentages for Fiscal 2010, Fiscal 2009 and Fiscal 2008. All fiscal years presented contain 52 weeks:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(dollars in thousands) | ||||||||||||
Cost of sales |
$ | 876,201 | $ | 834,188 | $ | 1,139,753 | ||||||
Gross margin |
$ | 1,103,994 | $ | 994,335 | $ | 1,054,806 | ||||||
Percentage of net sales |
55.8 | % | 54.4 | % | 48.1 | % |
The increase in gross margin as a percentage of net sales in Fiscal 2010 as compared to Fiscal 2009 was primarily the result of higher full price sell-through and higher margin rates achieved on non-full price sales at the Ann Taylor brand due to an improved merchandise assortment and effective marketing strategy, partially offset by slightly lower margin rates at the LOFT brand, due to a higher level of promotional activity at the LOFT stores channel. Overall, our gross margin performance also benefited from our strategy to appropriately position and manage inventory levels at both brands.
The increase in gross margin as a percentage of net sales in Fiscal 2009 as compared to Fiscal 2008 primarily reflected higher full price sales as a percentage of total sales and higher margin rates achieved, particularly on full price sales, due to the impact of lower planned inventory levels and less promotional activity as compared to Fiscal 2008, particularly during the fall season.
Selling, General and Administrative Expenses
The following table presents selling, general and administrative expenses in dollars and as a percentage of net sales for Fiscal 2010, Fiscal 2009 and Fiscal 2008:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(dollars in thousands) | ||||||||||||
Selling, general and administrative expenses |
$ | 978,580 | $ | 966,603 | $ | 1,050,560 | ||||||
Percentage of net sales |
49.4 | % | 52.9 | % | 47.8 | % |
Selling, general and administrative expenses in Fiscal 2010 increased approximately $12.0 million compared to Fiscal 2009, primarily reflecting higher marketing and performance-based compensation costs and an increase in variable costs related to higher sales, partially offset by payroll, benefits and tenancy related savings associated with our Restructuring Program and other cost savings initiatives. The decrease in selling, general and administrative expenses as a percentage of net sales for Fiscal 2010 as compared to Fiscal 2009 was primarily due to fixed cost leveraging as a result of higher net sales, Restructuring Program savings and a continued focus on controlling expenses.
The increase in selling, general and administrative expenses as a percentage of net sales in Fiscal 2009 compared to Fiscal 2008 was primarily due to the impact of fixed cost deleveraging resulting from lower net sales, as well as an increase in performance-based compensation expense, partially offset by tenancy cost savings associated with store closings as part of our strategic Restructuring Program.
25
Restructuring Charges
The following table presents restructuring charges in dollars and as a percentage of net sales for Fiscal 2010, Fiscal 2009 and Fiscal 2008:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(dollars in thousands) | ||||||||||||
Restructuring charges |
$ | 5,624 | $ | 36,368 | $ | 59,714 | ||||||
Percentage of net sales |
0.3 | % | 2.0 | % | 2.7 | % |
In January 2008, we initiated a multi-year, strategic Restructuring Program, which was designed to enhance profitability and improve overall operating effectiveness. In Fiscal 2010, Fiscal 2009 and Fiscal 2008, we recorded $5.6 million, $36.4 million and $59.7 million, respectively, in restructuring charges. As of January 29, 2011, all material restructuring charges have been incurred. Additional costs associated with store closings included in our Restructuring Program beyond Fiscal 2010 are expected to be immaterial. See Liquidity and Capital Resources for further discussion.
Asset Impairment Charges
The following table presents asset impairment charges in dollars and as a percentage of net sales for Fiscal 2010, Fiscal 2009 and Fiscal 2008:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(dollars in thousands) | ||||||||||||
Asset impairment charges |
$ | | $ | 15,318 | $ | 29,590 | ||||||
Percentage of net sales |
| % | 0.8 | % | 1.4 | % |
In Fiscal 2009 and Fiscal 2008, we recorded $15.3 million and $29.6 million, respectively, in non-cash store asset impairment charges related to stores that we expect to continue operating, based on projected undiscounted future cash flows. These non-cash store asset impairment charges were calculated using certain assumptions, including estimates related to future sales growth and gross margin rates. No such charges were recorded in Fiscal 2010.
Goodwill Impairment Charge
During Fiscal 2008, we wrote off $286.6 million in recorded goodwill, all of which resided under our Ann Taylor reporting unit. See Note 1, Summary of Significant Accounting Policies Goodwill and Intangible Assets in the Notes to Consolidated Financial Statements for further discussion.
Depreciation and Amortization
The following table presents depreciation and amortization expense in dollars and as a percentage of net sales for Fiscal 2010, Fiscal 2009 and Fiscal 2008:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(dollars in thousands) | ||||||||||||
Depreciation and amortization |
$ | 95,523 | $ | 104,351 | $ | 122,222 | ||||||
Percentage of net sales |
4.8 | % | 5.7 | % | 5.6 | % |
The decrease in depreciation and amortization expense in Fiscal 2010 as compared to Fiscal 2009 was due to lower average capital balances in Fiscal 2010 as compared to Fiscal 2009, driven by a reduction in the average store count over the two-year period and the impact of asset impairment charges and accelerated depreciation recognized in connection with our Restructuring Program.
26
The decrease in depreciation and amortization expense in Fiscal 2009 as compared to Fiscal 2008 was due to lower average capital balances in Fiscal 2009 as compared to Fiscal 2008, driven by a reduction in average store count year over year, an approximate $64 million decrease in capital spending year over year, the acceleration of depreciation in Fiscal 2008 relating to our Restructuring Program store closings, and the impact on depreciation expense of store asset impairment charges in both fiscal years.
Interest Income
The following table presents interest income in dollars and as a percentage of net sales for Fiscal 2010, Fiscal 2009 and Fiscal 2008:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(dollars in thousands) | ||||||||||||
Interest income |
$ | 964 | $ | 935 | $ | 1,677 | ||||||
Percentage of net sales |
0.0 | % | 0.1 | % | 0.1 | % |
Interest income increased in Fiscal 2010 as compared to Fiscal 2009 largely due to the impact of gains recorded in connection with our deferred compensation plan and higher average cash balances, partially offset by lower interest rates as compared to the comparable prior year period.
Interest income decreased in Fiscal 2009 as compared to Fiscal 2008 due to lower interest rates over the prior year, partially offset by higher average cash balances largely due to borrowings under our Credit Facility.
Interest Expense
The following table presents interest expense in dollars and as a percentage of net sales for Fiscal 2010, Fiscal 2009 and Fiscal 2008:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(dollars in thousands) | ||||||||||||
Interest expense |
$ | 1,632 | $ | 3,091 | $ | 1,462 | ||||||
Percentage of net sales |
0.1 | % | 0.2 | % | 0.1 | % |
Interest expense includes various charges, the largest of which are interest and fees related to our Credit Facility. The decrease in interest expense in Fiscal 2010 compared to Fiscal 2009 was primarily due to the fact that there were no borrowings outstanding under our Credit Facility at any time during Fiscal 2010. In March 2009, we accessed $125 million from our Credit Facility as a precaution against potential disruption in the credit markets. In July 2009, we repaid $50 million of these revolver borrowings, and, in October 2009, we repaid the remaining $75 million. The increase in interest expense in Fiscal 2009 compared to Fiscal 2008 was mainly driven by interest on borrowings under our Credit Facility from March 2009 to October 2009, as there were no borrowings under the Credit Facility during Fiscal 2008. See Liquidity and Capital Resources and Note 6, Debt and Other Financing Arrangements in the Notes to Consolidated Financial Statements for further discussion of our Credit Facility.
Income Taxes
The following table presents our effective income tax rate for Fiscal 2010, 2009 and 2008:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
Effective income tax rate |
38.4 | % | 30.3 | % | 10.1 | % |
Our effective income tax rate increased in Fiscal 2010 as compared to Fiscal 2009, primarily due to the impact of permanent items in a period of net income versus a period of net loss, a change in the mix of earnings in various state taxing jurisdictions and certain other discrete items, partially offset by the impact of certain state tax credits.
27
Our effective income tax rate increased in Fiscal 2009 as compared to Fiscal 2008, primarily due to the impact that goodwill impairment had on our Fiscal 2008 effective tax rate, since the majority of the goodwill impairment charge was not deductible for tax purposes. Excluding the effect this had on the Fiscal 2008 effective tax rate, our effective tax rate in Fiscal 2009 would have been comparatively higher than Fiscal 2008 due to a decrease in non-deductible executive compensation expense in Fiscal 2009 as compared to Fiscal 2008. See Note 10, Income Taxes in the Notes to Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
Our primary source of working capital is cash flow from operations. Our primary ongoing cash requirements relate to the purchase of inventory and property and equipment.
The following table sets forth certain measures of our liquidity:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(dollars in thousands) | ||||||||||||
Cash provided by operating activities |
$ | 164,311 | $ | 133,703 | $ | 172,818 | ||||||
Working capital |
$ | 268,005 | $ | 229,521 | $ | 118,013 | ||||||
Current ratio |
1.95:1 | 1.83:1 | 1.39:1 |
Operating Activities
Cash provided by operating activities increased $30.6 million to $164.3 million in Fiscal 2010 due to net income adjusted for non-cash expenses and an increase in net income tax benefits related to stock-compensation. These increases were partially offset by a higher investment in working capital, particularly inventory to support the comparable sales increase and new store growth in the factory outlet channel, as well as an increase in prepaid income taxes related to changes in estimates in the current year.
Merchandise inventories increased approximately $24.5 million, or 14.5%, in Fiscal 2010 from Fiscal 2009. Merchandise inventory on a per-square-foot basis, excluding Online Store inventory, was approximately $34 and $30 at the end of Fiscal 2010 and Fiscal 2009, respectively. The increase in inventory per square foot was driven primarily by the increase in comparable sales and the planned expansion of the factory outlet channel in Fiscal 2011. Inventory turned 4.8 times in Fiscal 2010 compared to 4.9 times in Fiscal 2009.
Investing Activities
Cash used for investing activities was $57.2 million in Fiscal 2010, compared with $38.9 million in Fiscal 2009 and $102.1 million in Fiscal 2008. Cash used for investing activities in Fiscal 2010 was primarily driven by capital expenditures related to new store openings, store refurbishment projects and investments in technology. These cash expenditures were partially offset by receipt of $6.0 million from the sale of our remaining investment in auction rate securities in the second quarter of Fiscal 2010. During Fiscal 2010, we opened 24 new stores, as compared to 14 new stores in Fiscal 2009.
The following table sets forth our capital expenditures:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(in thousands) | ||||||||||||
New store construction |
$ | 25,433 | $ | 8,472 | $ | 52,169 | ||||||
Store renovation/refurbishment |
14,172 | 4,920 | 10,766 | |||||||||
Information systems |
22,953 | 21,253 | 31,449 | |||||||||
Corporate offices/distribution center |
779 | 898 | 5,423 | |||||||||
Other |
1,030 | 193 | 388 | |||||||||
Total |
$ | 64,367 | $ | 35,736 | $ | 100,195 | ||||||
28
We expect our total capital expenditure requirements in Fiscal 2011 will be approximately $130 million. Of this amount, approximately $60 million will be spent on new store construction, driven by the planned opening of 78 stores, and approximately $25 million will be spent on 35 planned downsizes and remodels, largely associated with the roll-out of the new, smaller Ann Taylor store format. These investments will result in an increase in store square footage of approximately 410,000 square feet, or 7.7%. In addition, approximately $20 million is planned for store renovation and refurbishment programs, primarily for LOFT stores, and approximately $25 million will be spent to support continued investments in information systems and technology. The actual amount of our capital expenditures will depend in part on the number of stores opened, expanded and refurbished. To finance our capital requirements, we expect to use internally generated funds. See Business-Stores and Expansion.
On November 14, 2008, we entered into a settlement agreement with UBS AG (UBS), one of our investment providers, related to a $6.0 million investment in auction rate securities purchased from UBS. Under the terms of the settlement agreement, we received auction rate security rights that enabled us to sell our auction rate securities back to UBS at par value at any time during the two year period beginning June 30, 2010. On June 30, 2010, we exercised our auction rate security rights and sold the $6.0 million investment in auction rate securities back to UBS at par value. As of January 29, 2011, we had no funds invested in auction rate securities.
Financing Activities
Cash used for financing activities was $84.9 million in Fiscal 2010, compared with $2.6 million in Fiscal 2009 and $92.4 million in Fiscal 2008. Cash used for financing activities in Fiscal 2010 was primarily driven by the repurchase of $105.7 million of our common stock, partially offset by excess tax benefits related to stock-based compensation and cash inflows related to stock option exercises in Fiscal 2010.
On April 23, 2008, our wholly-owned subsidiary AnnTaylor, Inc. and certain of its subsidiaries entered into the Credit Facility with Bank of America N.A. and a syndicate of lenders, which amended its then existing $175 million senior secured revolving credit facility which was due to expire in November 2008. The Credit Facility provides us with an option to increase the total facility and the aggregate commitments thereunder up to $350 million, subject to the lenders agreement to increase their commitment for the requested amount. The Credit Facility expires on April 23, 2013 and may be used for working capital, letters of credit and other general corporate purposes. The Credit Facility contains an acceleration clause which, upon the occurrence of a Material Adverse Effect, as defined in the Credit Facility, may cause any outstanding borrowings to become immediately due and payable.
The 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 percentages of certain eligible assets. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $17.6 million, $13.8 million and $33.8 million as of January 29, 2011, January 30, 2010 and January 31, 2009, respectively, leaving a remaining available balance for loans and letters of credit of $120.2 million, $112.9 million and $115.0 million as of January 29, 2011, January 30, 2010 and January 31, 2009, respectively. In March 2009, we accessed $125 million from our Credit Facility as a precaution against potential disruption in the credit markets. In July 2009, we repaid $50 million of these revolver borrowings, and subsequently repaid the remaining $75 million in October 2009. There were no borrowings outstanding under the Credit Facility at January 29, 2011, January 30, 2010, or as of the date of this filing.
The Credit Facility permits us to pay cash dividends (and permits dividends by AnnTaylor, Inc. to fund such cash dividends) subject to certain Liquidity requirements (as defined in the Credit Facility) and other conditions as set forth in the Credit Facility. Certain of our subsidiaries are also permitted to pay dividends to us to fund certain taxes owed by us, fund ordinary operating expenses not in excess of $500,000 in any fiscal year, repurchase common stock held by employees not in excess of $100,000 in any fiscal year and for certain other stated purposes (subject to certain exceptions). See Note 6, Debt and Other Financing Arrangements, in the Notes to Consolidated Financial Statements for further discussion of the Credit Facility.
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On August 19, 2010, our Board of Directors approved a $100 million expansion of our Repurchase Program, bringing the total authorized under the Repurchase Program to $400 million, and the total then available for share repurchases to approximately $259.1 million. The Repurchase Program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors. Purchases of shares of common stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of common stock increase treasury shares available for general corporate purposes. During Fiscal 2010, we repurchased 4,201,004 shares of our common stock through open market purchases under the Repurchase Program at a cost of approximately $100 million. During Fiscal 2009, no shares were repurchased under the Repurchase Program. During Fiscal 2008, we repurchased 4,108,183 shares of our common stock under the Repurchase Program at a cost of approximately $100.8 million. As of January 29, 2011, approximately $159.1 million remained available under the Repurchase Program.
Subsequent to January 29, 2011, and through the date of this filing, we purchased an additional 4,197,097 shares of our common stock under the Repurchase Program at a cost of approximately $100 million. On March 8, 2011, our Board of Directors approved an additional $200 million expansion of the Repurchase Program, bringing the total authorized under the Repurchase Program to $600 million. As of the date of this filing, approximately $259.1 million remained available under the Repurchase Program.
In Fiscal 2000, our Board of Directors adopted a Stockholder Rights Plan (Rights Plan). Rights under the Rights Plan (Rights) were distributed as a dividend at the rate of one Right for each share of common stock held by stockholders of record as of the close of business on May 30, 2000. As a result of 3-for-2 stock splits that occurred in Fiscal 2004 and Fiscal 2002, each share of common stock represents four-ninths of a Right. Each Right entitles stockholders to buy one unit of a share of a new series of preferred stock for $125. No Rights were exercised under the Rights Plan through Fiscal 2010. The Rights Plan expired on May 18, 2010, and our Board of Directors did not extend its expiration date.
Short-Term Borrowings
In the second quarter of Fiscal 2010, we entered into a vendor financing program (the Trade Payable Program) with a financing company. Under the Trade Payable Program, the financing company makes accelerated and discounted payments to our vendors and we, in turn, make our regularly-scheduled full vendor payments to the financing company. As of January 29, 2011, there was $3.4 million outstanding under the Trade Payable Program, which is included in accrued expenses and other current liabilities on our Consolidated Balance Sheets. The average balance at each month end during the quarter ended January 29, 2011 was $3.3 million, and we paid no interest on amounts owed under the Trade Payable Program during the period, since remittances to the financing company were made within the agreed-upon timeframe. We expect to add additional vendors into the program, and, as such, we expect the Trade Payable Program will continue to expand.
Other
At January 29, 2011, substantially all of our cash and cash equivalents were invested in deposit accounts at FDIC-insured banks. All of our deposit account balances are currently FDIC insured and will remain so through December 31, 2012 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. We also have a small amount of cash and cash equivalents invested in money market funds that are backed by U.S. Treasury Securities as of January 29, 2011.
On January 30, 2008, we initiated a multi-year, strategic Restructuring Program designed to enhance profitability and improve overall operating effectiveness. This program was subsequently expanded during the third quarter of Fiscal 2008 and again during the second quarter of Fiscal 2009. The three key elements of our Restructuring Program include: (1) closing underperforming stores; (2) an organizational streamlining that reduced our corporate and field staffing levels; and (3) a broad-based productivity initiative that included, among other things, centralized procurement of non-merchandise goods and services, outsourcing certain activities and optimizing store productivity and effectiveness. As a result of our Restructuring Program, we have realized total ongoing annualized savings of approximately $125 million as of the end of Fiscal 2010. Approximately $40 million of these savings were realized in Fiscal 2008, an incremental $65 million were realized in Fiscal 2009 and the balance of $20 million of incremental savings were realized in Fiscal 2010.
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In connection with the store closing component of our Restructuring Program, we initially identified 117 stores for closure over the Fiscal 2008 to Fiscal 2010 period. In connection with the subsequent expansion of our Restructuring Program, we identified an additional 108 stores for closure, and now expect to close approximately 225 stores as part of our Restructuring Program. A total of 137 of these stores closed during the original Fiscal 2008 to Fiscal 2010 period, of which 35 were closed during Fiscal 2010. By division, we closed 33 Ann Taylor stores and 27 LOFT stores during Fiscal 2008, 18 Ann Taylor stores and 24 LOFT stores during Fiscal 2009, and 19 Ann Taylor stores and 16 LOFT stores during Fiscal 2010. The balance of these stores are expected to close in Fiscal 2011 and beyond. Additional costs associated with closings beyond Fiscal 2010 are expected to be immaterial.
As part of the organizational streamlining component of our Restructuring Program, we eliminated approximately 600 positions over the Fiscal 2007 to Fiscal 2009 period, of which 180 positions were eliminated in Fiscal 2007, 260 positions were eliminated in Fiscal 2008, and 160 positions were eliminated in Fiscal 2009. In the fourth quarter of Fiscal 2010, we eliminated approximately 45 positions in connection with the decision to co-source certain back-office functions with a strategic service partner.
Total pre-tax expenses associated with our restructuring initiatives were $134.0 million, of which $84.2 million were non-cash expenses, primarily associated with the write-down of assets related to store closures, and $49.8 million were cash charges for severance and various other costs. In Fiscal 2010, Fiscal 2009, Fiscal 2008 and Fiscal 2007 we recorded $5.6 million, $36.4 million, $59.7 million and $32.3 million, respectively, in restructuring charges.
We have a credit card program which offers eligible clients the choice of a private label or a co-branded credit card. All new cardholders are automatically enrolled in our exclusive rewards program, which is designed to recognize and promote client loyalty. We provide the sponsoring bank with marketing support of the program, and use our sales force to process credit card applications for both the private label and co-branded credit cards. As part of the program, we received an upfront signing bonus from the sponsoring bank. We also receive ongoing payments for new accounts activated, as well as a share of finance charges collected by the sponsoring bank. These revenue streams are accounted for as a single unit of accounting and accordingly will be recognized into revenue ratably based on the total projected revenues over the term of the agreement.
Certain judgments and estimates underlie our projected revenues and related expenses under the program, including projected future store counts, the number of applications processed, our projected sales growth and points breakage, among other things. During Fiscal 2010, Fiscal 2009 and Fiscal 2008, we recognized approximately $14.8 million, $14.4 million and $3.3 million of revenue related to the credit card program, respectively. At January 29, 2011, January 30, 2010 and January 31, 2009, approximately $5.8 million, $7.2 million and $8.5 million, respectively, of deferred credit card income is included in accrued expenses and other current liabilities on our Consolidated Balance Sheets. Partially offsetting the income from the credit card program are costs, net of points breakage, related to the customer loyalty program. These costs are included in either cost of sales or in net sales as a sales discount, as appropriate. The cost of sales impact, net of points breakage, was approximately $0.3 million, $5.6 million and $1.6 million and the sales discount impact was approximately $3.0 million, $2.1 million and $0.1 million for Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
In order to accelerate expansion in the factory outlet channel, we are leasing certain store locations at factory outlet centers across the United States. As a result, we plan to open approximately 44 new factory outlet stores during the second quarter of Fiscal 2011. The rental payments and construction costs associated with these locations will be funded with operating cash flows.
In 2009, we acquired the registered trademark in the PRC for the Ann Taylor mark (the Mark) in the apparel and footwear class pursuant to a Trademark Assignment Agreement, which assignment was subject to approval by the PRC Trademark Office. Until that approval was received, our existing trademark license agreement permitting our use of the Mark remained in effect. The assignment of the Mark was approved by the PRC Trademark Office in October 2010 and is subject to renewal with the PRC Trademark Office every ten years. The costs of renewal are immaterial, and we intend to renew the Mark indefinitely. We have recognized the full $3.75 million purchase price of the Mark, of which $1.0 million remains payable under the Assignment Agreement, as an indefinite-lived intangible asset included in Other assets on the Consolidated Balance Sheets as of January 29, 2011. The Mark is subject to annual impairment testing which is performed during the fourth quarter of each fiscal year, unless there is an indicator of impairment, which would require an interim impairment review. The most recent impairment test supported the carrying value of the Mark and did not result in an impairment charge.
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On October 1, 2007, we froze our non-contributory defined benefit Pension Plan (the Pension Plan). As a result of the freeze, only those associates who were eligible under the Pension Plan on or before September 30, 2007 (substantially all associates of the Company who completed 1,000 hours of service during a consecutive 12 month period prior to that date) are eligible to receive benefits from the Pension Plan once they have completed the five years of service required to become fully vested. No associate may become a participant in the Pension Plan on or after October 1, 2007. No additional benefits are earned under the Pension Plan on or after October 1, 2007.
Our funding obligations and liability under the terms of the Pension Plan are determined using certain actuarial assumptions, including a discount rate and an expected long-term rate of return on Pension Plan assets. The discount rate enables us to state expected future cash payments for pension benefits as a present value on the measurement date. A lower discount rate increases the present value of the benefit obligations and increases pension expense. The discount rate selected was based on a yield curve which uses expected cash flows from the Pension Plan and then discounts those cash flows with the bond rate for that period. This resulted in a discount rate of 5.75%. A one percent decrease in the assumed discount rate would increase total net periodic pension expense for Fiscal 2011 by $1.2 million and would increase the liability for pension benefits at January 29, 2011 by $8.0 million. A one percent increase in the assumed discount rate would decrease total net periodic pension expense for Fiscal 2011 by $0.2 million, would eliminate the liability for pension benefits, and would result in a prepaid pension asset of $4.9 million at January 29, 2011.
Pension Plan assets as of January 29, 2011 were allocated 44% in equities, 54% in bond-related funds and 2% in short-term investments. For the purposes of developing long-term rates of return, it was assumed that the short-term investments were reallocated to equities and bond-related funds, yielding assumed long-term rates of return of 8.4% and 4.9%, respectively. To develop the expected long-term rate of return on Pension Plan assets, we considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. A lower expected rate of return on Pension Plan assets would increase pension expense. Our expected long-term rate of return on Pension Plan assets was 6.25% for both Fiscal 2010 and Fiscal 2009. A one percent change in the long-term rate of return assumption would impact Fiscal 2011 pension expense by approximately $0.3 million.
As a result of losses experienced in global equity markets, our Pension Plan assets experienced negative returns for Fiscal 2008 which, in turn, increased pension costs in Fiscal 2009. Our Pension Plan assets experienced gains in Fiscal 2009. As a result, pension costs in Fiscal 2010 were $1.1 million lower than pension costs in Fiscal 2009, excluding settlement charges. Since Pension Plan assets experienced gains in Fiscal 2010, pension expense for Fiscal 2011, excluding any potential settlement charges, is projected to be approximately $0.1 million, or $0.3 million lower than pension expense, excluding settlement charges, for Fiscal 2010. Our Pension Plan is invested in readily-liquid investments, primarily equity and debt securities. Although we were not required to make a contribution to the Pension Plan in Fiscal 2010 or Fiscal 2009, any deterioration in the financial markets or changes in discount rates may require us to make a contribution to our Pension Plan in Fiscal 2011.
During Fiscal 2010 and Fiscal 2009, the total amount of lump sum payments made to plan participants exceeded the interest cost for those respective fiscal periods. As a result, non-cash settlement charges of $0.3 million and $1.2 million, respectively, were recorded and are included in Selling, general and administrative expenses in our Consolidated Statements of Operations.
We are self-insured for expenses related to our employee point of service medical plan, our workers compensation plan and for short-term and long-term disability, up to certain thresholds. Claims filed, as well as claims incurred but not reported, are accrued based on managements estimates, using information received from plan administrators, third-party actuaries, historical analysis and other relevant data. We believe we have taken reasonable steps to ensure that we are adequately accrued for incurred costs related to these programs at January 29, 2011.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as defined by Item 303 (a) (4) of Regulation S-K.
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Contractual Obligations
The Company has various contractual obligations which are recorded as liabilities in our Consolidated Financial Statements. Other items, such as purchase obligations, include certain commitments and contracts that are not recognized as liabilities in our Consolidated Financial Statements but are required to be disclosed in the Notes to Consolidated Financial Statements. Purchase obligations do not include those commitments or contracts that are cancelable without penalty.
The following table sets forth our significant contractual obligations as of January 29, 2011:
Payments Due by Fiscal Year | ||||||||||||||||||||
Total | 2011 | 2012-2013 | 2014-2015 | 2016 And After |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-term debt (1) |
$ | 2,727 | $ | 873 | $ | 1,648 | $ | 206 | $ | | ||||||||||
Capital leases (2) |
1,457 | 448 | 896 | 113 | | |||||||||||||||
Operating leases (3) |
1,047,226 | 177,337 | 309,581 | 254,169 | 306,139 | |||||||||||||||
Purchase obligations: |
||||||||||||||||||||
New store construction (4) |
5,298 | 5,298 | | | | |||||||||||||||
Merchandise (5) |
200,188 | 200,188 | | | | |||||||||||||||
Information services (6) |
89,130 | 23,342 | 37,701 | 28,087 | | |||||||||||||||
Other (7) |
17,422 | 16,430 | 992 | | | |||||||||||||||
Total |
$ | 1,363,448 | $ | 423,916 | $ | 350,818 | $ | 282,575 | $ | 306,139 | ||||||||||
(1) | Represents finance arrangements relating to support and maintenance associated with certain computer equipment on our Consolidated Balance Sheet |
(2) | Represents capital leases with 4 year terms relating to certain computer equipment on our Consolidated Balance Sheet. |
(3) | Represents future minimum lease payments under non-cancelable operating leases in effect as of January 29, 2011. The minimum lease payments above do not include common area maintenance (CAM) charges or real estate taxes, which are also contractual obligations under our store and office operating leases but are generally not fixed and can fluctuate from year to year. Total CAM charges and real estate taxes for Fiscal 2010, Fiscal 2009 and Fiscal 2008 were $68.6 million, $76.8 million and $81.6 million, respectively. |
(4) | Represents purchase commitments for Fiscal 2011 store construction not recorded on our Consolidated Balance Sheet. |
(5) | Represents open purchase orders for merchandise not yet received or recorded on our Consolidated Balance Sheet. |
(6) | Represents co-sourcing of certain back-office functions, consulting, maintenance and license agreements for services to be provided, as well as software not yet received or recorded on our Consolidated Balance Sheet. |
(7) | Represents contractual commitments or open purchase orders for non-merchandise goods or services not received or recorded on our Consolidated Balance Sheet. |
There were no borrowings outstanding under the Credit Facility as of January 29, 2011. The Credit Facility contains a provision for commitment fees related to the unused revolving loan commitment and outstanding letters of credit, which are not included in the table because these charges are not fixed and can fluctuate from year to year due to various circumstances. Total commitment fees for Fiscal 2010, Fiscal 2009 and Fiscal 2008 were $0.9 million, $1.0 million and $0.9 million, respectively.
The table above also excludes approximately $7 million of tax reserves accounted for under ASC 740-10, Income Taxes, as we are unable to reasonably estimate the ultimate amount or timing of any settlement. See Note 10, Income Taxes, in the Notes to Consolidated Financial Statements for further discussion. In addition, as discussed in Note 11, Retirement Plans, in the Notes to Consolidated Financial Statements, we have a long-term liability for our Pension Plan. Minimum pension funding requirements are not included in the table above as such amounts are not determinable.
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Recent Accounting Pronouncements
Recently Issued Standards
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Fair Value Measurements and Disclosures. ASU 2010-06 amends ASC 820-10, Fair Value Measurements and Disclosures, and requires new disclosures surrounding certain fair value measurements. ASU 2010-06 is effective for the first interim or annual reporting period beginning on or after December 15, 2009, except for certain disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for the first interim and annual reporting periods beginning on or after December 15, 2010. During Fiscal 2009, we early adopted the disclosure requirements effective for the first interim or annual reporting period beginning on or after December 15, 2009. However, we intend to adopt the remaining disclosure requirements when they become effective in the first quarter of Fiscal 2011. We do not expect the additional disclosure requirements of ASU 2010-06 will have any impact on our Consolidated Financial Statements or notes thereto.
In October 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue Arrangements. ASU 2009-13 amends ASC 605-10, Revenue Recognition, and addresses accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit, and provides guidance on how to measure and allocate arrangement consideration to one or more units of accounting. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted, but certain requirements must be met. We plan to adopt ASU 2009-13 in the first quarter of Fiscal 2011 and do not expect it will have any impact on our Consolidated Financial Statements.
Critical Accounting Policies
Managements Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates.
Based on the above, we have determined that our most critical accounting policies are those related to merchandise inventory valuation, asset impairment, income taxes and stock and incentive-based compensation. These policies are also discussed in the Notes to Consolidated Financial Statements and in relevant sections of this discussion and analysis.
Merchandise Inventory Valuation
Merchandise inventories are valued at the lower of average cost or market, at the individual item level. Market is determined based on the estimated net realizable value, which is generally the merchandise selling price. Merchandise inventory levels are monitored to identify slow-moving items and broken assortments (items no longer in stock in a sufficient range of sizes) and markdowns are used to clear such merchandise. Merchandise inventory value is reduced if the selling price is marked below cost. Physical inventory counts are performed annually in January and estimates are made for any shortage between the date of the physical inventory count and the balance sheet date.
Asset Impairment
Long-lived tangible assets are accounted for under ASC 360-10, Property, Plant, and Equipment. Long-lived assets are reviewed periodically for impairment or when events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Management estimates future pre-tax cash flows (undiscounted and without interest charges) based on historical experience, knowledge and market data. Estimates of future cash flows require that we make assumptions and apply judgment, including forecasting future sales and expenses and estimating useful lives of the assets. These estimates can be affected by factors such as future store results, real estate demand, and economic conditions that can be difficult to predict, as well as other factors such as those outlined in Risk Factors. If the expected future cash flows related to the long-lived assets are less than the assets carrying value, an impairment loss would be recognized for the difference between estimated fair value and carrying value.
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Income Taxes
We account for income taxes in accordance with ASC 740-10, Income Taxes, which requires the use of the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Inherent in the measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations. No valuation allowance has been provided for deferred tax assets, since we anticipate that the full amount of these assets will be realized in the future. In determining the need for a valuation allowance, we are required to make assumptions and to apply judgment, including forecasting future earnings, taxable income, and the mix of earnings in the jurisdictions in which we operate. See Risk Factors. Our effective tax rate considers our judgment of expected tax liabilities in the various taxing jurisdictions within which we are subject to tax. We are currently under examination by the U.S. federal, and certain state and local taxing jurisdictions. Further, at any given time, multiple tax years are subject to examination by various taxing authorities. The recorded amounts of income tax are subject to adjustment upon examination, changes in interpretation and changes in judgment utilized in determining estimates. While no adjustments to recorded amounts are anticipated, a 1% variance in our effective tax rate would affect net income after taxes by approximately $1.2 million in Fiscal 2010.
Stock and Incentive-based Compensation
The calculation of stock-based compensation expense requires the input of subjective assumptions, including the expected term of the stock-based awards, stock price volatility and pre-vesting forfeitures. We estimate the expected life of shares granted in connection with stock-based awards using historical exercise patterns, which we believe are representative of future behavior. We estimate the volatility of our common stock at the date of grant based on an average of our historical volatility and the implied volatility of publicly traded options on our common stock, if the latter is available. We estimate forfeitures based on our historical experience of stock-based awards granted, exercised and cancelled, as well as future expected behavior.
Similarly, the calculation of long-term performance compensation expense requires the input of subjective assumptions, including the expected forfeiture of earned and banked awards and forecasted estimates of our future income growth. We estimate forfeitures based on historical forfeiture patterns of stock-based awards with similar maximum vesting terms, as well as current and future trends of expected behavior. We estimate our future income growth using a best estimate approach, which considers past performance and future business trends.
The assumptions used to calculate the fair value of stock-based awards and long-term performance compensation expense represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we were to use different assumptions, the expense recorded could be materially different in the future. Similarly, if actual forfeiture rates differ materially from our estimates, the effect on stock-based compensation expense and long-term performance compensation expense could be material. See Note 9, Equity and Incentive Compensation Plans, in the Notes to Consolidated Financial Statements for additional information.
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
We have significant amounts of cash and cash equivalents invested in deposit accounts at FDIC-insured banks. All of our deposit account balances are currently FDIC insured and will remain so through December 31, 2012 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. We also have a small amount of cash and cash equivalents invested in money market funds that are backed by U.S. Treasury Securities as of January 29, 2011. With the continued uncertainty surrounding financial institutions, we cannot be assured that we will not experience losses on any money market holdings.
AnnTaylor Inc.s Credit Facility allows for investments in financial instruments with original maturity dates of up to 360 days. As of January 29, 2011, we did not hold any investments that did not qualify as cash and cash equivalents.
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ITEM 8. | Financial Statements and Supplementary Data. |
The following Consolidated Financial Statements of the Company for the years ended January 29, 2011, January 30, 2010 and January 31, 2009 are included as part of this Report (See Item 15):
Consolidated Statements of Operations for the Fiscal Years Ended January 29, 2011, January 30, 2010 and January 31, 2009.
Consolidated Balance Sheets as of January 29, 2011 and January 30, 2010.
Consolidated Statements of Stockholders Equity for the Fiscal Years Ended January 29, 2011, January 30, 2010 and January 31, 2009.
Consolidated Statements of Cash Flows for the Fiscal Years Ended January 29, 2011, January 30, 2010 and January 31, 2009.
Notes to Consolidated Financial Statements.
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
ITEM 9A. | Controls and Procedures. |
Disclosure Controls and Procedures
The Company conducted an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this report.
Managements Report on Internal Control over Financial Reporting
The management of AnnTaylor Stores Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Management assessed the effectiveness of the Companys internal control over financial reporting as of January 29, 2011 based on the framework and criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Companys internal control over financial reporting was effective as of January 29, 2011.
During the Companys fourth fiscal quarter, there were no changes in the Companys internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
The Companys Independent Registered Public Accounting Firm, Deloitte & Touche LLP, issued a report on the Companys internal control over financial reporting, which is included in the Report of Independent Registered Public Accounting Firm, on page 41.
ITEM 9B. | Other Information. |
None.
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ITEM 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this item is incorporated herein by reference to the Sections entitled Election of Class II Directors, Executive Officers, Corporate Governance, Stockholder Proposals for the 2012 Annual Meeting and Section 16(a) Beneficial Ownership Reporting Compliance in the Companys Proxy Statement for its 2011 Annual Meeting of Stockholders.
The Company has Business Conduct Guidelines that apply to all its associates, including its chief executive officer, chief financial officer/principal accounting officer and controller, as well as members of the Companys Board of Directors. The Business Conduct Guidelines are available on the Companys website at http://investor.anntaylor.com. Any updates or amendments to the Business Conduct Guidelines, as well as any waiver from the Business Conduct Guidelines granted to an executive officer (including the Companys chief executive officer, chief financial officer/principal accounting officer or controller), will also be posted on the website.
ITEM 11. | Executive Compensation. |
The information required by this item is incorporated herein by reference to the Sections entitled Executive Compensation, Director Compensation, Compensation Committee Interlocks and Insider Participation and Compensation Committee Report in the Companys Proxy Statement for its 2011 Annual Meeting of Stockholders.
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this item is presented below and incorporated herein by reference to the Section entitled Beneficial Ownership of Common Stock in the Companys Proxy Statement for its 2011 Annual Meeting of Stockholders.
The following table sets forth information with respect to shares of the Companys common stock that may be issued under the Companys existing equity compensation plans, as of January 29, 2011:
Equity Compensation Plan Information
(c) | ||||||||||||
(a) | (b) | Number of Securities Remaining Available for Future Issuance |
||||||||||
Plan Category |
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights |
Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
|||||||||
Equity compensation plans approved by security holders (1) |
4,084,777 | $ | 19.31 | 4,648,421 | (2) | |||||||
Equity compensation plans not approved by security holders (3) |
857,978 | 20.20 | 69,108 | |||||||||
Total |
4,942,755 | $ | 19.46 | 4,717,529 | ||||||||
(1) | Consists of the 1992 Stock Option and Restricted Stock and Unit Award Plan, the 2003 Equity Incentive Plan and the Associate Discount Stock Purchase Plan (ADSPP). |
(2) | Includes 1,611,231 shares of Common Stock available for issuance under the ADSPP. |
(3) | Consists of the 2000 Stock Option and Restricted Stock Award Plan and the 2002 Stock Option and Restricted Stock and Unit Award Plan. |
See Note 9, Equity and Incentive Compensation Plans in the Notes to Consolidated Financial Statements for a description of the material features of these plans.
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this item is incorporated herein by reference to the Sections entitled Related Person Transactions, Related Person Transactions Policy and Procedures and Corporate Governance in the Companys Proxy Statement for its 2011 Annual Meeting of Stockholders.
ITEM 14. | Principal Accounting Fees and Services. |
The information required by this item is incorporated herein by reference to the Section entitled Ratification of the Appointment of Independent Registered Public Accounting Firm in the Companys Proxy Statement for its 2011 Annual Meeting of Stockholders.
37
ITEM 15. | Exhibits and Financial Statement Schedules. |
(a) | List of documents filed as part of this Annual Report: |
1. | The following Consolidated Financial Statements of the Company are filed as part of this Annual Report: |
Report of Independent Registered Public Accounting Firm;
Consolidated Statements of Operations for the Fiscal Years Ended January 29, 2011, January 30, 2010 and January 31, 2009;
Consolidated Balance Sheets as of January 29, 2011 and January 30, 2010;
Consolidated Statements of Stockholders Equity for the Fiscal Years Ended January 29, 2011, January 30, 2010 and January 31, 2009;
Consolidated Statements of Cash Flows for the Fiscal Years Ended January 29, 2011, January 30, 2010 and January 31, 2009;
Notes to Consolidated Financial Statements.
2. | Schedules other than the above have been omitted because they are not applicable. |
3. | The exhibits filed as a part of this Annual Report are listed in the Exhibit Index. |
(b) | The exhibits listed in the Exhibit Index attached hereto are filed as part of this Annual Report and incorporated herein by reference. |
(c) | Not applicable. |
38
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ANNTAYLOR STORES CORPORATION | ||
By: | /s/ Kay Krill | |
Kay Krill | ||
President and Chief Executive Officer |
Date: March 11, 2011
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/ Kay Krill Kay Krill |
President, Chief Executive Officer and Director (Principal Executive Officer) |
March 11, 2011 Date | ||||||
/s/ Michael J Nicholson Michael J. Nicholson |
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
March 11, 2011 Date | ||||||
/s/ Ronald W. Hovsepian Ronald W. Hovsepian |
Non-Executive Chairman of the Board and Director |
March 11, 2011 Date | ||||||
/s/ James J. Burke, Jr. James J. Burke, Jr. |
Director |
March 11, 2011 Date | ||||||
/s/ Michelle Gass Michelle Gass |
Director |
March 11, 2011 Date | ||||||
/s/ Dale W. Hilpert Dale W. Hilpert |
Director |
March 11, 2011 Date | ||||||
/s/ Linda A. Huett Linda A. Huett |
Director |
March 11, 2011 Date | ||||||
/s/ Stacey Rauch Stacey Rauch |
Director |
March 11, 2011 Date | ||||||
/s/ Michael W. Trapp Michael W. Trapp |
Director |
March 11, 2011 Date | ||||||
/s/ Daniel W. Yih Daniel W. Yih |
Director |
March 11, 2011 Date |
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No. | ||||
41 | ||||
Consolidated Financial Statements: |
||||
42 | ||||
Consolidated Balance Sheets as of January 29, 2011 and January 30, 2010 |
43 | |||
44 | ||||
45 | ||||
46 |
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
AnnTaylor Stores Corporation
New York, NY
We have audited the accompanying consolidated balance sheets of AnnTaylor Stores Corporation and its subsidiaries (the Company) as of January 29, 2011 and January 30, 2010, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three fiscal years in the period ended January 29, 2011. We also have audited the Companys internal control over financial reporting as of January 29, 2011, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AnnTaylor Stores Corporation and its subsidiaries as of January 29, 2011 and January 30, 2010, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2011, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 11, 2011
41
CONSOLIDATED STATEMENTS OF OPERATIONS
For Fiscal Years Ended January 29, 2011, January 30, 2010 and January 31, 2009
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(in thousands, except per share amounts) | ||||||||||||
Net sales |
$ | 1,980,195 | $ | 1,828,523 | $ | 2,194,559 | ||||||
Cost of sales |
876,201 | 834,188 | 1,139,753 | |||||||||
Gross margin |
1,103,994 | 994,335 | 1,054,806 | |||||||||
Selling, general and administrative expenses |
978,580 | 966,603 | 1,050,560 | |||||||||
Restructuring charges |
5,624 | 36,368 | 59,714 | |||||||||
Asset impairment charges |
| 15,318 | 29,590 | |||||||||
Goodwill impairment charge |
| | 286,579 | |||||||||
Operating income/(loss) |
119,790 | (23,954 | ) | (371,637 | ) | |||||||
Interest income |
964 | 935 | 1,677 | |||||||||
Interest expense |
1,632 | 3,091 | 1,462 | |||||||||
Income/(loss) before income taxes |
119,122 | (26,110 | ) | (371,422 | ) | |||||||
Income tax provision/(benefit) |
45,725 | (7,902 | ) | (37,516 | ) | |||||||
Net income/(loss) |
$ | 73,397 | $ | (18,208 | ) | $ | (333,906 | ) | ||||
Basic earnings/(loss) per share |
$ | 1.26 | $ | (0.32 | ) | $ | (5.82 | ) | ||||
Weighted average shares outstanding |
57,203 | 56,782 | 57,366 | |||||||||
Diluted earnings/(loss) per share |
$ | 1.24 | $ | (0.32 | ) | $ | (5.82 | ) | ||||
Weighted average shares outstanding, assuming dilution |
58,110 | 56,782 | 57,366 |
See accompanying Notes to Consolidated Financial Statements.
42
CONSOLIDATED BALANCE SHEETS
January 29, 2011 and January 30, 2010
January 29, 2011 |
January 30, 2010 |
|||||||
(in thousands, except share amounts) | ||||||||
Assets | ||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 226,644 | $ | 204,491 | ||||
Short-term investments |
| 5,655 | ||||||
Accounts receivable |
17,501 | 19,267 | ||||||
Merchandise inventories |
193,625 | 169,141 | ||||||
Refundable income taxes |
26,631 | 24,929 | ||||||
Deferred income taxes |
28,145 | 35,799 | ||||||
Prepaid expenses and other current assets |
57,367 | 45,613 | ||||||
Total current assets |
549,913 | 504,895 | ||||||
Property and equipment, net |
332,489 | 365,934 | ||||||
Deferred financing costs, net |
671 | 973 | ||||||
Deferred income taxes |
31,224 | 23,683 | ||||||
Other assets |
12,523 | 6,656 | ||||||
Total assets |
$ | 926,820 | $ | 902,141 | ||||
Liabilities and Stockholders Equity | ||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 97,330 | $ | 76,969 | ||||
Accrued salaries and bonus |
29,346 | 32,168 | ||||||
Accrued tenancy |
42,620 | 44,878 | ||||||
Gift certificates and merchandise credits redeemable |
49,103 | 47,555 | ||||||
Accrued expenses and other current liabilities |
63,509 | 73,804 | ||||||
Total current liabilities |
281,908 | 275,374 | ||||||
Deferred lease costs |
165,321 | 183,917 | ||||||
Deferred income taxes |
850 | 1,584 | ||||||
Long-term performance compensation |
32,299 | 9,428 | ||||||
Other liabilities |
22,997 | 14,652 | ||||||
Commitments and contingencies (see note 7) |
||||||||
Stockholders equity |
||||||||
Common stock, $.0068 par value; 200,000,000 shares authorized; 82,554,516 and 82,476,328 shares issued, respectively |
561 | 561 | ||||||
Additional paid-in capital |
801,140 | 777,786 | ||||||
Retained earnings |
487,691 | 414,294 | ||||||
Accumulated other comprehensive loss |
(2,378 | ) | (4,158 | ) | ||||
Treasury stock, 27,205,853 and 23,701,800 shares, respectively, at cost |
(863,569 | ) | (771,297 | ) | ||||
Total stockholders equity |
423,445 | 417,186 | ||||||
Total liabilities and stockholders equity |
$ | 926,820 | $ | 902,141 | ||||
See accompanying Notes to Consolidated Financial Statements.
43
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For Fiscal Years Ended January 29, 2011, January 30, 2010 and January 31, 2009
(in thousands)
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Loss |
||||||||||||||||||||||||||||||
Common Stock | Treasury | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||
Balance at February 2, 2008 |
82,289 | $ | 560 | $ | 781,048 | $ | 766,408 | $ | (3,460 | ) | 21,409 | $ | (705,072 | ) | $ | 839,484 | ||||||||||||||||
Net loss |
| | | (333,906 | ) | | | | (333,906 | ) | ||||||||||||||||||||||
Other comprehensive loss, net of tax: |
||||||||||||||||||||||||||||||||
Defined benefit pension plan adjustments, net of taxes of $4,713 (See Note 11) |
| | | | (4,242 | ) | | | (4,242 | ) | ||||||||||||||||||||||
Total comprehensive loss |
(338,148 | ) | ||||||||||||||||||||||||||||||
Exercise of stock options, related tax benefit and tax effect of expirations |
77 | | 2,103 | | | (141 | ) | 1,975 | 4,078 | |||||||||||||||||||||||
Stock-based compensation |
| | 12,628 | | | | | 12,628 | ||||||||||||||||||||||||
Issuance of restricted stock, net of forfeitures and related tax deficiency |
| | (6,028 | ) | | | (170 | ) | 5,229 | (799 | ) | |||||||||||||||||||||
Repurchase of common and restricted stock |
| | | | | 4,223 | (103,281 | ) | (103,281 | ) | ||||||||||||||||||||||
Issuance of common stock pursuant to Associate Discount Stock Purchase Plan and related tax benefit of disqualifying dispositions |
110 | 1 | 2,101 | | | (100 | ) | 448 | 2,550 | |||||||||||||||||||||||
Balance at January 31, 2009 |
82,476 | 561 | 791,852 | 432,502 | (7,702 | ) | 25,221 | (800,701 | ) | 416,512 | ||||||||||||||||||||||
Net loss |
| | | (18,208 | ) | | | | (18,208 | ) | ||||||||||||||||||||||
Other comprehensive income/(loss), net of tax: |
||||||||||||||||||||||||||||||||
Defined benefit pension plan adjustments, net of taxes of $2,145 (See Note 11) |
| | | | 3,544 | | | 3,544 | ||||||||||||||||||||||||
Total comprehensive loss |
(14,664 | ) | ||||||||||||||||||||||||||||||
Exercise of stock options, related tax deficiency and tax effect of expirations |
| (1,003 | ) | | | (12 | ) | 111 | (892 | ) | ||||||||||||||||||||||
Stock-based compensation |
| | 16,088 | | | | | 16,088 | ||||||||||||||||||||||||
Issuance of restricted stock, net of forfeitures and related tax deficiency |
| | (29,235 | ) | | | (1,214 | ) | 27,750 | (1,485 | ) | |||||||||||||||||||||
Repurchase of restricted stock |
| | | | | 74 | (502 | ) | (502 | ) | ||||||||||||||||||||||
Issuance of common stock pursuant to Associate Discount Stock Purchase Plan and related tax benefit of disqualifying dispositions |
| | 84 | | | (367 | ) | 2,045 | 2,129 | |||||||||||||||||||||||
Balance at January 30, 2010 |
82,476 | 561 | 777,786 | 414,294 | (4,158 | ) | 23,702 | (771,297 | ) | 417,186 | ||||||||||||||||||||||
Net income |
| | | 73,397 | | | | 73,397 | ||||||||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||||||||||
Defined benefit pension plan adjustments, net of taxes of $1,175 (See Note 11) |
| | | | 1,780 | | | 1,780 | ||||||||||||||||||||||||
Total comprehensive income |
75,177 | |||||||||||||||||||||||||||||||
Exercise of stock options, related tax benefits and tax effect of expirations |
79 | | 4,265 | | | (670 | ) | 5,591 | 9,856 | |||||||||||||||||||||||
Stock-based compensation |
| | 21,210 | | | | | 21,210 | ||||||||||||||||||||||||
Issuance of restricted stock, net of forfeitures and related tax benefits |
| | (2,238 | ) | | | (167 | ) | 5,813 | 3,575 | ||||||||||||||||||||||
Repurchase of common and restricted stock |
| | | | | 4,493 | (105,708 | ) | (105,708 | ) | ||||||||||||||||||||||
Issuance of common stock pursuant to Associate Discount Stock Purchase Plan and related tax benefit of disqualifying dispositions |
| | 117 | | | (152 | ) | 2,032 | 2,149 | |||||||||||||||||||||||
Balance at January 29, 2011 |
82,555 | $ | 561 | $ | 801,140 | $ | 487,691 | $ | (2,378 | ) | 27,206 | $ | (863,569 | ) | $ | 423,445 | ||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Fiscal Years Ended January 29, 2011, January 30, 2010 and January 31, 2009
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(in thousands) | ||||||||||||
Operating activities: |
||||||||||||
Net income/(loss) |
$ | 73,397 | $ | (18,208 | ) | $ | (333,906 | ) | ||||
Adjustments to reconcile net income/(loss) to net cash provided by operating activities: |
||||||||||||
Goodwill impairment charge |
| | 286,579 | |||||||||
Deferred income taxes |
(1,796 | ) | 16,734 | (23,690 | ) | |||||||
Depreciation and amortization |
95,523 | 104,351 | 122,222 | |||||||||
Loss on disposal and write-down of property and equipment |
1,459 | 16,473 | 29,581 | |||||||||
Stock-based compensation |
21,210 | 16,088 | 12,829 | |||||||||
Non-cash interest and other non-cash items |
(1,931 | ) | 2,814 | 2,506 | ||||||||
Non-cash restructuring charges |
617 | 18,665 | 39,775 | |||||||||
Tax benefit/(deficiency) from exercise/vesting of stock awards |
6,967 | (2,403 | ) | (580 | ) | |||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
5,130 | (5,186 | ) | 2,863 | ||||||||
Merchandise inventories |
(25,919 | ) | 4,306 | 77,250 | ||||||||
Prepaid expenses and other current assets |
(12,104 | ) | 17,752 | 4,899 | ||||||||
Refundable income taxes |
(1,702 | ) | 10,341 | (35,270 | ) | |||||||
Other non-current assets and liabilities, net |
11,140 | (21,965 | ) | (12,610 | ) | |||||||
Accounts payable and accrued expenses |
(7,680 | ) | (26,059 | ) | 370 | |||||||
Net cash provided by operating activities |
164,311 | 133,703 | 172,818 | |||||||||
Investing activities: |
||||||||||||
Purchases of marketable securities |
(834 | ) | (563 | ) | (1,180 | ) | ||||||
Sales of marketable securities and short-term investments |
6,156 | 804 | 9,407 | |||||||||
Restricted cash received for sublease |
| (617 | ) | | ||||||||
Proceeds from insurance settlement |
1,419 | | | |||||||||
Purchase of intangible asset |
(2,750 | ) | | | ||||||||
Purchases of property and equipment |
(61,213 | ) | (38,573 | ) | (110,342 | ) | ||||||
Net cash used for investing activities |
(57,222 | ) | (38,949 | ) | (102,115 | ) | ||||||
Financing activities: |
||||||||||||
Proceeds from draw down of credit facility |
| 125,000 | | |||||||||
Repayments of credit facility |
| (125,000 | ) | | ||||||||
Proceeds from the issuance of common stock pursuant to Associate Discount Stock Purchase Plan |
2,032 | 2,045 | 2,544 | |||||||||
Proceeds from exercise of stock options |
6,582 | 111 | 3,864 | |||||||||
Excess tax benefits from stock-based compensation |
7,159 | 320 | 366 | |||||||||
Repurchases of common and restricted stock |
(105,708 | ) | (502 | ) | (103,281 | ) | ||||||
Proceeds from fixed asset financing |
2,678 | | 7,578 | |||||||||
Repayments of fixed asset financing and capital lease obligations |
(1,056 | ) | (4,557 | ) | (2,176 | ) | ||||||
Change in trade payable program, net |
3,377 | | | |||||||||
Payments of deferred financing cost |
| | (1,303 | ) | ||||||||
Net cash used for financing activities |
(84,936 | ) | (2,583 | ) | (92,408 | ) | ||||||
Net increase/(decrease) in cash |
22,153 | 92,171 | (21,705 | ) | ||||||||
Cash and cash equivalents, beginning of year |
204,491 | 112,320 | 134,025 | |||||||||
Cash and cash equivalents, end of year |
$ | 226,644 | $ | 204,491 | $ | 112,320 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid during the year for interest |
$ | 1,333 | $ | 2,914 | $ | 1,063 | ||||||
Cash paid during the year for income taxes |
$ | 58,194 | $ | 5,825 | $ | 20,370 | ||||||
Property and equipment acquired through capital lease |
$ | 767 | $ | | $ | 1,638 | ||||||
Accrual for purchases of property and equipment |
$ | 12,041 | $ | 9,229 | $ | 12,066 | ||||||
See accompanying Notes to Consolidated Financial Statements.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
AnnTaylor Stores Corporation (the Company) is a leading national specialty retailer of womens apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands. Its principal market consists of the United States. The Company sells its products through traditional retail stores and on the Internet at www.anntaylor.com and www.LOFT.com (together, the Online Stores) or by phone at 1-800-DIAL-ANN and 1-888-LOFT-444.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, including AnnTaylor, Inc. The Company has no material assets other than the common stock of AnnTaylor, Inc. and conducts no business other than the management of AnnTaylor, Inc. All intercompany accounts have been eliminated in consolidation.
Reclassification
On the Consolidated Balance Sheet at January 30, 2010, approximately $9.4 million of liabilities related to long-term performance compensation, which were previously included in Other liabilities are now presented as a separate line item, Long-term performance compensation, to conform to the January 29, 2011 presentation, which was separately disclosed to comply with applicable balance sheet condensation rules.
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. All fiscal years presented in these Consolidated Financial Statements include 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
Revenue Recognition
The Company records revenue as merchandise is sold to clients. The Companys policy with respect to gift certificates and gift cards is to record revenue as they are redeemed for merchandise. Prior to their redemption, these gift certificates and gift cards are recorded as a liability. While the Company will continue to honor all gift certificates and gift cards presented for payment, management reviews unclaimed property laws to determine gift certificate and gift card balances required for escheatment to the appropriate government agency. Amounts related to shipping and handling billed to clients in a sales transaction are classified as revenue and the costs related to shipping product to clients (billed and unbilled) are classified as cost of sales. A reserve for estimated returns is established when sales are recorded. The Company excludes sales taxes collected from clients from net sales in its Consolidated Statements of Operations.
46
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
1. Summary of Significant Accounting Policies (Continued)
Revenue Recognition (Continued)
The Company has a credit card program which offers eligible clients the choice of a private label or a co-branded credit card. All new cardholders are automatically enrolled in the Companys exclusive rewards program, which is designed to recognize and promote client loyalty. The Company provides the sponsoring bank with marketing support of the program, and uses its sales force to process credit card applications for both the private label and co-branded credit cards. As part of the program, the Company received an upfront signing bonus from the sponsoring bank. The Company also receives ongoing payments for new accounts activated, as well as a share of finance charges collected by the sponsoring bank. These revenue streams are accounted for as a single unit of accounting under Accounting Standards Codification (ASC) 605-25, Revenue Recognition, and accordingly will be recognized into revenue ratably based on the total projected revenues over the term of the agreement.
Certain judgments and estimates underlie the Companys projected revenues and related expenses under the program, including projected future store counts, the number of applications processed, the Companys projected sales growth and points breakage, among other things. During Fiscal 2010, Fiscal 2009 and Fiscal 2008, the Company recognized approximately $14.8 million, $14.4 million, and $3.3 million of revenue related to the credit card program, respectively. Partially offsetting the income from the credit card program are costs, net of points breakage, related to the customer loyalty program. These costs are included in either cost of sales or in net sales as a sales discount, as appropriate. The cost of sales impact, net of points breakage, was approximately $0.3 million, $5.6 million and $1.6 million and the sales discount impact was approximately $3.0 million, $2.1 million and $0.1 million for Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
Cash and Cash Equivalents
Cash and short-term highly liquid investments with original maturity dates of 3 months or less at time of purchase and no redemption restrictions are considered cash or cash equivalents. The Company has significant amounts of cash and cash equivalents invested in deposit accounts at FDIC-insured banks. All of the Companys deposit account balances are currently FDIC insured and will remain so through December 31, 2012 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Company also has a small amount of cash and cash equivalents invested in money market funds that are backed by U.S. Treasury Securities as of January 29, 2011.
Merchandise Inventories
Merchandise inventories are valued at the lower of average cost or market, at the individual item level. A reserve is established to account for situations where the current selling price or future estimated selling price is less than cost. Physical inventory counts are performed annually in January and estimates are made for any shortage between the date of the physical inventory count and the balance sheet date.
47
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
1. Summary of Significant Accounting Policies (Continued)
Cost of Sales and Selling, General and Administrative Expenses
The following table illustrates the primary costs classified in each major expense category:
Cost of Sales |
Selling, General and Administrative Expenses | |
Cost of merchandise sold;
Costs associated with the Companys sourcing operations;
Freight costs associated with moving merchandise from suppliers to the Companys distribution center;
Costs associated with the movement of merchandise through customs;
Costs associated with the fulfillment and shipment of online client orders;
Depreciation related to merchandise management systems;
Sample development costs;
Direct costs of the credit card client loyalty program;
Merchandise shortage; and
Client shipping costs. |
Payroll, bonus and benefit costs for retail and corporate associates;
Design and merchandising costs;
Occupancy costs for retail and corporate facilities;
Depreciation related to retail and corporate assets;
Advertising and marketing costs;
Occupancy and other costs associated with operating the Companys distribution center;
Freight expenses associated with moving merchandise from the distribution center to the Companys retail stores; and
Legal, finance, information systems and other corporate overhead costs. |
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the following estimated useful lives:
Building | 40 years | |
Leasehold improvements | 10 years or term of lease, if shorter | |
Furniture, fixtures and equipment | 2-10 years | |
Software | 5 years |
When assets are sold or retired, the related cost and accumulated depreciation are removed from their respective accounts and any resulting gain or loss is recorded to selling, general and administrative expenses, unless the amounts are associated with the Companys multi-year strategic restructuring program (the Restructuring Program) in which case they are included in restructuring charges. Expenditures for maintenance and repairs which do not improve or extend the useful lives of the respective assets are expensed as incurred.
Store Pre-Opening Costs
Non-capital expenditures, such as rent, advertising and payroll costs incurred prior to the opening of a new store are charged to expense in the period they are incurred.
Internal-Use Software Development Costs
As required by ASC 350-40, Internal-Use Software, the Company capitalizes certain external and internal computer software and software development costs incurred during the application development stage. The application development stage generally includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized software costs are depreciated on a straight-line basis over five years.
48
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
1. Summary of Significant Accounting Policies (Continued)
Deferred Rent Obligations
Rent expense under non-cancelable operating leases with scheduled rent increases or free rent periods is accounted for on a straight-line basis over the initial lease term beginning on the date of initial possession, which is generally when the Company enters the space and begins construction build-out. Any reasonably assured renewals are considered. The amount of the excess of straight-line rent expense over scheduled payments is recorded as a deferred liability. Construction allowances and other such lease incentives are recorded as deferred credits and are amortized on a straight-line basis as a reduction of rent expense beginning in the period they are deemed to be earned, which often is subsequent to the date of initial possession and generally coincides with the store opening date. The current portion of unamortized deferred lease costs and construction allowances is included in Accrued tenancy and the long-term portion is included in Deferred lease costs on the Companys Consolidated Balance Sheets.
Lease Termination Costs
Contractual penalties associated with lease terminations are accounted for in accordance with the requirements of ASC 840-20, Leases Operating Leases, which requires that the amount of the penalty be recognized on either an undiscounted or discounted basis, with consistent application. The Company recognizes such penalties on an undiscounted basis at the time notification to terminate the lease is provided to the lessor.
Deferred Financing Costs
Deferred financing costs are amortized using the interest method over the term of the related debt. Accumulated amortization at January 29, 2011 and January 30, 2010 was approximately $6.5 million and $6.2 million, respectively. Amortization expense recognized was approximately $302,000, $302,000, and $316,000 in Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
Long-Lived Assets
The Company accounts for long-lived tangible assets under ASC 360-10, Property, Plant, and Equipment. Long-lived assets are reviewed periodically for impairment or when events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Assessment for possible impairment is based on the Companys ability to recover the carrying value of the long-lived asset from the expected future pre-tax cash flows (undiscounted and without interest charges). The expected future pre-tax cash flows are estimated based on historical experience, knowledge and market data. Estimates of future cash flows require the Company to make assumptions and to apply judgment, including forecasting future sales and expenses and estimating useful lives of the assets. These estimates can be affected by factors such as, but not necessarily limited to, future store results, real estate demand, and economic conditions that can be difficult to predict. If the expected future cash flows related to the long-lived assets are less than the assets carrying value, an impairment loss is recognized for the difference between estimated fair value and carrying value.
In Fiscal 2010, Fiscal 2009 and Fiscal 2008, the Company recorded store asset impairment charges of $0.5 million, $27.3 million and $66.8 million, respectively. In Fiscal 2009 and Fiscal 2008, approximately $15.3 million and $29.6 million, respectively, of these store asset impairment charges related to assets in stores that will remain open. There were no such charges in Fiscal 2010. In Fiscal 2010, Fiscal 2009, and Fiscal 2008, approximately $0.5 million, $12.0 million, and $37.2 million of these store asset impairment charges, respectively, related to assets in stores closing in connection with the Companys Restructuring Program. See Note 2, Restructuring Charges, for further discussion.
Goodwill and Intangible Assets
ASC 350-10, Intangibles Goodwill and Other, requires that goodwill and other indefinite-lived intangible assets be tested for impairment at least on an annual basis. The $286.6 million in recorded goodwill resided under the Companys Ann Taylor reporting unit.
49
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
1. Summary of Significant Accounting Policies (Continued)
Goodwill and Intangible Assets (Continued)
The deterioration in the financial and housing markets and resulting effect on consumer confidence and discretionary spending that occurred during the second half of Fiscal 2008 had a significant impact on the retail industry, particularly for womens specialty apparel retailers. As a result, the Company considered the impact this had on its business as an indicator under ASC 350-10 that a reduction in its goodwill fair value may have occurred. Accordingly, the Company performed an interim test for goodwill impairment during the third quarter of Fiscal 2008 following the two step process defined in ASC 350-10 and concluded that the recorded goodwill value was not impaired as of November 1, 2008.
During the fourth quarter of Fiscal 2008, there was further deterioration in the financial and credit markets, which continued to weigh on consumer confidence and resulted in additional declines in discretionary retail spending. This impacted the Companys Fiscal 2008 fourth quarter business in a significant way, which caused management to revise its forward-looking business projections downward. These updated projections were used to perform the Companys annual test for goodwill impairment. Based on this testing, management determined that the fair value of its Ann Taylor reporting unit was less than its carrying value. Accordingly, management performed an analysis to determine the extent of the goodwill impairment and concluded that the carrying value of the goodwill of the Ann Taylor reporting unit was fully impaired. This resulted in a non-cash goodwill impairment charge of $286.6 million in the fourth quarter of Fiscal 2008.
In 2009, the Company acquired the registered trademark in the Peoples Republic of China (PRC) for the Ann Taylor mark (the Mark) in the apparel and footwear class pursuant to a Trademark Assignment Agreement, which was subject to approval by the PRC Trademark Office. Until that approval was received, the Companys existing trademark license agreement permitting the Companys use of the Mark remained in effect. The assignment of the Mark was approved by the PRC Trademark Office in October 2010. The Mark is subject to annual impairment testing which is performed during the fourth quarter of each fiscal year, unless there is an indicator of impairment, which would require an interim impairment review. The most recent impairment test supported the carrying value of the Mark and did not result in an impairment charge.
Advertising
Costs associated with the production of advertising, such as printing and other costs, as well as costs associated with communicating advertising that has been produced, such as magazine ads, are expensed when the advertising first appears in public. Costs of direct mail catalogs and postcards are fully expensed when the advertising is scheduled to first arrive in clients homes. Advertising costs were approximately $79.3 million, $60.8 million and $60.7 million in Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
Stock-based Awards
The Company accounts for stock-based awards in accordance with ASC 718-10, Compensation Stock Compensation. ASC 718-10 requires the Company to calculate the grant-date fair value and recognize that calculated value as compensation expense over the requisite service period, which is generally the vesting period, adjusted for estimated forfeitures.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. ASC 740-10 requires the use of the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. No valuation allowance has been provided for deferred tax assets, since management anticipates that the full amount of these assets will be realized. In determining the need for a valuation allowance, management is required to make assumptions and to apply judgment, including forecasting future earnings, taxable income, and the mix of earnings in the jurisdictions in which the Company operates.
50
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
1. Summary of Significant Accounting Policies (Continued)
Income Taxes (Continued)
The tax effects of uncertain tax positions taken or expected to be taken in income tax returns are recognized only if they are more likely-than-not to be sustained on examination by the taxing authorities, based on the technical merits as of the reporting date. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company recognizes estimated accrued interest and penalties related to uncertain tax positions in income tax expense.
The Company recognizes the benefit of an uncertain tax position in the period when it is effectively settled. Previously recognized tax positions are derecognized in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination.
The Company and its domestic subsidiaries file a consolidated Federal income tax return, while the Companys foreign subsidiaries file in their respective local jurisdictions.
Segments
The Company has determined that it has four operating segments, as defined under ASC 350-10, including Ann Taylor, LOFT, Ann Taylor Factory and LOFT Outlet. The Company has aggregated its operating segments based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the objective and basic principles of the Statement, if the segments have similar economic characteristics, similar product, similar production processes, similar clients and similar methods of distribution.
The Companys operating segments have similar economic characteristics and similar operating, financial and competitive risks. They are similar in nature of product, as they all offer womens apparel, shoes and accessories. Merchandise inventory for the Companys operating segments is sourced from the same countries and some of the same vendors, using similar production processes. Clients of the Companys operating segments have similar characteristics. Merchandise for the Companys operating segments is distributed to retail stores in a similar manner through the Companys Louisville Distribution Center and is subsequently distributed to clients in a similar manner, through its retail and outlet stores. The Companys Ann Taylor and LOFT operating segments also sell merchandise through the Companys Online Stores.
Comprehensive Income
Comprehensive income consists of two components, net income/(loss) and other comprehensive income/(loss). Other comprehensive income/(loss) refers to gains and losses that under generally accepted accounting principles are recorded as an element of stockholders equity but are excluded from net income/(loss). The only impact to the Companys accumulated other comprehensive income/(loss) during the three fiscal years presented in this report relates to the Companys defined benefit pension plan, the accounting for which is in accordance with ASC 715-20, Compensation Retirement Benefits. See Note 11, Retirement Plans, for further discussion.
Fair Value of Financial Instruments
ASC 825-10, Financial Instruments, requires management to disclose the estimated fair value of certain assets and liabilities defined by ASC 825-10 as financial instruments. The Company does not have any non-financial assets or non-financial liabilities that are recognized at fair value on a recurring basis at January 29, 2011 or January 30, 2010. At January 29, 2011 and January 30, 2010, management believes that the carrying value of cash and cash equivalents, short-term investments, receivables and payables approximates fair value, due to the short maturity of these financial instruments.
51
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
1. Summary of Significant Accounting Policies (Continued)
Self Insurance
The Company is self-insured for certain losses related to its employee point of service medical plan, its workers compensation plan and for short-term and long-term disability up to certain thresholds. Costs for self-insurance claims filed, as well as claims incurred but not reported, are accrued based on managements estimates, using information received from plan administrators, third-party actuaries, historical analysis and other relevant data. Management believes that it has adequately reserved for its self-insurance liability, which is capped through the use of stop loss contracts with insurance companies. Any significant variation from historical trends in claims incurred but not paid could cause actual expense to differ from the accrued liability.
Recent Accounting Pronouncements
Recently Issued Standards
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Fair Value Measurements and Disclosures. ASU 2010-06 amends ASC 820-10, Fair Value Measurements and Disclosures, and requires new disclosures surrounding certain fair value measurements. ASU 2010-06 is effective for the first interim or annual reporting period beginning on or after December 15, 2009, except for certain disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for the first interim and annual reporting periods beginning on or after December 15, 2010. During Fiscal 2009, the Company early adopted the disclosure requirements effective for the first interim or annual reporting period beginning on or after December 15, 2009. However, it intends to adopt the remaining disclosure requirements when they become effective in the first quarter of Fiscal 2011. The Company does not expect the additional disclosure requirements of ASU 2010-06 will have any impact on its Consolidated Financial Statements or notes thereto.
In October 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue Arrangements. ASU 2009-13 amends ASC 605-10, Revenue Recognition, and addresses accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit, and provides guidance on how to measure and allocate arrangement consideration to one or more units of accounting. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted, but certain requirements must be met. The Company plans to adopt ASU 2009-13 in the first quarter of Fiscal 2011 and does not expect it will have any impact on its Consolidated Financial Statements.
2. Restructuring Charges
On January 30, 2008, the Company initiated its Restructuring Program, which was designed to enhance profitability and improve overall operating effectiveness. The Restructuring Program was subsequently expanded during the third quarter of Fiscal 2008 and again during the second quarter of Fiscal 2009. The three key elements of the Companys Restructuring Program include: (1) closing underperforming stores; (2) an organizational streamlining that reduced the Companys corporate and field staffing levels; and (3) a broad-based productivity initiative that included, among other things, centralized procurement of non-merchandise goods and services, outsourcing certain activities and optimizing store productivity and effectiveness.
In connection with the store closing component of the Companys Restructuring Program, the Company initially identified 117 stores for closure over the Fiscal 2008 to Fiscal 2010 period. In connection with the subsequent expansion of the Companys Restructuring Program, the Company identified an additional 108 stores for closure, and now expects to close approximately 225 stores as part of its Restructuring Program. A total of 137 of these stores closed during the original Fiscal 2008 to Fiscal 2010 period, of which 35 were closed during Fiscal 2010. By division, the Company closed 33 Ann Taylor stores and 27 LOFT stores during Fiscal 2008, 18 Ann Taylor stores and 24 LOFT stores during Fiscal 2009, and 19 Ann Taylor stores and 16 LOFT stores during Fiscal 2010. The balance of these stores are expected to close in Fiscal 2011 and beyond. Additional costs associated with closings beyond Fiscal 2010 are expected to be immaterial.
52
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
2. Restructuring Charges (Continued)
As part of the organizational streamlining component of its Restructuring Program, the Company eliminated approximately 600 positions over the Fiscal 2007 to Fiscal 2009 period, of which 180 positions were eliminated in Fiscal 2007, 260 positions were eliminated in Fiscal 2008, and 160 positions were eliminated in Fiscal 2009. In the fourth quarter of Fiscal 2010, the Company eliminated approximately 45 positions in connection with the decision to co-source certain back-office functions with a strategic service partner.
Total pre-tax expenses associated with the Companys restructuring initiatives were $134.0 million, of which $84.2 million were non-cash expenses, primarily associated with the write-down of assets related to store closures, and $49.8 million were cash charges for severance and various other costs. In Fiscal 2010, Fiscal 2009 and Fiscal 2008, the Company recorded $5.6 million, $36.4 million and $59.7 million, respectively, in restructuring charges.
The following table details information related to restructuring charges recorded during Fiscal 2010, Fiscal 2009 and Fiscal 2008:
Severance and Related Costs |
Asset Impairment (1) |
Other Restructuring Costs |
Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at February 2, 2008 |
$ | (4,227 | ) | $ | | $ | (500 | ) | $ | (4,727 | ) | |||||
Restructuring provision |
(14,792 | ) | (37,255 | ) | (7,667 | ) | (59,714 | ) | ||||||||
Cash payments |
9,276 | | 4,085 | 13,361 | ||||||||||||
Non-cash adjustments |
| 37,255 | 2,520 | 39,775 | ||||||||||||
Balance at January 31, 2009 |
$ | (9,743 | ) | $ | | $ | (1,562 | ) | $ | (11,305 | ) | |||||
Restructuring provision (2) |
(7,821 | ) | (12,012 | ) | (16,535 | ) | (36,368 | ) | ||||||||
Cash payments |
15,182 | | 7,043 | 22,225 | ||||||||||||
Non-cash adjustments |
| 12,012 | 6,653 | 18,665 | ||||||||||||
Balance at January 30, 2010 |
$ | (2,382 | ) | $ | | $ | (4,401 | ) | $ | (6,783 | ) | |||||
Restructuring provision |
(2,167 | ) | (494 | ) | (2,963 | ) | (5,624 | ) | ||||||||
Cash payments |
2,372 | | 3,837 | 6,209 | ||||||||||||
Non-cash adjustments |
| 494 | 123 | 617 | ||||||||||||
Balance at January 29, 2011 |
$ | (2,177 | ) | $ | | $ | (3,404 | ) | $ | (5,581 | ) | |||||
(1) | Asset impairment charges represent the write-down of store assets to their estimated fair value for those store locations identified for closure as part of the Companys Restructuring Program. See Note 1, Long-Lived Assets, for information related to store asset impairment charges not related to the Companys Restructuring Program. |
(2) | Other restructuring charges include the write-down of corporate assets disposed of in connection with the sublet of the Companys excess corporate office space in New York City, as well as the estimated loss, net of sublet income, associated with that sublease agreement. |
Restructuring-related severance accruals are included in Accrued salaries and bonus on the Companys Consolidated Balance Sheets as of January 29, 2011 and January 30, 2010. Other restructuring-related accruals are included in Accrued tenancy, Accrued expenses and other current liabilities, and Other liabilities on the Companys Consolidated Balance Sheets as of January 29, 2011 and January 30, 2010.
53
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
3. Investments
On November 14, 2008, the Company entered into a settlement agreement with UBS AG (UBS), one of its investment providers, related to a $6.0 million investment in auction rate securities purchased from UBS. Under the terms of the settlement agreement, the Company received auction rate security rights that enabled it to sell its auction rate securities back to UBS at par value at any time during the two year period beginning June 30, 2010. On June 30, 2010, the Company exercised its auction rate security rights and sold its $6.0 million investment in auction rate securities back to UBS at par value. As of January 29, 2011, the Company had no funds invested in auction rate securities.
At January 29, 2011, the Company had $2.8 million invested in a self-directed Non-Qualified Deferred Compensation Plan (the Deferred Compensation Plan) for certain associates at the vice-president level and above, which is structured as a rabbi trust. These investments are classified as trading securities and are recorded as a long-term asset, included in Other assets, on the Companys Consolidated Balance Sheets. The investments are valued using quoted market prices multiplied by the number of shares held in the Deferred Compensation Plan. Unrealized holding gains and losses on trading securities are included in interest income on the Companys Consolidated Statements of Operations. See Note 11, Retirement Plans, for further discussion of the Deferred Compensation Plan.
ASC 820-10 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| Level 1 Quoted prices in active markets for identical assets or liabilities. |
| Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
54
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
3. Investments (Continued)
The following tables segregate all financial assets and liabilities as of January 29, 2011 and January 30, 2010 that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date:
January 29, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(in thousands) | ||||||||||||||||
Non-qualified deferred compensation plan assets (1) |
$ | 2,804 | $ | 103 | $ | 2,701 | $ | | ||||||||
Total assets |
$ | 2,804 | $ | 103 | $ | 2,701 | $ | | ||||||||
January 30, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(in thousands) | ||||||||||||||||
Non-qualified deferred compensation plan assets (1) |
$ | 1,762 | $ | | $ | 1,762 | $ | | ||||||||
Auction rate securities (2) |
5,649 | | | 5,649 | ||||||||||||
Put option on auction rate securities (3) |
349 | | | 349 | ||||||||||||
Total assets |
$ | 7,760 | $ | | $ | 1,762 | $ | 5,998 | ||||||||
(1) | The Company maintains a self-directed, non-qualified deferred compensation plan structured as a rabbi trust for certain associates at the vice-president level and above. The investment assets of the rabbi trust are valued using quoted market prices multiplied by the number of shares held in the trust. The classification of prior year amounts was updated to reflect current year classification. |
(2) | Auction rate securities were valued using a discounted cash-flow analysis. The model considers factors that reflect assumptions market participants would use in pricing, including, among others: the collateralization underlying the investments; the creditworthiness of the counterparty; expected future cash flows, including the next time the security was expected to have a successful auction; and risks associated with the uncertainties in the credit market. The amounts presented exclude accrued interest. |
(3) | Under the terms of its settlement with UBS, the Company received certain auction rate security rights. These rights were accounted for as a put option and were valued using a discounted cash-flow analysis. |
The following table provides a reconciliation of the beginning and ending balances for the Companys investment in auction rate securities and the related put option for Fiscal 2010 and Fiscal 2009, as these assets are measured at fair value using significant unobservable inputs (Level 3):
Fiscal year ended | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
(in thousands) | ||||||||
Balance at beginning of period |
$ | 5,998 | $ | 5,987 | ||||
Total gains realized included in interest income |
2 | 11 | ||||||
Exercise of put option and sale of auction rate securities (1) |
(6,000 | ) | | |||||
Balance at end of period |
$ | | $ | 5,998 | ||||
|
(1) | On June 30, 2010, the Company exercised its auction rate security rights and sold its $6.0 million investment in auction rate securities back to UBS. |
55
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
4. Property and Equipment
Property and equipment consists of the following:
As of | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
(in thousands) | ||||||||
Land and building |
$ | 14,082 | $ | 14,260 | ||||
Leasehold improvements |
517,397 | 507,081 | ||||||
Furniture, fixtures, equipment and software |
489,048 | 479,478 | ||||||
Assets under construction |
31,050 | 5,943 | ||||||
1,051,577 | 1,006,762 | |||||||
Less accumulated depreciation and amortization |
719,088 | 640,828 | ||||||
Net property and equipment |
$ | 332,489 | $ | 365,934 | ||||
Depreciation and amortization expense was approximately $95.5 million, $104.4 million and $122.2 million in Fiscal 2010, 2009 and 2008, respectively.
In accordance with ASC 820-10, the following tables segregate all non-financial assets and liabilities that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition into the most appropriate level within the fair value hierarchy based on the inputs used to determine fair value as of and for the years ended January 29, 2011 and January 30, 2010:
Total January 29, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Gains (Losses) |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-lived assets held and used (1) |
$ | | $ | | $ | | $ | | $ | (494 | ) | |||||||||
Total assets |
$ | | $ | | $ | | $ | | $ | (494 | ) | |||||||||
Total January 30, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Gains (Losses) |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-lived assets held and used (1) |
$ | 5,272 | $ | | $ | | $ | 5,272 | $ | (27,330 | ) | |||||||||
Total assets |
$ | 5,272 | $ | | $ | | $ | 5,272 | $ | (27,330 | ) | |||||||||
(1) | The Company performs impairment tests under the guidance of ASC 360-10, Property, Plant, and Equipment, whenever there are indicators of impairment. These tests typically consider which assets are impaired at a store level. The Company recognizes an impairment loss if the carrying value of a long-lived asset or group of assets is not recoverable from undiscounted cash flows, and measures that impairment loss as the difference between the carrying value and fair value of the assets based on discounted cash flow projections. Upon adoption of ASC 820-10, the Company considered all relevant valuation techniques (e.g., market, income, and cost approaches) that could be obtained without undue cost and effort, and determined that the discounted cash flow approach continued to provide the most relevant and reliable means by which to determine fair value in this circumstance. The range of discount rates utilized in determining fair value for this purpose during Fiscal 2010 and Fiscal 2009 was 7.18%-10.20% and 5.75-12.50%, respectively, based upon the corresponding benchmark interest rates associated with the period of remaining cash flows for the individual stores. |
56
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
4. Property and Equipment (Continued)
During Fiscal 2010, long-lived assets held and used with a carrying value of $0.5 million were written down to their fair value, resulting in asset impairment charges of $0.5 million, which are included in Restructuring charges on the Companys Consolidated Statements of Operations.
During Fiscal 2009, long-lived assets held and used with a carrying value of $32.6 million were written down to their fair value, resulting in asset impairment charges of $27.3 million. Of this amount, approximately $12.0 million and $15.3 million was included in Restructuring charges and Asset impairment charges, respectively, in the Companys Consolidated Statements of Operations.
5. Intangible Assets
In 2009, the Company acquired the registered trademark in the Peoples Republic of China (PRC) for the Ann Taylor mark (the Mark) in the apparel and footwear class pursuant to a Trademark Assignment Agreement, which assignment was subject to approval by the PRC Trademark Office. Until that approval was received, the Companys existing trademark license agreement permitting the Companys use of the Mark remained in effect. The assignment of the Mark was approved by the PRC Trademark Office in October 2010 and is subject to renewal with the PRC Trademark Office every ten years. The costs of renewal are immaterial, and the Company intends to renew the Mark indefinitely. The Company has recognized the full $3.75 million purchase price of the Mark, of which $1.0 million remains payable under the Assignment Agreement, as an indefinite-lived intangible asset included in Other assets on the Consolidated Balance Sheets as of January 29, 2011. The Mark is subject to annual impairment testing in accordance with ASC 350-10, Intangibles Goodwill and Other, which is performed during the fourth quarter of each fiscal year, unless there is an indicator of impairment, which would require an interim impairment review. The most recent impairment test supported the carrying value of the Mark and did not result in an impairment charge.
6. Debt and Other Financing Arrangements
Credit Facility
On April 23, 2008, the Companys wholly-owned subsidiary AnnTaylor, Inc. and certain of its subsidiaries entered into a Third Amended and Restated $250 million senior secured revolving credit facility with Bank of America N.A. and a syndicate of lenders (the Credit Facility), which amended its then existing $175 million senior secured revolving credit facility which was due to expire in November 2008. The Credit Facility provides the Company with an option to increase the total facility and the aggregate commitments thereunder of up to $350 million, subject to the lenders agreement to increase their commitment for the requested amount. The Credit Facility expires on April 23, 2013 and may be used for working capital, letters of credit and other general corporate purposes. The Credit Facility contains an acceleration clause which, upon the occurrence of a Material Adverse Effect, as defined in the Credit Facility, may cause any borrowings outstanding to become immediately due and payable.
The 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 percentages of certain eligible assets. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $17.6 million and $13.8 million as of January 29, 2011 and January 30, 2010, respectively, leaving a remaining available balance for loans and letters of credit of $120.2 million and $112.9 million as of January 29, 2011 and January 30, 2010, respectively. In March 2009, the Company accessed $125 million from the Credit Facility as a precaution against potential disruption in the credit markets. In July 2009, the Company repaid $50 million of these revolver borrowings, and subsequently repaid the remaining $75 million in October 2009. There were no borrowings outstanding under the Credit Facility at January 29, 2011, January 30, 2010, or as of the date of this filing.
57
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
6. Debt and Other Financing Arrangements (Continued)
Credit Facility (Continued)
Amounts outstanding under the Credit Facility bear interest at a rate equal to, at the option of AnnTaylor, Inc., 1) the Base Rate, defined as the higher of (i) the federal funds rate plus a margin of 0.5% and (ii) the Bank of America prime rate, or 2) the LIBOR Rate, plus a margin of 1.25% to 1.75%, depending on the Average Daily Availability as defined in the Credit Facility. In addition, AnnTaylor, Inc. is required to pay the lenders a monthly commitment fee on the unused revolving loan commitment at a rate ranging from 0.325% to 0.375% per annum also depending on the Average Daily Availability. Fees for outstanding commercial and standby letters of credit range from 0.50% to 0.75% and from 1.25% to 1.75%, respectively. The Credit Facility contains financial and other covenants, including limitations on indebtedness and liens, and a fixed charge coverage ratio covenant that is triggered if certain liquidity thresholds are not met.
The Credit Facility permits the Company to pay cash dividends (and permits dividends by AnnTaylor, Inc. to fund such cash dividends) subject to certain Liquidity requirements (as defined in the Credit Facility) and other conditions as set forth in the Credit Facility. Certain subsidiaries of the Company are also permitted to pay dividends to the Company to fund certain taxes owed by the Company, fund ordinary operating expenses of the Company not in excess of $500,000 in any fiscal year; repurchase common stock held by employees not in excess of $100,000 in any fiscal year and for certain other stated purposes (subject to certain exceptions).
The lenders have been granted a pledge of the common stock of AnnTaylor, Inc. and certain of its subsidiaries, and a security interest in substantially all real and personal property (other than leasehold interests) and other assets of AnnTaylor, Inc. and certain of its subsidiaries, as collateral for its obligations under the Credit Facility.
Capital Lease
On August 25, 2008, the Company entered into a capital lease for certain computer equipment with a four year term. The computer equipment was placed in service in February 2009. On May 1, 2010, the Company entered into a second capital lease for certain computer equipment with a four-year term and modified the original August 25, 2008 lease agreement by extending the term so that both lease agreements end four years after May 1, 2010. The following table presents leased assets by major class:
As of | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
(in thousands) | ||||||||
Computer equipment |
$ | 2,405 | $ | 1,638 | ||||
Less accumulated depreciation |
(799 | ) | (328 | ) | ||||
Net carrying value |
$ | 1,606 | $ | 1,310 | ||||
58
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
6. Debt and Other Financing Arrangements (Continued)
Capital Lease (Continued)
Future minimum lease payments under the capital lease as of January 29, 2011 are as follows:
Fiscal Year |
(in thousands) | |||
2011 |
$ | 448 | ||
2012 |
448 | |||
2013 |
448 | |||
2014 |
113 | |||
2015 |
| |||
Thereafter |
| |||
Total capital lease obligation |
1,457 | |||
Less weighted average interest rate of 1.71% on capital lease |
40 | |||
Total principal, excluding interest |
1,417 | |||
Less current portion |
428 | |||
Total long-term obligation, net of current portion |
$ | 989 | ||
Other
There was $1.2 million and $0.6 million included in Accrued expenses and other current liabilities and $2.6 million and $1.0 million included in Other liabilities on the Companys Consolidated Balance Sheets at January 29, 2011 and January 30, 2010, respectively, related to borrowings for the purchase of fixed assets. In addition, in connection with the sublease of excess corporate office space in New York City, the Company received a $0.6 million deposit, held as restricted cash, which is included in Other assets with an offsetting long-term liability included in Other liabilities on the Companys Consolidated Balance Sheets at January 29, 2011 and January 30, 2010.
In the second quarter of Fiscal 2010, the Company entered into a vendor financing program (the Trade Payable Program) with a financing company. Under the Trade Payable Program, the financing company makes accelerated and discounted payments to the Companys vendors and the Company, in turn, makes its regularly-scheduled full vendor payments to the financing company. As of January 29, 2011, there was $3.4 million outstanding under the Trade Payable Program, which is included in Accrued expenses and other current liabilities on the Companys Consolidated Balance Sheets.
In order to accelerate expansion in the factory outlet channel, the Company is leasing certain store locations at factory outlet centers across the United States. As a result, the Company plans to open approximately 44 new factory outlet stores during the first half of Fiscal 2011. As of January 29, 2011, 23 leases related to these stores have been executed but no store openings have yet occurred.
59
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
7. Commitments and Contingencies
Operating Leases
The Company occupies its retail stores and administrative facilities under operating leases, most of which are non-cancelable. Some of the store leases grant the Company the right to extend the term for one or two additional five-year periods under substantially the same terms and conditions as the original leases. Some store leases also contain early termination options, which can be exercised by the Company under specific conditions. Most of the store leases require payment of a specified minimum rent, plus contingent rent based on a percentage of the stores 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 maintenance (CAM) costs in addition to the future minimum lease payments. The Company also leases certain office equipment for its corporate offices and store locations under non-cancelable operating leases which generally have 3-year terms.
Future minimum lease payments under non-cancelable operating leases as of January 29, 2011 are as follows:
Fiscal Year |
(in thousands) | |||
2011 |
$ | 177,337 | ||
2012 |
160,110 | |||
2013 |
149,471 | |||
2014 |
136,073 | |||
2015 |
118,096 | |||
Thereafter |
306,139 | |||
Total |
1,047,226 | |||
Sublease rentals |
24,351 | |||
Net rentals |
$ | 1,022,875 | ||
The minimum lease payments above do not include CAM charges or real estate taxes, which are also contractual obligations under the Companys store and office operating leases, but are generally not fixed and can fluctuate from year to year. Total CAM charges and real estate taxes for Fiscal 2010, Fiscal 2009 and Fiscal 2008 were $68.6 million, $76.8 million and $81.6 million, respectively.
Rent expense for the fiscal years ended January 29, 2011, January 30, 2010, and January 31, 2009 was as follows:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(in thousands) | ||||||||||||
Minimum rent |
$ | 194,331 | $ | 203,427 | $ | 203,734 | ||||||
Percentage rent |
986 | 462 | 441 | |||||||||
Total |
$ | 195,317 | $ | 203,889 | $ | 204,175 | ||||||
Legal Proceedings
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be determined with certainty, in the Companys opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity.
60
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
8. Net Income/(Loss) per Share
Basic earnings/(loss) per share is calculated by dividing net income/(loss) associated with common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method discussed in ASC 260-10, Earnings Per Share.
The determination and reporting of earnings per share requires the inclusion of time and performance-based restricted stock as participating securities, since they have the right to share in dividends, if declared, equally with common shareholders. During periods of net income, participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (the two-class method). During periods of net income, participating securities have the effect of diluting both basic and diluted earnings per share. During periods of net loss, no effect is given to participating securities, since they do not share in the losses of the Company.
The following table presents a reconciliation of basic and diluted earnings per share for the years ended January 29, 2011, January 30, 2010, and January 31, 2009, respectively.
Fiscal Year Ended | ||||||||||||||||||||||||||||||||||||
January 29, 2011 | January 30, 2010 | January 31, 2009 | ||||||||||||||||||||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||
Basic Earnings per Share |
Net Income |
Shares | Per Share Amount |
Net Loss |
Shares | Per Share Amount |
Net Loss |
Shares | Per Share Amount |
|||||||||||||||||||||||||||
Net income/(loss) |
$ | 73,397 | $ | (18,208 | ) | $ | (333,906 | ) | ||||||||||||||||||||||||||||
Less net income associated with participating securities |
1,300 | | | |||||||||||||||||||||||||||||||||
Basic earnings/(loss) per Share |
$ | 72,097 | 57,203 | $ | 1.26 | $ | (18,208 | ) | 56,782 | $ | (0.32 | ) | $ | (333,906 | ) | 57,366 | $ | (5.82 | ) | |||||||||||||||||
Diluted Earnings per Share |
||||||||||||||||||||||||||||||||||||
Net income/(loss) |
$ | 73,397 | $ | (18,208 | ) | $ | (333,906 | ) | ||||||||||||||||||||||||||||
Less net income associated with participating securities |
1,280 | | | |||||||||||||||||||||||||||||||||
Effect of dilutive securities |
907 | | | |||||||||||||||||||||||||||||||||
Diluted earnings/(loss) per Share |
$ | 72,117 | 58,110 | $ | 1.24 | $ | (18,208 | ) | 56,782 | $ | (0.32 | ) | $ | (333,906 | ) | 57,366 | $ | (5.82 | ) | |||||||||||||||||
Non-participating securities (options) representing 2,878,825 shares of common stock were excluded from the above computation of weighted average shares for diluted earnings per share for Fiscal 2010 due to their antidilutive effect, since their exercise prices exceeded the average market price of the common shares during the period. Non-participating securities (options and contingently issuable securities) representing 5,231,343 shares of common stock were excluded from the above computation of weighted average shares for diluted loss per share for Fiscal 2009 due to the net loss for the period. Non-participating securities (options) representing 3,772,766 shares of common stock were excluded from the above computation of weighted average shares for diluted loss per share for Fiscal 2008 due to the net loss for the period.
61
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. Equity and Incentive Compensation Plans
Preferred Stock
At January 29, 2011, January 30, 2010, and January 31, 2009, there were 2 million shares of preferred stock, par value $0.01, authorized and unissued.
Stockholder Rights Plan
In Fiscal 2000, the Companys Board of Directors adopted a Stockholder Rights Plan (Rights Plan). Rights under the Rights Plan (Rights) were distributed as a dividend at the rate of one Right for each share of common stock held by stockholders of record as of the close of business on May 30, 2000. As a result of 3-for-2 stock splits of the Companys common stock that occurred in Fiscal 2004 and Fiscal 2002, each share of common stock represents four-ninths of a Right. Each Right entitles stockholders to buy one unit of a share of a new series of preferred stock for $125. No Rights were exercised under the Rights Plan through Fiscal 2010. The Rights Plan expired on May 18, 2010, and the Companys Board of Directors did not extend its expiration date.
Repurchase Program
On August 19, 2010, the Companys Board of Directors approved a $100 million expansion of its existing securities repurchase program (the Repurchase Program), bringing the total authorized under the Repurchase Program to $400 million, and the total then available for share repurchases to approximately $259.1 million. The Repurchase Program will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by the Companys Board of Directors. Purchases of shares of common stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of common stock increase treasury shares available for general corporate purposes. During Fiscal 2010, the Company repurchased 4,201,004 shares of its common stock through open market purchases under the Repurchase Program at a cost of approximately $100 million. During Fiscal 2009, no shares were repurchased under the Repurchase Program. During Fiscal 2008, the Company repurchased 4,108,183 shares of its common stock under the Repurchase Program at a cost of approximately $100.8 million. As of January 29, 2011, approximately $159.1 million remained available under the Repurchase Program.
Subsequent to January 29, 2011, and through the date of this filing, the Company purchased an additional 4,197,097 shares under the Repurchase Program at a cost of approximately $100 million. On March 8, 2011, the Companys Board of Directors approved an additional $200 million expansion of the Repurchase Program, bringing the total authorized under the Repurchase Program to $600 million. As of the date of this filing, approximately $259.1 million remained available under the Repurchase Program.
Associate Discount Stock Purchase Plan
In Fiscal 1999, the Company established an Associate Discount Stock Purchase Plan (the Stock Purchase Plan). Under the terms of the Stock Purchase Plan, as amended, eligible employees may purchase shares of the Companys common stock quarterly, at a price equal to 85% of the lower of the closing price of the Companys common stock at the beginning or end of each quarterly stock purchase period. Participating employees pay for their stock purchases under the Stock Purchase Plan by authorizing limited payroll deductions of up to a maximum of 15% of their compensation. On May 19, 2010 and May 15, 2008, the Companys stockholders approved an increase in the number of shares available for purchase under the Stock Purchase Plan by 1,500,000 and 650,000 shares, respectively. During Fiscal 2010, 152,223 shares were issued pursuant to the Stock Purchase Plan, at an average discount of $2.36 per share. At January 29, 2011, there were 1,611,231 shares available for future issuance under the Stock Purchase Plan. The Company recorded approximately $0.7 million, $0.9 million and $1.2 million in compensation expense related to the Stock Purchase Plan during Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
62
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. Equity and Incentive Compensation Plans (Continued)
Stock Incentive Plans
The Company has established four stock incentive plans (the Plans), which are summarized below:
Shares Reserved | Shares
Reserved for Issuance at January 29, 2011 |
Shares Available for Future Grant |
||||||||||||||||||
Year Established |
Defined |
Plan Name |
Restricted Stock (1) |
Total Authorized |
||||||||||||||||
1992 |
1992 Plan | 1992 Stock Option and Restricted Stock and Unit Award Plan | 713,250 | 7,200,000 | 9,000 | | ||||||||||||||
2000 |
2000 Plan | 2000 Stock Option and Restricted Stock Award Plan | 562,500 | 2,250,000 | 17,875 | | ||||||||||||||
2001 |
2002 Plan | 2002 Stock Option and Restricted Stock and Unit Award Plan | 787,500 | 4,500,000 | 909,211 | 69,108 | ||||||||||||||
2003 |
2003 Plan | 2003 Equity Incentive Plan | 5,760,000 | 11,750,000 | 7,112,967 | 3,037,190 |
(1) | Included in the number of total authorized shares. The Company may issue restricted stock grants up to the levels provided under each plan, however shares not used for this purpose are available for issuance as stock option grants, except for 150,750 shares under the 1992 Plan. |
On May 15, 2008 and May 19, 2010, the Companys stockholders approved certain amendments to its 2003 Plan, including increasing the total authorized shares reserved for issuance from 5.5 million to 8.75 million shares, and from 8.75 million to 11.75 million shares, respectively.
Stock option awards outstanding under the Companys Plans are granted at exercise prices which are equal to the market value of the Companys common stock on the grant date (determined in accordance with the applicable Plan), generally vest over three or four years and expire no later than ten years after the grant date. Each of the Plans also includes an acceleration clause by which all options not exercisable by their terms will, upon the occurrence of certain contingent events, become exercisable. Shares underlying stock award grants are generally issued out of treasury stock. All the Plans allow for restricted stock awards, and the 2002 Plan and 2003 Plan also include restricted unit awards. A restricted unit represents the right to receive a share of common stock and/or the cash value of a share of common stock on the date the restrictions on the restricted unit lapse. The restrictions on restricted stock or restricted unit grants generally lapse over a three or four-year period from the date of the grant. Certain executives also receive performance-based restricted stock or restricted unit grants, which generally vest over three years if certain pre-established goals are met. In the event a grantee terminates employment with the Company, any unvested stock options and any restricted stock or restricted units still subject to restrictions are generally forfeited.
Stock Options
In accordance with ASC 718-10, Compensation Stock Compensation, the Company recognizes stock option expense equal to the grant date fair value of a stock option on a straight-line basis over the requisite service period, which is generally the vesting period, net of estimated forfeitures. As of January 29, 2011, there was $8.9 million of unrecognized compensation cost related to unvested options, which is expected to be recognized over a remaining weighted average vesting period of 1.7 years. The total intrinsic value of options exercised was approximately $11.2 million and approximately $2.1 million during Fiscal 2010 and Fiscal 2008, respectively. The total intrinsic value of options exercised during Fiscal 2009 was not material.
63
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. Equity and Incentive Compensation Plans (Continued)
Stock Options (Continued)
The following table summarizes stock option activity for the fiscal year ended January 29, 2011:
Shares | Weighted Average Exercise Price |
|||||||
Options outstanding at January 30, 2010 |
5,156,228 | $ | 17.94 | |||||
Granted (1) |
604,000 | 19.58 | ||||||
Forfeited or expired |
(69,088 | ) | 22.55 | |||||
Exercised |
(748,385 | ) | 8.80 | |||||
Options outstanding at January 29, 2011 |
4,942,755 | $ | 19.46 | |||||
Vested and exercisable at January 29, 2011 |
2,392,975 | $ | 26.29 | |||||
Options expected to vest at January 29, 2011 |
1,483,132 | $ | 12.83 | |||||
|
(1) | Options granted during Fiscal 2010 vest annually over a three year period, and expire ten years after the grant date. Of these, 586,000 vest equally in each of March 2011, 2012 and 2013, 9,000 vest equally on each of April 2011, 2012 and 2013 and 9,000 vest equally in each of July 2011, 2012 and 2013. |
The weighted average fair value of options granted during the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009, estimated as of the grant date using the Black-Scholes option pricing model, was $9.29, $3.49 and $8.30 per share, respectively. The weighted average remaining contractual term for options outstanding at January 29, 2011 and January 30, 2010 was 6.8 and 7.4 years, respectively. The weighted average remaining contractual term for options vested and exercisable at January 29, 2011 was 5.3 years. The weighted average remaining contractual term for options expected to vest at January 29, 2011 was 8.4 years. At January 29, 2011, the aggregate intrinsic value of options outstanding, options vested and exercisable and options expected to vest was $28.7 million, $4.3 million, and $13.9 million, respectively.
Option valuation models require the input of highly subjective assumptions, including expected stock price volatility. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The fair value of options granted under the Companys Plans was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
Expected volatility |
54.9 | % | 63.1 | % | 42.7 | % | ||||||
Risk-free interest rate |
2.2 | % | 2.2 | % | 2.5 | % | ||||||
Expected life (years) |
4.7 | 4.2 | 4.2 | |||||||||
Dividend yield |
| | |
64
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. Equity and Incentive Compensation Plans (Continued)
Stock Options (Continued)
The risk-free rate is based on a zero-coupon U.S. Treasury rate in effect at the time of grant with maturity dates that coincide with the expected life of the options. The expected life of the options is based on a calculation of the Companys historical exercise patterns to estimate future exercise patterns. The expected volatility for grants is based on a simple average of (i) historical volatility of stock price returns using daily closing prices and (ii) the volatility implied by exchange-traded call options to purchase the Companys common stock, to the extent sufficient data for the latter is available. Historical volatility was calculated as of the grant date using stock price data over periods of time equal in duration to the expected life of the options granted. In assessing implied volatility data, the Company analyzed call option market activity during the three month period preceding the grant date. The Company also considered the volume of market activity of the underlying shares and traded options, the similarity of the exercise prices of traded options to the exercise price of employee stock options during the period and traded options whose terms are close to the expected term of the employee stock options.
Restricted Stock
In accordance with ASC 718-10, the fair value of restricted stock awards is based on the market price of the Companys stock on the date of grant (determined in accordance with the applicable Plan) and is amortized to compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period, net of estimated forfeitures. As of January 29, 2011, there was $3.5 million of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted average vesting period of 0.9 years. The weighted average grant date fair value of restricted stock awards granted during the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009 was $19.82, $3.29, and $21.39, respectively. The total fair value of restricted stock awards vested during the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009 was $15.2 million, $1.5 million and $6.9 million, respectively.
The following table summarizes restricted stock activity for the fiscal year ended January 29, 2011:
Time - Based | Performance - Based | |||||||||||||||
Number of Shares |
Weighted Average Grant Date Fair Value |
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||||||||
Restricted stock awards at January 30, 2010 |
1,360,177 | $ | 8.20 | 436,502 | $ | 7.83 | ||||||||||
Granted |
41,827 | (1) | 20.82 | 137,098 | (2) | 19.51 | ||||||||||
Vested |
(784,964 | ) | 7.88 | (283,927 | ) | 18.27 | ||||||||||
Forfeited |
(12,194 | ) | 9.38 | | | |||||||||||
Restricted stock awards at January 29, 2011 |
604,846 | $ | 9.46 | 289,673 | $ | 3.13 | ||||||||||
|
(1) | Of this amount, 4,500 shares vest equally in each of April 2011, 2012 and 2013, 4,500 shares vest equally in each of July 2011, 2012 and 2013 and the remaining 32,827 shares vest in May 2011. |
(2) | Of this amount, 128,765 shares vested immediately on the grant date, and are comprised of 100,000 shares in partial settlement for a bonus earned in connection with the Fiscal 2009 savings under the Companys Restructuring Program, and 28,765 shares for over-achievement of performance targets for Fiscal 2009 performance vesting restricted stock grants. The remaining 8,333 shares vest 20% in August 2011, and 40% in each of March 2012 and March 2013. |
65
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. Equity and Incentive Compensation Plans (Continued)
Restricted Units
In March 2010, the Company granted 293,000 time vesting and 169,500 performance vesting restricted unit awards with a grant date fair value of $19.58. Of these, 454,000 were outstanding as of January 29, 2011 and 8,500 were forfeited during Fiscal 2010. The time vesting restricted unit awards vest annually over three years. The performance vesting restricted unit awards vest annually over a three-year period based on achievement of performance targets set bi-annually for each tranche of the grant. Based on Company performance, grantees may earn 75% to 125% of the units granted with respect to each tranche. If the Company does not achieve the minimum threshold goal associated with such units, grantees will not earn anything with respect to that tranche. Managements estimates of the probability and level of achievement related to the performance vesting restricted unit awards is considered in the compensation cost recorded during Fiscal 2010.
Since there were insufficient shares available to settle these restricted unit awards in stock as of the date of grant, they were classified and accounted for as liability awards and were marked-to-market through May 19, 2010. Under mark-to-market accounting, the liability for these awards was remeasured periodically during the period through May 19, 2010 based upon the closing market price of the Companys common stock. On May 19, 2010, the Companys shareholders approved an additional 3,000,000 shares under the Companys 2003 Plan. As such, the Company reserved shares sufficient to cover these restricted unit awards, reclassified the liability of approximately $0.5 million recognized through that date into equity and began accounting for these awards as equity awards as of May 19, 2010. The per share fair value of the restricted unit awards as of May 19, 2010 was $21.10.
In accordance with ASC 718-10, the fair value of restricted units is based on the market price of the Companys stock on the date of grant (determined in accordance with the applicable Plan) and is amortized to compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period, net of estimated forfeitures. As of January 29, 2011, there was $4.3 million of unrecognized compensation cost related to unvested restricted units, which is expected to be recognized over a remaining weighted average vesting period of 2.1 years.
General
ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. In Fiscal 2010, Fiscal 2009 and Fiscal 2008, stock-based compensation expense was recorded net of estimated forfeitures, such that expense was recorded only for those stock-based awards that are expected to vest.
ASC 718-10 also requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for stock-based compensation arrangements (excess tax benefits) be classified as financing cash flows. For the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009, excess tax benefits realized from stock-based compensation arrangements were $7.2 million, $0.3 million, and $0.4 million, respectively. The Company received $6.6 million, $0.1 million and $3.9 million in cash from the exercise of stock options during the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009, respectively.
During the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009, the Company recognized approximately $21.2 million, $16.1 million and $12.6 million, respectively, in total share-based compensation expense. This stock-based compensation expense is included on the same income statement line as the cash compensation paid to the recipient of the stock-based award. The associated tax benefit recognized in the Consolidated Statements of Operations for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009 was approximately $6.7 million, $4.6 million and $3.5 million, respectively.
66
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. Equity and Incentive Compensation Plans (Continued)
Long-Term Performance Compensation
During Fiscal 2008, the Compensation Committee of the Companys Board of Directors established, for Vice-Presidents and above, a long-term cash incentive program, the Restricted Cash Program (RCP). Under the RCP, corporate operating profit is the performance metric applied for the earning of amounts under the program, and any amounts earned are banked and deferred until the end of the third fiscal year following the earnings period. Consistent with the Companys long-term business objective of driving revenue growth with strong bottom-line performance, amounts banked during the three-year deferral period are adjusted upwards or downwards by the average percentage increase or decrease, as the case may be, of the Companys corporate net income performance over the three-year deferral period. Such corporate net income performance may be modified for certain unusual or infrequently occurring events to avoid distorting operating fundamentals and penalizing management for the consequences of such unusual or infrequent events. Amounts banked under the RCP are recorded as compensation expense on a pro-rata basis over the service period, and any adjustments made for changes in corporate net income performance during the deferral period are accounted for as changes in estimate. In order to receive any cash bonus under the RCP, except in limited circumstances, the executive must be employed by the Company at the end of the three-year deferral period.
10. Income Taxes
The provision/(benefit) for income taxes for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009 consists of the following:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(in thousands) | ||||||||||||
Federal: |
||||||||||||
Current |
$ | 45,440 | $ | (3,397 | ) | $ | (19,252 | ) | ||||
Deferred |
(1,465 | ) | (6,953 | ) | (17,615 | ) | ||||||
Total federal |
43,975 | (10,350 | ) | (36,867 | ) | |||||||
State and local: |
||||||||||||
Current |
1,300 | (12 | ) | 3,880 | ||||||||
Deferred |
(515 | ) | 1,960 | (7,222 | ) | |||||||
Total state and local |
785 | 1,948 | (3,342 | ) | ||||||||
Foreign: |
||||||||||||
Current |
780 | 579 | 1,545 | |||||||||
Deferred |
185 | (79 | ) | 1,148 | ||||||||
Total foreign |
965 | 500 | 2,693 | |||||||||
Total |
$ | 45,725 | $ | (7,902 | ) | $ | (37,516 | ) | ||||
67
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
10. Income Taxes (Continued)
The reconciliation between the provision/(benefit) for income taxes and the expected provision/(benefit) for income taxes at the U.S. federal statutory rate of 35% for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009 is as follows:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(dollars in thousands) | ||||||||||||
Income/(loss) before income taxes |
$ | 119,122 | $ | (26,110 | ) | $ | (371,422 | ) | ||||
Federal statutory rate |
35 | % | 35 | % | 35 | % | ||||||
Provision/(benefit) for income taxes at federal statutory rate |
41,693 | (9,139 | ) | (129,998 | ) | |||||||
State and local income taxes, net of federal income tax benefit |
3,031 | 685 | (1,468 | ) | ||||||||
Goodwill impairment charge |
| | 93,412 | |||||||||
Prior year tax credits |
| | 2,391 | |||||||||
Other |
1,001 | 552 | (1,853 | ) | ||||||||
Provision/(benefit) for income taxes |
$ | 45,725 | $ | (7,902 | ) | $ | (37,516 | ) | ||||
The tax effects of significant items comprising the Companys deferred tax assets/(liabilities) as of January 29, 2011 and January 30, 2010 are as follows:
As of | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
(in thousands) | ||||||||
Current: |
||||||||
Inventory |
$ | 7,661 | $ | 7,278 | ||||
Accrued expenses and other |
12,636 | 19,950 | ||||||
Deferred rent and lease incentives |
7,848 | 8,571 | ||||||
Total current |
$ | 28,145 | $ | 35,799 | ||||
Non-current: |
||||||||
Depreciation and amortization |
$ | (64,971 | ) | $ | (69,827 | ) | ||
Deferred rent and lease incentives |
66,725 | 74,514 | ||||||
Benefits related |
22,407 | 12,131 | ||||||
Other |
4,820 | 2,714 | ||||||
Amounts included in accumulated other comprehensive loss |
1,393 | 2,567 | ||||||
Total non-current |
$ | 30,374 | $ | 22,099 | ||||
The income tax provision/(benefit) reflects the current and deferred tax consequences of events that have been recognized in the Companys Consolidated Financial Statements or tax returns. U.S. federal income taxes are provided on unremitted foreign earnings, except those that are considered permanently reinvested, which at January 29, 2011 amounted to approximately $4.1 million. However, if these earnings were not considered permanently reinvested, under current law, the incremental tax on such undistributed earnings would be approximately $0.5 million.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions and generally remains open to income tax examinations by relevant tax authorities for tax years beginning with Fiscal 2005. The Company also files income tax returns in foreign jurisdictions and generally remains open to income tax examinations for tax years beginning with Fiscal 2004. The Company is currently under examination for U.S. federal and certain state and local jurisdictions.
68
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
10. Income Taxes (Continued)
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
(in thousands) | ||||
Balance at February 2, 2008 |
$ | 5,446 | ||
Additions based on tax positions related to the current year |
355 | |||
Additions for tax positions of prior years |
223 | |||
Reductions for tax positions of prior years |
(1,352 | ) | ||
Settlements |
(1,280 | ) | ||
Lapses in statutes of limitation |
(320 | ) | ||
Balance at January 31, 2009 |
3,072 | |||
Additions based on tax positions related to the current year |
95 | |||
Additions for tax positions of prior years |
89 | |||
Settlements |
(152 | ) | ||
Lapses in statutes of limitation |
(34 | ) | ||
Balance at January 30, 2010 |
3,070 | |||
Additions based on tax positions related to the current year |
478 | |||
Additions for tax positions of prior years |
3,925 | |||
Reductions for tax positions of prior years |
(514 | ) | ||
Balance at January 29, 2011 |
$ | 6,959 | ||
To the extent these unrecognized tax benefits are ultimately recognized, approximately $4.8 million will impact the Companys effective tax rate in a future period. The Company anticipates that the amount of unrecognized tax benefits may change in the next twelve months. However, it does not expect the change to have a significant impact on its consolidated financial statements.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its provision/(benefit) for income taxes. During the fiscal year ended January 29, 2011, the Company recognized approximately $1.2 million of interest and penalties, net of related deferred tax assets, on unrecognized tax benefits. For the fiscal years ended January 30, 2010 and January 31, 2009, interest and penalties recorded on unrecognized tax benefits were immaterial. The Company had approximately $3.7 million and $2.0 million for the payment of interest and penalties accrued at January 29, 2011 and January 30, 2010, respectively.
The Company is subject to periodic audits of its various tax returns by government agencies, which could result in possible income tax liabilities. Although the outcome of these matters cannot currently be determined, the Company believes adequate provision has been made for any potential unfavorable financial statement impact.
11. Retirement Plans
Savings Plan
Substantially all employees of the Company and its subsidiaries who work at least 30 hours per week or who work 1,000 hours during a consecutive 12 month period are eligible to participate in the Companys 401(k) Plan. Prior to October 1, 2007, participants could contribute to the 401(k) Plan an aggregate of up to 75% of their annual earnings in any combination of pre-tax and after-tax contributions, subject to certain limitations. The Company made a matching contribution of 50% with respect to the first 3% of each participants contributions to the 401(k) Plan prior to October 1, 2007. Beginning October 1, 2007, the Company match was increased to 100% with respect to the first 3% and 50% with respect to the second 3% of each participants contributions to the 401(k) Plan made on or after October 1, 2007. Effective January 1, 2010, the Company suspended its matching contributions under the 401(k) Plan. Effective January 1, 2011, the Company reinstated the match. The Companys contributions to the 401(k) Plan for Fiscal 2010, Fiscal 2009 and Fiscal 2008 were approximately $0.1 million, $5.2 million and $5.6 million, respectively.
69
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
11. Retirement Plans (Continued)
Pension Plan
The Company froze its non-contributory defined benefit Pension Plan (the Pension Plan) in October 2007. As a result, no additional associates became participants in the Pension Plan, and no additional benefits were earned under the Pension Plan on or after October 1, 2007.
The following table provides information for the Pension Plan at January 29, 2011 and January 30, 2010:
Fiscal Year Ended | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
(in thousands) | ||||||||
Change in benefit obligation: |
||||||||
Projected benefit obligation at beginning of year |
$ | 32,434 | $ | 34,322 | ||||
Interest cost |
1,787 | 2,106 | ||||||
Actuarial (gain)/loss |
(195 | ) | 1,326 | |||||
Benefits paid |
(2,688 | ) | (5,320 | ) | ||||
Projected benefit obligation at end of year |
31,338 | 32,434 | ||||||
Change in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
28,673 | 27,655 | ||||||
Actual return on plan assets |
3,795 | 6,338 | ||||||
Benefits paid |
(2,688 | ) | (5,320 | ) | ||||
Fair value of plan assets at end of year |
29,780 | 28,673 | ||||||
Funded status at end of year |
(1,558 | ) | (3,761 | ) | ||||
Net amount included in other liabilities |
$ | (1,558 | ) | $ | (3,761 | ) | ||
Amounts recognized in the Companys Consolidated Balance Sheets consist of:
As of | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
(in thousands) | ||||||||
Non-current liabilities |
$ | (1,558 | ) | $ | (3,761 | ) | ||
Total |
$ | (1,558 | ) | $ | (3,761 | ) | ||
The accumulated benefit obligation for the Companys Pension Plan was approximately $31.3 million and $32.4 million at January 29, 2011 and January 30, 2010, respectively. As a result of the Pension Plan freeze, the accumulated benefit obligation equals the projected benefit obligation.
70
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
11. Retirement Plans (Continued)
Pension Plan (Continued)
The following table summarizes the components of Net Periodic Benefit Cost and other amounts recognized in accumulated other comprehensive (income)/loss:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
(in thousands) | ||||||||||||
Net periodic benefit cost: |
||||||||||||
Interest cost |
$ | 1,787 | $ | 2,106 | $ | 1,977 | ||||||
Expected return on plan assets |
(1,673 | ) | (1,601 | ) | (2,315 | ) | ||||||
Amortization of net loss |
300 | 1,029 | 50 | |||||||||
Settlement loss recognized |
338 | 1,249 | 1,829 | |||||||||
Net periodic benefit cost |
752 | 2,783 | 1,541 | |||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive loss: |
||||||||||||
Net (gain)/loss arising during the year |
(2,317 | ) | (3,411 | ) | 8,693 | |||||||
Settlement charge |
(338 | ) | (1,249 | ) | (1,829 | ) | ||||||
Amortization of net gain |
(300 | ) | (1,029 | ) | (50 | ) | ||||||
Total recognized in other comprehensive (income)/loss |
(2,955 | ) | (5,689 | ) | 6,814 | |||||||
Total recognized in net periodic benefit cost and other comprehensive (income)/loss |
$ | (2,203 | ) | $ | (2,906 | ) | $ | 8,355 | ||||
As a result of the Pension Plan freeze, the Company has no remaining prior service cost that will be amortized from accumulated other comprehensive loss into net periodic benefit cost. For the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009, the total amount of lump sum payments made to Pension Plan participants exceeded the interest cost for the year. As a result, in Fiscal 2010, Fiscal 2009 and Fiscal 2008, non-cash settlement charges of $0.3 million, $1.2 million and $1.8 million, respectively, were recorded and included in Selling, general and administrative expenses in the Companys Consolidated Statements of Operations.
Amounts recognized in accumulated other comprehensive loss consist of:
Fiscal Year Ended | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
(in thousands) | ||||||||
Net actuarial loss |
$ | 3,771 | $ | 6,726 | ||||
Total |
$ | 3,771 | $ | 6,726 | ||||
For the fiscal years ended January 29, 2011 and January 30, 2010 the following weighted average assumptions were used to determine benefit obligations at the end of the fiscal year:
Fiscal Year Ended | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
Discount rate |
5.75 | % | 6.15 | % |
71
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
11. Retirement Plans (Continued)
Pension Plan (Continued)
For the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009 the following weighted average assumptions were used to determine net periodic benefit cost:
Fiscal Year Ended | ||||||||||||
January 29, 2011 |
January 30, 2010 |
January 31, 2009 |
||||||||||
Discount rate |
6.15 | % | 6.75 | % | 5.80 | % | ||||||
Long-term rate of return on assets |
6.25 | % | 6.25 | % | 6.25 | % |
To develop the expected long-term rate of return on Pension Plan assets, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the Pension Plan portfolio. The Company assumes that all employees will take lump-sum payouts based on historical payout trends. The discount rate was developed using the Mercer Yield Curve, which consists of spot interest rates for each of the next 30 years and is developed based on pricing and yield information for high quality corporate bonds, whose cash flows mirror the anticipated timing of future benefit payments.
Since the Pension Plan was frozen in October 2007, its goal is to provide all plan benefits and expenses through growth and income from the Pension Plans assets, with such employer contributions as may be required in accordance with applicable rules and regulations. Accordingly, in Fiscal 2008, the Companys investment policy was revised to meet these objectives and specifies a minimum investment of 50% but not more than 70% in debt securities, a minimum investment of 30% but not more than 50% in equity securities and up to 20% in cash and cash equivalents. Pension Plan assets consist primarily of equity and fixed income funds or cash and cash equivalents. The equity securities do not include any of the Companys common stock. The Pension Plan prohibits transactions investing in direct real estate, venture capital, private placements and purchasing securities on margin or short selling securities. The Pension Plans principal investment objectives are: to exceed the policy target index net of fees; to have the equity and fixed income portfolios exceed the Standard & Poors 500 Index and the Barclays Capital Aggregate Index, respectively, after fees; and to maintain total portfolio risk equal or less than that of the Pension Plans policy target allocation. The Pension Plans investment performance guidelines are set and measured against appropriate portfolio benchmarks. The Pension Plans goals, objectives, asset allocation policies and funding forecasts are reviewed periodically within any given plan year, or when significant changes have occurred in Pension Plan benefits, participant demographics or funded status.
72
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
11. Retirement Plans (Continued)
Pension Plan (Continued)
As discussed in Note 3, Investments, ASC 820-10 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The investments held by the Companys Pension Plan and their associated level within the fair value hierarchy are shown below:
| Level 1 Quoted prices in active markets for identical assets or liabilities. No investments held by the Companys Pension Plan as of January 29, 2011 were valued using Level 1 inputs. |
| Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
Mutual funds, money market funds and common collective trusts:
These investments are valued using the Net Asset Value provided by the administrators of the funds. The Net Asset Value is based on the value of the underlying assets owned by the fund or trust, minus its liabilities, and then divided by the number of shares outstanding. The unit price of this investment is not quoted in an active market. However, the unit price is based on underlying investments which are either traded in an active market or are valued based on observable inputs such as market interest rates and quoted prices for similar securities.
| Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. No investments held by the Companys Pension Plan as of January 29, 2011 required valuation using Level 3 inputs. |
73
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
11. Retirement Plans (Continued)
Pension Plan (Continued)
The following tables segregate all financial assets and liabilities held by the Companys Pension Plan as of January 29, 2011 and January 30, 2010 that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy, based on the inputs used to determine fair value at the measurement date. The classification of assets held by the Pension Plan as of January 30, 2010 was updated to conform to the current year classification:
January 29, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(in thousands) | ||||||||||||||||
Mutual funds: |
||||||||||||||||
Foreign large blend |
$ | 1,358 | $ | | $ | 1,358 | $ | | ||||||||
Foreign large growth |
611 | | 611 | | ||||||||||||
Intermediate term bond |
10,935 | | 10,935 | | ||||||||||||
Large blend |
578 | | 578 | | ||||||||||||
Large growth |
3,848 | | 3,848 | | ||||||||||||
Large value |
3,352 | | 3,352 | | ||||||||||||
Mid cap blend |
1,993 | | 1,993 | | ||||||||||||
Real estate |
681 | | 681 | | ||||||||||||
Small blend |
720 | | 720 | | ||||||||||||
Small growth |
696 | | 696 | | ||||||||||||
Total mutual funds |
24,772 | | 24,772 | | ||||||||||||
Common collective trusts |
4,818 | | 4,818 | | ||||||||||||
Money market funds |
190 | | 190 | |||||||||||||
Total assets |
$ | 29,780 | $ | | $ | 29,780 | $ | | ||||||||
January 30, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(in thousands) | ||||||||||||||||
Mutual funds: |
||||||||||||||||
Fixed income |
$ | 10,385 | $ | | $ | 10,385 | $ | | ||||||||
Large cap stock |
7,233 | | 7,233 | | ||||||||||||
International stock |
2,030 | | 2,030 | | ||||||||||||
Small cap stock |
803 | | 803 | | ||||||||||||
Real estate |
774 | | 774 | | ||||||||||||
Total mutual funds |
21,225 | | 21,225 | | ||||||||||||
Common collective trusts |
6,977 | | 6,977 | | ||||||||||||
Money market funds |
471 | | 471 | |||||||||||||
Total assets |
$ | 28,673 | $ | | $ | 28,673 | $ | | ||||||||
74
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
11. Retirement Plans (Continued)
Pension Plan (Continued)
The benefits expected to be paid under the Pension Plan as of January 29, 2011 are as follows:
Fiscal Year |
(in thousands) | |||
2011 |
$ | 4,392 | ||
2012 |
3,499 | |||
2013 |
3,156 | |||
2014 |
2,829 | |||
2015 |
2,527 | |||
2016-2020 |
9,709 |
The Company made no contributions to the Pension Plan in Fiscal 2010, Fiscal 2009 or Fiscal 2008. Although the Company was not required to make a contribution to the Pension Plan during these periods, any deterioration in the financial markets or changes in discount rates may require the Company to make a contribution to its Pension Plan in Fiscal 2011.
Non-Qualified Deferred Compensation Plan
Under the Companys non-qualified deferred compensation plan (the Deferred Compensation Plan), certain associates at the vice-president level and above may defer up to 50% of their salary and, prior to January 2011, up to 100% of cash-based performance compensation earned during a calendar year. Beginning in January 2011, those associates may only defer up to 95% of cash-based performance compensation earned during a calendar year. Under the Deferred Compensation Plan, the Company matches the amount of the base and bonus compensation deferred by the executive during the Plan year above the Internal Revenue Code Section 401(a)(17) qualified plan compensation limit as indexed on an annual basis (Eligible Compensation). The Company matches 100% on the first 3% of a participants deferred Eligible Compensation, and 50% of a participants deferred Eligible Compensation over 3% and up to 6%. Effective January 1, 2010, the Company suspended the match on amounts deferred under the Deferred Compensation Plan on or after that date, and, effective January 1, 2011, the Company reinstated the match. The amounts deferred by the executive and credited to the executives deferred compensation account are at all times fully vested. The Companys matching deferral credited to an executives deferred compensation account vests upon the second anniversary of the executives date of hire, or earlier upon a change in control (as defined under the Deferred Compensation Plan).
75
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. Selected Quarterly Financial Data - Unaudited
Quarter | ||||||||||||||||
Fiscal 2010 | First | Second | Third | Fourth | ||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net sales |
$ | 476,181 | $ | 483,472 | $ | 505,281 | $ | 515,261 | ||||||||
Gross margin |
$ | 282,891 | $ | 266,074 | $ | 288,776 | $ | 266,253 | ||||||||
Net income (1) (2) |
$ | 22,616 | $ | 18,612 | $ | 24,196 | $ | 7,973 | ||||||||
Basic earnings per share (4) |
$ | 0.38 | $ | 0.32 | $ | 0.41 | $ | 0.14 | ||||||||
Diluted earnings per share (4) |
$ | 0.38 | $ | 0.31 | $ | 0.41 | $ | 0.14 | ||||||||
Quarter | ||||||||||||||||
Fiscal 2009 | First | Second | Third | Fourth | ||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net sales |
$ | 426,747 | $ | 470,229 | $ | 462,410 | $ | 469,137 | ||||||||
Gross margin |
$ | 236,858 | $ | 246,173 | $ | 264,855 | $ | 246,449 | ||||||||
Net (loss)/income (1) (3) |
$ | (2,314 | ) | $ | (18,004 | ) | $ | 2,069 | $ | 41 | ||||||
Basic (loss)/earnings per share (4) |
$ | (0.04 | ) | $ | (0.32 | ) | $ | 0.04 | $ | | ||||||
Diluted (loss)/earnings per share (4) |
$ | (0.04 | ) | $ | (0.32 | ) | $ | 0.03 | $ | |
(1) | Includes pre-tax charges related to the Companys Restructuring Program of approximately $0.4 million, $0.8 million, $0.6 million, and $3.8 million during the first, second, third, and fourth quarter, respectively, of Fiscal 2010, and $1.0 million, $31.1 million, $0.6 million, and $3.7 million during the first, second, third and fourth quarter, respectively, of Fiscal 2009. See Note 2, Restructuring Charges, for further discussion. |
(2) | Includes approximately $1.6 million related to certain state income tax credits recorded by the Company during the fourth quarter of Fiscal 2010. |
(3) | Includes pre-tax asset impairment charges of approximately $15.3 million during the third quarter of Fiscal 2009. See Note 1, Summary of Significant Accounting Policies, for further discussion. |
(4) | The sum of the quarterly per share data may not equal the annual amounts due to quarterly changes in the weighted average shares and share equivalents outstanding. |
76
EXHIBIT INDEX
Exhibit No. |
Document | |
3.1 |
Restated Certificate of Incorporation of the Company (as amended through April 27, 2006). Incorporated by reference to Exhibit 3.1 to the Form 10-Q of the Company for the Quarter ended April 29, 2006 filed on June 7, 2006. | |
3.2 |
Bylaws of the Company (as amended through January 27, 2009). Incorporated by reference to Exhibit 3.2 to the Form 8-K of the Company filed on January 30, 2009. | |
4.1 |
Amended and Restated Rights Agreement, dated as of May 1, 2001, between the Company and Mellon Investor Services LLC. Incorporated by reference to Exhibit 1 of Form 8-A/A No. 1 of the Company filed on May 24, 2001. | |
10.1 |
Third Amended and Restated Credit Agreement, dated as of April 23, 2008 (the Credit Agreement), by and among AnnTaylor, Inc., Annco, Inc., AnnTaylor Distribution Services, Inc., AnnTaylor Retail, Inc., the financial institutions from time to time parties thereto, Bank of America, N.A., as administrative and collateral agent and JPMorgan Chase Bank, N.A., Wachovia Bank, National Association and RBS Citizens, N.A. as syndication agents. Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the Quarter ended October 30, 2010 filed on November 19, 2010. | |
10.2 |
Third Amended and Restated Pledge and Security Agreement, dated as of April 23, 2008, by AnnTaylor, Inc., AnnTaylor Stores Corporation, Annco, Inc., AnnTaylor Distribution Services, Inc., and AnnTaylor Retail, Inc. in favor of Bank of America, N.A., in its capacity as administrative agent for each of the lenders party to the Credit Agreement. Incorporated by reference to Exhibit 10.2 to the Form 10-Q of the Company for the Quarter ended October 30, 2010 filed on November 19, 2010. | |
10.3 |
Third Amended and Restated Parent Guaranty, dated as of April 23, 2008, made by AnnTaylor Stores Corporation in favor of Bank of America, N.A., in its capacity as administrative agent for each of the lenders party to the Credit Agreement. Incorporated by reference to Exhibit 10.3 to the Form 8-K of the Company filed on April 29, 2008. | |
10.4 |
Trademark Security Agreement, dated as of April 23, 2008, made by Annco, Inc., in favor of Bank of America, N.A., in its capacity as administrative agent for each of the lenders party to the Credit Agreement. Incorporated by reference to Exhibit 10.3 to the Form 10-Q of the Company for the Quarter ended October 30, 2010 filed on November 19, 2010. | |
10.5 |
Trademark Assignment Agreement, dated July 15, 2009, between AnnTaylor Sourcing Far East Limited, Annco, Inc. and Guangzhou Pan Yu San Yuet Fashion Manufactory Ltd. Incorporated by reference to Exhibit 10.4 to the Form 10-Q of the Company for the Quarter ended October 30, 2010 filed on November 19, 2010. | |
10.6 |
Agreement of Lease, dated as of August 3, 2004, between the Company and No. 1 Times Square Development LLC. Incorporated by reference to Exhibit 10.5 to the Form 10-Q of the Company for the Quarter ended July 31, 2004 filed on September 8, 2004. | |
10.7 |
Amended and Restated Tax Sharing Agreement, dated as of November 10, 2003, between the Company and AnnTaylor, Inc. Incorporated by reference to Exhibit 10.2 to the Form 10-K of the Company filed on March 25, 2004. | |
10.8 |
The AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan, Amended and Restated as of February 23, 1994 (the 1992 Plan). Incorporated by reference to Exhibit 10.15 to the Form 10-K of the Company filed on May 1, 1997. | |
10.8.1 |
First Amendment to the 1992 Plan, amended as of February 20, 1997. Incorporated by reference to Exhibit 10.15.1 to the Form 10-Q of the Company for the Quarter ended August 2, 1997 filed on September 12, 1997. | |
10.8.2 |
January 16, 1998 Amendment to the 1992 Plan, as amended. Incorporated by reference to Exhibit 10 to the Form 8-K of the Company filed on March 13, 1998. | |
10.8.3 |
May 12, 1998 Amendment to the 1992 Plan, as amended. Incorporated by reference to Exhibit 10.16.3 to the Form 10-Q of the Company for the Quarter ended May 2, 1998 filed on June 16, 1998. |
77
ANNTAYLOR STORES CORPORATION
EXHIBIT INDEX
10.8.4 |
Amendment to the 1992 Plan, effective as of March 10, 2000. Incorporated by reference to Exhibit 10.8.4 to the Form 10-K of the Company filed on April 18, 2000. | |
10.8.5 |
Second Restated Amendment to the 1992 Plan, effective as of March 9, 2004. Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the Quarter ended July 31, 2004 filed on September 8, 2004. | |
10.8.6 |
Amendment to the 1992 Plan, effective as of January 26, 2006. Incorporated by reference to Exhibit 10.4.8 to the Form 10-K of the Company filed on March 23, 2006. | |
10.9 |
The AnnTaylor Stores Corporation 2000 Stock Option and Restricted Stock Award Plan (the 2000 Plan). Incorporated by reference to Exhibit 10.4 to the Form 10-K of the Company filed on April 1, 2003. | |
10.9.1 |
First Amendment to the 2000 Plan, effective as of January 29, 2002. Incorporated by reference to Exhibit 10.18.1 to the Form 10-K of the Company filed on April 4, 2002. | |
10.9.2 |
Second Restated Second Amendment to the 2000 Plan, effective as of March 9, 2004. Incorporated by reference to Exhibit 10.2 to the Form 10-Q of the Company for the Quarter ended July 31, 2004 filed on September 8, 2004. | |
10.9.3 |
Third Amendment to the 2000 Plan, effective as of January 26, 2006. Incorporated by reference to Exhibit 10.5.5 to the Form 10-K of the Company filed on March 23, 2006. | |
10.9.4 |
Fourth Amendment to the 2000 Plan, effective as of March 13, 2008. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of the Company for the Quarter ended May 3, 2008 filed on May 29, 2008. | |
10.10 |
The AnnTaylor Stores Corporation 2002 Stock Option and Restricted Stock and Unit Award Plan (the 2002 Plan). Incorporated by reference to Exhibit 10.9 to the Form 10-K of the Company filed on April 4, 2002. | |
10.10.1 |
First Amendment to the 2002 Plan, effective as of March 11, 2003. Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the Quarter ended May 3, 2003 filed on June 13, 2003. | |
10.10.2 |
Second Restated Second Amendment to the 2002 Plan, effective as of March 9, 2004. Incorporated by reference to Exhibit 10.3 to the Form 10-Q of the Company for the Quarter ended July 31, 2004 filed on September 8, 2004. | |
10.10.3 |
Third Amendment to the 2002 Plan, effective as of January 26, 2006. Incorporated by reference to Exhibit 10.6.5 to the Form 10-K of the Company filed on March 23, 2006. | |
10.10.4 |
Fourth Amendment to the 2002 Plan, effective as of March 13, 2008. Incorporated by reference to Exhibit 10.9 to the Form 10-Q of the Company for the Quarter ended May 3, 2008 filed on May 29, 2008. | |
10.11 |
The AnnTaylor Stores Corporation 2003 Equity Incentive Plan (the 2003 Plan), as amended through March 10, 2010. Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the Quarter ended May 1, 2010 filed on May 21, 2010. | |
10.12 |
Amended and Restated AnnTaylor Stores Corporation Management Performance Compensation Plan (the ATIP). Incorporated by reference to Exhibit 10.1 to the Form 8-K filed on May 18, 2007. | |
10.12.1 |
Amendment to the ATIP, effective as of March 13, 2008. Incorporated by reference to Exhibit 10.7 to the Form 10-Q of the Company for the Quarter ended May 3, 2008 filed on May 29, 2008. | |
10.12.2 |
Second Amendment to the ATIP, effective as of March 5, 2009. Incorporated by reference to Exhibit 10.12.2 to the Form 10-K of the Company filed on March 9, 2009. | |
10.13 |
AnnTaylor Stores Corporation Deferred Compensation Plan, as amended through August 18, 2005. Incorporated by reference to Exhibit 10.1 to the Form 8-K of the Company filed on August 24, 2005. | |
10.14* |
AnnTaylor Stores Corporation Non-Qualified Deferred Compensation Plan, as amended and restated as of November 17, 2010. |
78
ANNTAYLOR STORES CORPORATION
EXHIBIT INDEX
10.15 |
AnnTaylor Stores Corporation 2004 Long-Term Cash Incentive Plan (the LTCIP). Incorporated by reference to Exhibit B to the Proxy Statement of the Company filed on March 25, 2004. | |
10.15.1 |
Amendment to the LTCIP, effective as of March 13, 2008. Incorporated by reference to Exhibit 10.10 to the Form 10-Q of the Company for the Quarter ended May 3, 2008 filed on May 29, 2008. | |
10.16 |
AnnTaylor Stores Corporation Special Severance Plan, as amended through August 21, 2008. Incorporated by reference to Exhibit 10.4 to the Form 10-Q of the Company for the Quarter ended November 1, 2008 filed on November 21, 2008. | |
10.17 |
Form of 2002 Plan Non-Qualified Stock Option Agreement (Time-Vesting Options for Directors). Incorporated by reference to Exhibit 10.1 to the Form 8-K of the Company filed on October 29, 2004. | |
10.18 |
Form of 2003 Plan Non-Statutory Stock Option Agreement (Time-Vesting Options for Directors). Incorporated by reference to Exhibit 10.2 to the Form 8-K of the Company filed on October 29, 2004. | |
10.19 |
Form of 2003 Plan Restricted Stock Award Agreement for Non-Employee Directors (Time-Vesting Restricted Stock). Incorporated by reference to Exhibit 10.3 to the Form 8-K of the Company filed on May 16, 2006. | |
10.20 |
Form of 2000 Plan Non-Qualified Stock Option Agreement (Time-Vesting Options). Incorporated by reference to Exhibit 10.5 to the Form 10-Q of the Company for the Quarter ended May 5, 2007 filed on June 8, 2007. | |
10.21 |
Form of 2002 Plan Non-Qualified Stock Option Agreement (Time-Vesting Options). Incorporated by reference to Exhibit 10.6 to the Form 10-Q of the Company for the Quarter ended May 5, 2007 filed on June 8, 2007. | |
10.22 |
Form of 2003 Plan Non-Statutory Stock Option Agreement (Time-Vesting Options). Incorporated by reference to Exhibit 10.1 to the Form 8-K of the Company filed on May 16, 2006. | |
10.23 |
Form of 2000 Plan Restricted Stock Award Agreement (Time-Vesting Restricted Stock). Incorporated by reference to Exhibit 10.9 to the Form 10-Q of the Company for the Quarter ended April 29, 2006 filed on June 7, 2006. | |
10.24 |
Form of 2002 Plan Restricted Stock Award Agreement (Time-Vesting Restricted Stock). Incorporated by reference to Exhibit 10.7 to the Form 10-Q of the Company for the Quarter ended April 29, 2006 filed on June 7, 2006. | |
10.25 |
Form of 2003 Plan Restricted Stock Award Agreement (Time-Vesting Restricted Stock). Incorporated by reference to Exhibit 10.2 to the Form 8-K of the Company filed on May 16, 2006. | |
10.26 |
Form of 2002 Plan Restricted Stock Award Agreement (Performance-Vesting Restricted Stock). Incorporated by reference to Exhibit 10.29 to the Form 10-K of the Company filed on April 1, 2005. | |
10.27 |
Form of 2003 Plan Restricted Stock Award Agreement (Performance-Vesting Restricted Stock). Incorporated by reference to Exhibit 10.30 to the Form 10-K of the Company filed on April 1, 2005. | |
10.28 |
Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.2 to the Form 8-K of the Company filed on August 24, 2005. | |
10.29 |
Summary of Compensation Arrangements for Non-Employee Directors. Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the Quarter ended July 31, 2010 filed on August 20, 2010. | |
10.30 |
Employment Agreement, effective as of October 1, 2005, between the Company and Katherine Lawther Krill. Incorporated by reference to Exhibit 10 to the Form 8-K of the Company filed on November 23, 2005. |
79
ANNTAYLOR STORES CORPORATION
EXHIBIT INDEX
10.30.1 |
Amendment to Employment Agreement, effective as of December 19, 2008, between the Company and Katherine Lawther Krill. Incorporated by reference to Exhibit 10.32.1 to the Form 10-K of the Company filed on March 9, 2009. | |
10.31 |
Letter Agreement, executed August 7, 2008, between the Company and Christine Beauchamp. Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the Quarter ended August 2, 2008 filed on August 22, 2008. | |
10.32 |
Letter Agreement, executed November 1, 2008, between the Company and Gary Muto. Incorporated by reference to Exhibit 10.2 to the Form 10-Q of the Company for the Quarter ended November 1, 2008 filed on November 21, 2008. | |
10.33 |
Letter Agreement, executed September 10, 2007, between the Company and Michael J. Nicholson. Incorporated by reference to Exhibit 10.1 to the Form 8-K of the Company filed on September 17, 2007. | |
10.34 |
Confidentiality, Non-solicitation of Associates and Non-competition Agreement, dated August 7, 2008, between the Company and Christine Beauchamp. Incorporated by reference to Exhibit 10.2 to the Form 10-Q of the Company for the Quarter ended August 2, 2008 filed on August 22, 2008. | |
10.35 |
Confidentiality, Non-solicitation of Associates and Non-competition Agreement, dated November 6, 2008, between the Company and Gary Muto. Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the Quarter ended November 1, 2008 filed on November 21, 2008. | |
10.35.1 |
Amendment to Confidentiality, Non-solicitation of Associates and Non-competition Agreement between the Company and Gary Muto, effective November 24, 2008. Incorporated by reference to Exhibit 10.37.1 to the Form 10-K of the Company filed on March 9, 2009. | |
10.36 |
Confidentiality, Non-solicitation of Associates and Non-competition Agreement, dated June 9, 2008, between the Company and Brian Lynch. Incorporated by reference to Exhibit 10.5 to the Form 10-Q of the Company for the Quarter ended August 2, 2008 filed on August 22, 2008. | |
10.36.1 |
Amendment to Confidentiality, Non-solicitation of Associates and Non-competition Agreement between the Company and Brian Lynch, effective December 18, 2008. Incorporated by reference to Exhibit 10.38.1 to the Form 10-K of the Company filed on March 9, 2009. | |
10.37 |
Confidentiality, Non-solicitation of Associates and Non-competition Agreement, dated June 9, 2008, between the Company and Michael Nicholson. Incorporated by reference to Exhibit 10.6 to the Form 10-Q of the Company for the Quarter ended August 2, 2008 filed on August 22, 2008. | |
10.38 |
Form of 2003 Plan Restricted Unit Award Agreement (Time-Vesting Restricted Units). Incorporated by reference to Exhibit 10.41 to the Form 10-K of the Company filed on March 12, 2010. | |
10.39 |
Form of 2003 Plan Restricted Unit Award Agreement (Performance-Vesting Restricted Units). Incorporated by reference to Exhibit 10.5 to the Form 10-Q of the Company for the Quarter ended October 30, 2010 filed on November 19, 2010. | |
21 |
Subsidiaries of the Company. Incorporated by reference to Exhibit 21 to the Form 10-K of the Company filed on April 1, 2003. | |
23* |
Consent of Independent Registered Public Accounting Firm. | |
31.1* |
Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* |
Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1° |
Certification of chief executive officer and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS |
XBRL Instance | |
101.SCH |
XBRL Taxonomy Extension Schema | |
101.CAL |
XBRL Taxonomy Extension Calculation | |
101.DEF |
XBRL Taxonomy Extension Definition |
80
ANNTAYLOR STORES CORPORATION
EXHIBIT INDEX
101.LAB |
XBRL Taxonomy Extension Labels | |
101.PRE |
XBRL Taxonomy Extension Presentation |
* | Filed electronically herewith. |
° | Furnished electronically herewith. |
| Management contract or compensatory plan or arrangement. |
| Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections. |
81
Exhibit 10.14
ANNTAYLOR STORES CORPORATION
NON-QUALIFIED DEFERRED COMPENSATION PLAN
(Amended and Restated as of November 17, 2010)
1
Table of Contents
Article 1 | ||||||
1.1 |
Establishment of the Plan | 1 | ||||
1.2 |
Purpose of the Plan | 1 | ||||
Article 2 |
||||||
2.1 |
Account Balance | 1 | ||||
2.2 |
Administrator | 1 | ||||
2.3 |
Beneficiary | 1 | ||||
2.4 |
Change in Control | 2 | ||||
2.5 |
Code | 2 | ||||
2.6 |
Committee | 2 | ||||
2.7 |
Compensation | 2 | ||||
2.8 |
Deferral Election Form | 2 | ||||
2.9 |
Disability | 2 | ||||
2.10 |
Distributable Event | 2 | ||||
2.11 |
Early Retirement Date | 2 | ||||
2.12 |
Eligible Employee | 3 | ||||
2.13 |
Employer | 3 | ||||
2.14 |
ERISA | 3 | ||||
2.15 |
Excess Compensation | 3 | ||||
2.16 |
Incentive Compensation | 3 | ||||
2.17 |
Normal Retirement Date | 3 | ||||
2.18 |
Participant | 3 | ||||
2.19 |
Plan | 3 | ||||
2.20 |
Plan Year | 3 | ||||
2.21 |
RCP Award | 3 | ||||
2.22 |
Separation from Service | 4 | ||||
2.23 |
Spouse | 4 | ||||
2.24 |
Trust Agreement | 4 | ||||
2.25 |
Trust Fund | 4 | ||||
2.26 |
Trustee | 4 | ||||
2.27 |
Unforeseeable Emergency | 4 |
2
2.28 |
Valuation Date | 5 | ||||
2.29 |
Vested Interest | 5 | ||||
Article 3 |
||||||
3.1 |
Eligibility Requirements | 5 | ||||
3.2 |
Initial Deferral Elections, Generally | 5 | ||||
3.3 |
Initial Deferral Elections for RCP Awards | 5 | ||||
Article 4 |
||||||
4.1 |
Employer Credits | 5 | ||||
4.2 |
Separate Accounting | 6 | ||||
4.3 |
Vesting in the Account Balance | 6 | ||||
4.4 |
Earnings | 6 | ||||
4.5 |
Amounts Payable | 6 | ||||
Article 5 |
||||||
5.1 |
Distribution | 6 | ||||
5.2 |
Subsequent Deferral | 7 | ||||
5.3 |
Form of Payment | 7 | ||||
5.4 |
Acceleration of Benefits | 7 | ||||
5.5 |
Forfeiture of Amounts Not Vested | 8 | ||||
Article 6 |
||||||
6.1 |
Administrator | 8 | ||||
6.2 |
Accounts and Expenses | 8 | ||||
6.3 |
Employers Powers | 9 | ||||
6.4 |
Responsibility of the Employer | 9 | ||||
Article 7 |
||||||
7.1 |
Unfunded Status of Plan | 9 | ||||
7.2 |
Investment Vehicle | 9 | ||||
7.3 |
Directed Investments | 9 | ||||
Article 8 |
||||||
8.1 |
Amendment of Plan | 11 | ||||
8.2 |
Termination of Plan by Employer | 11 | ||||
8.3 |
Automatic Termination of Plan | 11 | ||||
8.4 |
Amendment and Termination Compliance | 11 | ||||
Article 9 |
3
9.1 |
Limitation of Rights | 11 | ||||
9.2 |
Total Agreement | 12 | ||||
9.3 |
No Contract of Employment | 12 | ||||
9.4 |
Limitation on Assignment | 12 | ||||
9.5 |
Representations | 12 | ||||
9.6 |
Severability | 12 | ||||
9.7 |
Applicable Law | 12 | ||||
9.8 |
Title to Assets | 12 | ||||
9.9 |
Gender and Number | 12 | ||||
9.10 |
Headings and Subheadings | 12 | ||||
9.11 |
Legal Action | 13 | ||||
9.12 |
Claims Procedure | 13 |
4
ANNTAYLOR STORES CORPORATION
NON-QUALIFIED DEFERRED COMPENSATION PLAN
Article 1
Establishment and Purpose of the Plan
1.1 | Establishment of the Plan. The AnnTaylor Stores Corporation (the Employer) hereby adopts the Ann Taylor Stores Corporation Non-Qualified Deferred Compensation Plan (the Plan), effective January 1, 2008. The Plan assets will be held in a Rabbi Trust. |
1.2 | Purpose of the Plan. The purpose of the Plan is to provide additional benefits to Participants upon the occurrence of a Distributable Event. |
Article 2
Definitions
Whenever used in the Plan, the following terms will have the meanings as set forth in this Article, unless a different meaning is clearly required by the context in which the term is used.
2.1 | Account Balance. The term Account Balance means the bookkeeping account maintained for each Participant which reflects the value of the deferred Compensation credited to the Participant, including the earnings or losses allocable thereto and adjusted to reflect any distribution made to the Participant or his or her Beneficiary. If a Participant has more than one Beneficiary at the time of the Participants death, a separate Account Balance will be maintained for each Beneficiary. A Participant will have no secured rights of any kind to his or her Account Balance. |
2.2 | Administrator. The term Administrator means the Employer unless another Administrator is appointed by the Employer to administer the Plan. |
2.3 | Beneficiary. The term Beneficiary means the person, persons, or legal entity entitled to receive benefits under this Plan that become payable in the event of the Participants death. All Beneficiary designation must be in writing on a form prescribed acceptable to the Administrator, and a Participant may amend or revoke such designation at any time in writing. Such designation, amendment, or revocation will be effective upon receipt of same by the Administrator. If a Beneficiary has not been designated, or if all of a Participants designated Beneficiaries die prior to the death of the Participant, or if a Beneficiary designation is ineffective for any reason, then the estate of the Participant will be the Beneficiary. Upon the death of the Participant, any Beneficiary entitled to the Participants Vested Interest under this Section will become a vested |
1
Beneficiary and have all the rights of the Participant with the exception of making deferrals, including the right to designate Beneficiaries. |
2.4 | Change in Control. A Change in Control shall only exist for purposes of the Plan if a Change in Control would exist as defined in Section 409A of the Code, and the regulations promulgated thereunder, and if a change in control would also exist under Ann Taylors Special Severance Plan. |
2.5 | Code. The term Code means the Internal Revenue Code of 1986, as now in effect or as hereafter amended and the regulations promulgated thereunder. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered. |
2.6 | Committee. The term Committee means the committee, if any, appointed by the Employer to which the Employer delegates some or all of its administrative duties under the Plan. |
2.7 | Compensation. The term Compensation means, with respect to a Plan Year, base salary and Incentive Compensation earned by the Participant for services rendered during such Plan Year. |
2.8 | Deferral Election Form. The term Deferral Election Form means a form indicating the amount of Compensation to be deferred and the time and form of payment of such deferred amount, in such form as the Committee shall from time to time approve. In the event of a conflict between the terms of the Plan and the terms of a Deferral Election Form, the terms of the Plan shall govern. |
2.9 | Disability. The term Disability is defined in the Ann Taylors long term disability policy; provided that a Disability shall only exist for purposes of the Plan if a disability would exist under the definition provided in section 409A of the code and the regulations promulgated thereunder. |
2.10 | Distributable Event. The term Distributable Event means an event occurring as a result of: |
(1) | the Participants death; |
(2) | Disability; |
(3) | a Change in Control |
(4) | Separation from Service |
(5) | a specified date as elected by the Participant subject to the limitations of Sections 3.2 and 5.1; |
(6) | Unforeseeable Emergency. |
2.11 | Early Retirement Date. The term Early Retirement Date means the date a Participant reaches age 55 and completes at least 5 years of employment with the Employer. Years of employment with the Employer shall be determined in the same manner as years of service are determined under AnnTaylor Incorporated Savings Plan. |
2
2.12 | Eligible Employee. The term Eligible Employee means any person who is employed by the Employer and is a member of a select group of employees set forth from to time in a resolution of the Committee. An Eligible Employee can, at the election of the Administrator, include an independent contractor. |
2.13 | Employer. The term Employer means AnnTaylor Stores Corporation and its direct and indirect subsidiaries. |
2.14 | ERISA. The term ERISA means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder. Reference to any section or subsection of ERISA includes reference to any comparable or succeeding provisions which amends, supplements or replaces such section or subsection. |
2.15 | Excess Compensation. The term Excess Compensation means with respect to the Plan year, the total of base compensation, bonus compensation, and any RCP Awards, earned for the plan year minus the 401(a)(17) qualified plan compensation limit as indexed on an annual basis. The term Excess Compensation does not mean guaranteed sign-on bonuses, or other similar long-term, non-performance-based payments. |
2.16 | Incentive Compensation. The term Incentive Compensation means the total of the bonus compensation earned by a Participant for services rendered during all or a portion of a Plan Year and any RCP Awards. The term Incentive Compensation does not mean guaranteed sign-on bonuses, or other similar long-term, non-performance-based payments. |
2.17 | Normal Retirement Date. The term Normal Retirement Date means age 65. |
2.18 | Participant. The term Participant means an Eligible Employee who has satisfied the eligibility requirements set forth in Section 3.1 and has entered the Plan as a participant. |
2.19 | Plan. The term Plan means AnnTaylor Stores Corporation Non-Qualified Deferred Compensation Plan. |
2.20 | Plan Year. The term Plan Year means the Employers fiscal year. |
2.21 | RCP Award. A cash award issued pursuant to the Employers Restricted Cash Program which includes an initial banked amount determined based on a 12 month performance period (initial performance year) and adjustments thereon made over a subsequent three-year performance period (adjustment period) as determined in accordance with the terms of the Restricted Cash |
3
Program from time to time. For purposes of the Plan, (i) the service period with respect to a RCP Award begins on the first day of the initial performance year and (ii) the entire amount of the RCP Award (the initial banked amount and any adjustments thereon) is included as Compensation for the Plan Year in which the last date of the adjustment period occurs. |
2.22 | Separation from Service. The term Separation from Service means a separation from service with the Employer, except as otherwise determined by the Administrator in accordance with Section 409A of the Code and the regulations promulgated thereunder. A Separation from Service will not be deemed to have occurred upon the sale of a subsidiary or business unit with respect to a Participant who continues in employment with the subsidiary or purchaser unless or until the Participant incurs a Separation from Service with such subsidiary or purchaser. |
2.23 | Spouse. The term Spouse means the individual to whom a Participant is or was married. |
2.24 | Trust Agreement. The term Trust Agreement means the written agreement, if any, made by and between the Employer and the Trustee under which the Trust Fund is maintained. |
2.25 | Trust Fund. The term Trust Fund means the unfunded trust fund, if any, created under and subject to the Trust Agreement to hold some or all of the assets of the Plan. |
2.26 | Trustee. The term Trustee means the Trustee or Trustees, if any, and any successors thereto, who are duly appointed under the Trust Agreement. |
2.27 | Unforeseeable Emergency. The term Unforeseeable Emergency means a severe financial hardship of the Participant resulting (a) from an illness or accident of the Participant, the Participants Spouse, or the Participants dependent as defined in Code §152(a); (b) from loss of the Participants property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by homeowners insurance, e.g., as a result of a natural disaster); (c) from the need to pay for the funeral expenses of the Participants Spouse or dependent as defined in Code §152(a); or (d) from other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, as determined by the Board of Directors of the Employer and provided that an Unforeseeable Emergency shall only exist for purposes of the Plan if an Unforeseeable Emergency would exist as defined in Section 409A of the Code, and the regulations promulgated thereunder. For example, the imminent foreclosure of or eviction from the Participants primary residence may constitute an unforeseeable emergency. In addition, the need to pay for medical expenses (including non-refundable deductibles) and the cost of prescription drug medication may constitute an unforeseeable emergency. But except as specifically provided above, the purchase of a home or payment of college tuition is not an Unforeseeable Emergency. |
4
2.28 | Valuation Date. The term Valuation Date means the date on which the Trustee determines the value of the Trust Fund. The Trust Fund must be valued at least annually as of the last day of the Plan Year, but the Administrator can elect to have all or any portion of the Trust Fund valued more frequently. |
2.29 | Vested Interest. The term Vested Interest means a Participants nonforfeitable interest in his or her Account Balance. |
Article 3
Participation in the Plan
3.1 | Eligibility Requirements. An Eligible Employee will be eligible to enter the Plan as a Participant by resolution of the Committee. |
3.2 | Initial Deferral Elections, Generally. Each Participant must make each initial deferral election pursuant to this Plan by completing a Deferral Election Form. Subject to Sections 3.3 and 5.2, each such initial deferral election must be irrevocable, before the beginning of the Participants first taxable year inwhich the Participant performs services relating to the Compensation he or she elects to defer under the Plan, in accordance with Section 409A of the Code and the regulations promulgated thereunder. |
3.3 | Initial Deferral Elections for RCP Awards. To the extent expressly permitted by the Committee from time to time, in its sole discretion, and as set forth in an applicable Deferral Election Form, a Participant may be permitted to make an initial deferral election with respect to a RCP Award by completing a Deferral Election Form after the beginning of the Participants first taxable year in which the Participant performs services with respect to which the RCP Award relates. |
Article 4
Credits
4.1 | Employer Credits. Each Plan Year, the following amounts will be credited to the Account Balance of each Participant: |
a) | If the Participant elects to defer an amount under the AnnTaylor Incorporated Savings Plan, then to the extent such deferral is a deferral of up to 6% of the Participants Excess Compensation, the deferral amount will be credited under the Plan. |
b) | The amount of base salary the Participant elects to defer, provided that such amount may not exceed 50% of the Participants annual base salary, or other greater limit set by the Administrator. |
c) | The amount of Incentive Compensation that the Participant elects to defer under the Plan. |
d) | Beginning on the anniversary of the Participants date of hire, an amount equal to the sum of 1 and 2 below: |
5
1. | An amount equal to 100% of the amount credited under (a) above that constitutes 3% or less of the Participants Excess Compensation. |
2. | An amount equal to 50% of any amount credited under (a) above that constitutes more than 3% of the Participants Excess Compensation, and 6% or less of the Participants Excess Compensation. |
Provided, however, that no amount shall be credited pursuant to this Section 4.1(d) for amounts relating to credits under (a) above that relate to Excess Compensation accrued between January 1, 2010 and December 31, 2010.
4.2 | Separate Accounting. The Trustee shall maintain separate accounts for amounts credited to the Trust under 4.1(a), (b), (c), and (d), and shall maintain separate accounts for each Plan Year. |
4.3 | Vesting in the Account Balance. Credits under 4.1(a), (b), and (c) are at all times fully vested. Credits under 4.1(d) vest upon the second anniversary of a Participants date of hire, subject to the Participants continuous employment through such date, except that upon a Change in Control, all credits to accounts made under 4.1(d) shall vest immediately. |
4.4 | Earnings. Earnings on the amounts deferred shall be credited based on earnings of the Trust Fund. |
4.5 | Amounts Payable. Amounts paid under section 5.1 below shall equal the vested amounts credited to the accounts of Participants as provided herein determined as of the most recent Valuation Date occurring prior to each such payment. |
Article 5
Distribution of Benefits
5.1 | Distribution. |
(a) Amounts Credited Under 4.1(a), (b) and (c). Subject to the terms of the Deferral Election Form, amounts credited under 4.1 (a), (b) and (c) will be distributed as a lump sum payment six months after a Separation from Service or according to a fixed schedule elected by the Participant.
(b) Amounts Credited Under 4.1(d). Subject to the terms of the Deferral Election Form, vested amounts credited under 4.1(d) will be distributed only upon Separation from Service, and in the following manner:
| Upon Separation from Service prior to the Early Retirement Date or Normal Retirement Date: in a single lump sum six months following the Separation from Service. |
6
| Upon Separation from Service following the Early Retirement Date or Normal Retirement Date: in the form as elected by the Participant prior to commencement of participation in the Plan. A Participant receiving distribution amounts in the form of installments will receive the initial installment as soon as administratively feasible following the 6 months period after Separation from Service, with subsequent installments to be paid on an annual basis in each successive calendar year. For Participants receiving distributions in substantially equal installments, the proportion of the total amount in the account to be paid in each installment shall be determined by dividing the number one by the number of remaining installments. |
5.2 | Subsequent Deferral. Any changes in the time or form of distribution may not take effect until 12 months after the subsequent elections are made. If a subsequent election is made with respect to distributions that would occur because of a Change in Control, a fixed schedule, or Separation from Service, the new election cannot allow payment until at least five years after payments would have otherwise begun under the initial deferral election, unless otherwise permitted under Section 409A of the Code. |
5.3 | Form of Payment. Payment shall be made in the form of cash unless the Participant elects another form of payment and the Employer agrees to provide payment in that form. |
5.4 | Acceleration of Benefits |
(a) Death or Disability: For amounts credited under 4.1(a), (b), and (c) that the Participant has elected to receive according to a fixed schedule, distribution will accelerate upon the Participants Death or Disability.
(b) Change in Control: For amounts credited under 4.1(a), (b), (c), and (d), distributions will accelerate upon a Change in Control. (See 4.3 above for vesting rules upon a Change in Control.)
(c) Unforseeable Emergency: If a Participant has an Unforeseeable Emergency, the Participant may elect to receive a lump sum distribution equal to the amount requested or, if less, the maximum amount determined by the Administrator to be permitted to be distributed under this sub-section (c), 409A of the Code, and the regulations promulgated thereunder. A distribution due to an Unforeseeable Emergency (a) may not be made to the extent that such emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participants assets (to the extent that any such liquidation would not itself cause severe financial hardship), or by cessation of deferrals under the Plan; and (b) may not exceed the amount reasonably necessary to satisfy the emergency need (which may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution).
(d) No Acceleration: Except as provided for in subsection (a), (b), and (c) above, in no event will the time or schedule of any payment be accelerated except in the instance of (a) payments to someone other than the Participant that are needed to fulfill a domestic relations order as defined in Code §414(q); (b) payments necessary to comply with federal rules against conflicts of
7
interest; and (c) the minimum amount necessary to pay FICA taxes required by Code §3121(v)(2) (and the related income tax withholding triggered by the distribution). In addition, the Plan may be amended at any time to add a provision permitting an automatic lump sum payment of not more than $10,000 upon termination of a Participants entire interest in the Plan, provided the distribution is made not later than the later of (a) 2 1/2 months after a Participants Separation from Service; or (b) the end of the calendar year which contains the date of the Participants Separation from Service.
5.5 | Forfeiture of Amounts Not Vested. Any amounts not vested at the time of distribution shall be forfeited to the Employer. |
Article 6
Plan Administration
6.1 | Administrator. The Employer will be responsible for appointing an Administrator to administer the Plan. Such Administrator may be an individual and/or a committee authorized to act collectively on behalf of the Plan. The Administrator will have responsibility for the operation and administration of the Plan and will direct payment of Plan benefits. The Administrator will have the power and authority to adopt, interpret, alter, amend, or revoke rules and regulations necessary to administer the Plan and delegate ministerial duties and employ such outside professionals as may be required for prudent administration of the Plan. The Administrator will also have authority to enter agreements on behalf of the Employer necessary to implement this Plan. The Administrator, if otherwise eligible, may participate in the Plan but will not be entitled to make decisions solely with respect to his or her own participation. If the Employer appoints an individual and a committee as Administrator, the Employer will designate the division of the duties hereunder between the individual and the committee. |
6.2 | Accounts and Expenses. An Account Balance will be established for each Participant. Such Account Balance will be valued at fair market value as of the last day of the calendar year and on such other dates as necessary for the proper administration of the Plan, and each Participant will receive a written accounting at least annually of his or her Account Balance (and the Vested Interest therein) following such valuation. Such accounting will be made as soon as administratively feasible after the end of the calendar year. Each Account Balance will be credited or debited, as applicable, with (a) any increase or decrease resulting from investments; (b) any expenses incurred by the Employer in maintaining and administering this Plan, which may be paid out of the Plan; and (c) the amount of any distribution. |
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6.3 | Employers Powers. The Employer and the Administrator will have the power and authority to adopt, interpret, alter, amend or revoke rules and regulations necessary to administer the Plan and to delegate ministerial duties and employ such outside professionals, including the Administrator, as may be required for the prudent administration of the Plan. The Employer will also have authority to enter into contracts as necessary to implement this Plan. |
6.4 | Responsibility of the Employer. The Employer will have the sole responsibility for the establishment and maintenance of the Plan. The Employer, will have the power and authority to appoint an Administrator, any Trustees (to the extent assets of the Plan are held in an unfunded Trust), and any other professionals as may be required for the administration of the Plan or Trust. The Employer will also have the right to remove any individual or party appointed to perform functions under the Plan. |
Article 7
Investment of Rabbi Trust Assets
7.1 | Unfunded Status of Plan. It is intended that this Plan will be unfunded within the meaning of that term under ERISA. Any Employer credits which are made to an unfunded Trust will be transmitted to the Trustee not less frequently than annually. |
7.2 | Investment Vehicle. The Employer may elect to invest all assets of the Plan in an unfunded Trust Fund, but all credits made to the Plan, all property and rights to property (including rights as a Beneficiary of a contract providing life insurance protection) purchased with such credits, and all income attributable to such credits, property or rights, will remain (until paid or made available to the Participant or Beneficiary) solely the property and rights of the Employer, subject only to the claims of the Employers general creditors. Assets will be held in a Rabbi Trust. |
7.3 | Directed Investments. Subject to any rules or procedures established by the Administrator under paragraph (h), the Administrator may permit Participants to direct the investment of one or more of their accounts, and subject to any such rules or procedures, investment directives must be given by a Participant in accordance with the following: |
(a) Directed Investment Accounts. The Administrator will designate which accounts can be directed and whether the Participant or other payee can direct all or only a portion of each such account. Any such designation can be changed by the Administrator from time to time by communicating new procedures to the Participants.
(b) Investment Funds. Any amount a Participant or other payee directs will be put into a segregated investment selected by him or her; or among alternative investment funds offered under the Plan. With respect to any Plan assets which are invested in the Trust Fund, such alternative investment funds will be under the full control and management of the Trustees. Alternatively, if investments outside the Trustees control are allowed, Participants and payees
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may not direct that investments be made in collectibles, other than U.S. Government gold and silver coins. If a Participant or payee fails to make a timely investment election, at the Administrators discretion either no election will be deemed to have been made or the Participant or other payee will be considered to have made an election to invest 100% of his or her account in an investment option, the primary objective of which is the preservation of principal, until such time as an investment decision by the Participant or other payee becomes effective.
(c) Investment Form. A Participants investment direction will be made in a form acceptable to, and in accordance with procedures established by, the Administrator. Unless changed by procedures established by the Administrator and communicated to Participants and other payees, (1) a Participant or other payee may change his or her investment election by filing a new investment designation form with the Administrator or the Administrators designee; (2) any such change will be effective no later than the first day of the next investment election period; and (3) investment election periods will be established at the discretion of the Administrator.
(d) Transfers of Assets Between Funds. Unless changed by procedures established by the Administrator and communicated to Participants and other payees, if multiple investment fund options are made available, a Participant or other payee may elect to transfer all or part of his or her account from one investment fund to another investment fund by filing an investment designation form with the Administrator or with the Administrators designee within a reasonable administrative period prior to the next period for which investment options may be elected to be transferred. The funds will be transferred as soon as practicable prior to, or by the start of, the new election period. If made available, telephone or other electronic or computer transfers will be permitted under uniform procedures approved adopted by the Administrator.
(e) Administrator Responsibility. Either the Administrator or the Administrators designee will be responsible when transmitting Employer and Employee credits or other Plan assets to indicate the dollar amount which is to be credited to each investment fund on behalf of each Participant or other payee.
(f) No Administrator Liability. Except as may otherwise be provided under the terms of the Plan, neither the Administrator nor the Employer will be liable to the Participant or other payee (or to his or her Beneficiaries) for any loss resulting from action taken under this Section at the direction of the Participant or other payee.
(g) Charges and Fees. Any charge or fee, including legal fees, incurred in connection with a Participants direction under this Section of the Plan may be charged to and paid from the assets of the Participants account.
(h) Adoption of Procedures. All investment designations by Participants or other payees will be made subject to and in accordance with any rules or procedures the Administrator may adopt. Such rules or procedures, when properly executed in a written document, will be deemed incorporated in this Plan.
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Article 8
Amendment or Termination of Plan
8.1 | Amendment of Plan. The Employer can amend the Plan at any time, and from time to time, in whole or in part, but any such amendment (a) must be in writing; (b) will be binding on all parties claiming an interest under the Plan; and (c) cannot deprive a Participant or Beneficiary of a right accrued under the Plan prior to the date of the amendment without the written consent of the Participant or Beneficiary, provided, however, that a Beneficiarys consent is not required if the amendment is executed prior to the date of the Participants death. Notwithstanding the foregoing, the Employer can amend the Plan at any time, retroactively if necessary, to (a) assure that the Plan is characterized as a top-hat plan of deferred compensation maintained for a select group of management or highly compensated employee as described under ERISA §201(2), §301(a)(3), and §401(a)(1); and (b) to conform the Plan to the requirements of any applicable law, including ERISA and the Code. No amendment described in the preceding sentence will be considered prejudicial to any interest of a Participant or Beneficiary under the Plan. |
8.2 | Termination of Plan by Employer. Although the Employer has established this Plan with the intention and expectation to maintain the Plan indefinitely, the Employer may terminate or discontinue the Plan in whole or in part at any time without any liability for such termination or discontinuance. Upon termination, all credits will cease. The Plan is considered terminated only if all assets of the Plan are paid to Participants as soon as administratively practicable. If the assets of the Plan are not distributed, the Plan will be treated as a frozen plan and must continue to comply with all of the statutory requirements necessary for Plan eligibility. |
8.3 | Automatic Termination of Plan. The Plan will automatically terminate with respect to the Employer upon dissolution of the Employer or upon the Employers merger or consolidation with any other business organization if there is a failure by the surviving business organization to specifically adopt and continue the Plan. |
8.4 | Amendment and Termination Compliance. No amendment or termination shall be effective other than in compliance with Section 409A of the Code, and the regulations promulgated thereunder. |
Article 9
Miscellaneous Provisions
9.1 | Limitation of Rights. Neither the establishment of this Plan nor any modification thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving a Participant or other person any legal or equitable right against the Employer except as otherwise provided under the terms of the Plan. |
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9.2 | Total Agreement. This Plan and other administrative forms will constitute the total agreement or contract between the Employer and an Employee or Participant regarding his or her participation in the Plan and his or her benefits under the Plan. No oral statement or representation regarding the Plan may be relied upon by an Employee or Participant. |
9.3 | No Contract of Employment. Participation in this Plan will not be construed to establish or create an employment contract between any Eligible Employee and the Employer. |
9.4 | Limitation on Assignment. Benefits under this Plan may not be assigned, sold, transferred, or encumbered, and any attempt to do so will be void. A Participants or Beneficiarys interest in the Plan will not be subject to debts or liabilities of the Participant, and will not be subject to attachment, garnishment, or other legal process. |
9.5 | Representations. The Employer does not represent or guarantee that any particular federal or state income, payroll, personal property, or other tax consequence will result from participation in this Plan. A Participant should consult with professional tax advisors to determine the tax consequences of his or her participation. Furthermore, the Employer does not represent or guarantee successful investment of Plan assets and will not be required to repay any loss that may result from such investment or lack of investment. |
9.6 | Severability. If a court of competent jurisdiction holds any provision of the Plan to be invalid or unenforceable, the remaining Plan provisions will nevertheless continue to be fully effective. |
9.7 | Applicable Law. This Plan will be construed in accordance with applicable federal law and, to the extent otherwise applicable and to the extent not superseded by applicable federal law, the laws of the domicile of the Employer. |
9.8 | Title to Assets. No Participant or Beneficiary will have any right to, or any interest in, any Plan assets upon his or her Separation from Service with the Employer, except as may otherwise be provided under the terms of the Plan. |
9.9 | Gender and Number. Words used in the masculine gender will be construed as in the feminine or neuter gender where applicable, and words used in the singular will be construed as in the plural where applicable. |
9.10 | Headings and Subheadings. Headings and subheadings are used for convenience of reference, and they constitute no part of this Plan and are not to be considered in its construction. |
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9.11 | Legal Action. In any claim, suit or proceeding about the Plan which is brought against the Administrator, the Plan will be construed and enforced according to the laws of the state in which the Employer maintains its principal place of business. |
9.12 | Claims Procedure. The claims procedure required under ERISA §503 and the regulations thereunder is set forth in a written policy established by the Administrator. Such policy will be the sole and exclusive remedy for an Employee, Participant or Beneficiary (Claimant) to make a claim for benefits under the Plan. |
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This Agreement is executed as of the day of , 201 .
AnnTaylor Stores Corporation | ||
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Print Name |
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Title |
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ANNTAYLOR STORES CORPORATION
NON-QUALIFIED DEFERRED COMPENSATION PLAN
Administrative Policy Regarding Claims Procedures
In accordance with Section 9.12 of ANNTAYLOR STORES CORPORATION NON-QUALIFIED DEFERRED COMPENSATION PLAN (the Plan), ANNTAYLOR STORES CORPORATION and its subsidiaries (the Sponsoring Employer) hereby implements the rules and procedures set forth below to govern claims for benefit under the Plan. The procedures set forth in the policy here are the sole and exclusive remedy for an Employee, Participant or Beneficiary (Claimant) to make a claim for benefits, and these procedures will be administered and interpreted in a manner consistent with the requirements of ERISA §503 and the regulations thereunder. All claims determinations that are made by the Administrator, the Appropriate Named Fiduciary, and/or the Committee (if one has been appointed under Section 8.3 of the Plan) will be made in accordance with this procedure and will be applied consistently to similarly situated Claimants. The terms used in this procedure will have the same meaning ascribed to those terms in the Plan.
Definitions
In applying the terms of this Policy, any terms used herein which are also used in the Plan will have the same meaning ascribed to them under this Policy as ascribed to them under the terms of the Plan except as may otherwise be provided in this Policy. In addition, the following terms specific to this Policy will have the following meanings:
Appropriate Named Fiduciary. For purposes of this Policy, the term Appropriate Named Fiduciary means either (1) if a Committee has been appointed by the Sponsoring Employer under Section 8.3 of the Plan, the Committee; (2) if a Committee has not been appointed pursuant to Section 8.3 of the Plan, the Administrator; or (3) if an appeal of the initial denial is made for Disability Benefits, then an individual who is neither the individual who made the initial adverse benefit determination that is the subject of the appeal, nor the subordinate of such individual. Furthermore, for purposes of this Policy, if a Committee has not been appointed by the Sponsoring Employer pursuant to Section 8.3 of the Plan, any reference to Committee will be considered a reference to the Administrator.
Disability Benefit. For purposes of this Policy, the term Disability Benefit means a benefit that, if available and provided by the Plan, becomes payable upon a determination of a Participants Disability, other than any disability that, pursuant to the terms of this Plan, is determined either by the Social Security Administration or under the Sponsoring Employers long term disability plan.
Initial Determination of a Claim
Written Claim. A Claimant (or the Claimants authorized representative) may file a claim for a benefit to which the Claimant believes he or she is entitled under the Plan. Claims must be filed in writing with the Administrator.
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Denial of a Claim. The Administrator, in its sole and complete discretion, will make all initial determinations as to the right of any person to benefits. If the claim is denied in whole or in part, the Administrator will send the Claimant a written or electronic notice (which electronic notice must comply with the standards imposed by Department of Labor Regulation §2520.104b-1(c)(1)(I), (iii), and (iv)) informing the Claimant of the denial. The notice must be written in a manner calculated to be understood by the Claimant and must contain the following information: (1) the specific reason or reasons for the denial; (2) reference to the specific plan provisions on which the denial is based; (3) a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary; (4) a description of the Plans review (i.e., appeal) procedures and the time limits applicable to such procedures, including a statement of the Claimants right to bring a civil action under ERISA §502(a) following an adverse benefit determination on review; and (5) in the case of the Plans denial to provide Disability Benefits to a Claimant (a) if an internal rule, guideline, protocol, or other similar criterion was relied upon in making the adverse determination, either the specific rule, guideline, protocol, or other similar criterion; or a statement that such a rule, guideline, protocol, or other similar criterion was relied upon in making the adverse determination and that a copy of such rule, guideline, protocol, or other criterion will be provided free of charge to the Claimant upon request; or (b) if the adverse benefit determination is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment for the determination, applying the terms of the plan to the Claimants medical circumstances, or a statement that such explanation will be provided free of charge upon request.
Notice of a Claim Denial
Claims for Non-Disability Benefits. With respect to a claim for benefits that are not Disability Benefits, written or electronic notice of the denial will be given within a reasonable period of time (but no later than 90 days) from the date the Administrator receives the written claim, unless special circumstances require an extension of time for processing the claim. In no event may the extension exceed 90 days from the end of the initial 90-day period. If an extension is necessary, the Administrator will send the Claimant a written notice prior to the expiration of the initial 90-day period in which the Administrator indicates the special circumstances requiring an extension and the date by which the Administrator expects to render a decision.
Claims for Disability Benefits. With respect to a claim for Disability Benefits, written or electronic notice of the denial will be given within a reasonable period of time (but no later than 45 days) from the date the Administrator receives the written claim. The 45-day period can be extended by the Administrator for up to 30 days if the Administrator both determines that an extension is necessary due to matters beyond the control of the Administrator and notifies the Claimant, prior to the expiration of the initial 45-day period, of the circumstances requiring the extension and the date by which the Administrator expects to render a decision. If, prior to the end of the first 30-day extension period, the Administrator determines that, due to matters beyond the control of the Administrator, a decision cannot be rendered within that extension period, then the period for making the determination may be extended for up to an additional 30 days, provided the Administrator notifies the Claimant, prior to the expiration of the first 30-day extension period, of the circumstances requiring the extension and the date as of which the Administrator expects to render a decision. In the case of any extension under this paragraph, the
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notice of extension will specifically explain the standards on which entitlement to a benefit is based, the unresolved issues that prevent a decision on the claim, and the additional information needed to resolve those issues, and the Claimant will be afforded at least 45 days within which to provide the specified information.
Appeals Process
Request for Appeal. If the Administrator denies a claim in whole or in part, the Claimant may elect to appeal the denial. If the Claimant does not appeal the denial pursuant to the procedures set forth in this Policy, the denial will be final, binding and unappeasable. If a request for an appeal is timely filed, the Claimant will be afforded a full and fair review of the claim and the denial. As part of this review, the Claimant may submit written comments, documents, records, and other information relating to the claim, and the review will take into account all such comments, documents, records, or other information submitted by the Claimant, without regard to whether such information was submitted or considered in the Administrators initial benefit determination. The Claimant also may obtain, free of charge and upon request, records and other information relevant to the claim, without regard to whether such information was relied upon by the Administrator in making the initial benefit determination. The timing for an appeal of the initial denial of benefits (and other applicable provisions) is as follows:
(a) | Appeal of a Claim for Non-Disability Benefits. With respect to a claim for benefits that are not Disability Benefits, the written request for appeal must be filed by the Claimant (or by the Claimants authorized representative) with the Appropriate Named Fiduciary within 60 days after the date on which the Claimant receives the Administrators notice of denial. |
(b) | Appeal of a Claim for Disability Benefits. With respect to a claim for Disability Benefits, (A) the written request for appeal must be filed by the Claimant (or by the Claimants authorized representative) with the Appropriate Named Fiduciary within 180 days after the date on which the Claimant receives the Administrators notice of denial; (B) the appeal for Disability Benefits will not afford any deference to the initial denial and will be conducted by the Appropriate Named Fiduciary who is neither the individual who made the adverse benefit determination that is the subject of the appeal, nor the subordinate of such individual; (C) if the appeal of any adverse benefit determination is based in whole or in part on a medical judgment, including determinations with regard to whether a particular treatment, drug, or other item is experimental, investigational, or not medically necessary or appropriate, then the Appropriate Named Fiduciary will consult with a health care professional who has appropriate training and experience in the field of medicine involved in the medical judgment; (D) the Claimant will be given the identification of medical or vocational experts whose advice was obtained on behalf of the Plan in connection with a Claimants initial denial, without regard to whether the advice was relied upon in making the benefit determination; and (E) the health care professional engaged for a consultation under clause (C) above will be an individual who is neither an individual who was consulted in connection with the initial denial that is the subject of the appeal, nor the subordinate of any such individual. |
Review of Appeal. The Appropriate Named Fiduciary will, in its sole and complete discretion, determine whether to uphold all or part of the initial claim denial. If on appeal the Appropriate
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Named Fiduciary determines that all or part of the initial denial should be upheld, the Administrator will send the Claimant a written or electronic notice informing the Claimant of its decision to uphold all or part of the initial denial, written in a manner calculated to be understood by the Claimant and containing the specific reason or reasons for the denial; a specific reference to pertinent Plan provisions on which the denial is based; a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents and other information relevant to the claim; and an explanation of the Claimants right to request arbitration and the applicable time limits for doing so. Any written or electronic notice informing the Claimant of its decision to uphold all or a portion of the initial denial will be given according to the following provisions:
(a) | Notice to Uphold Denial of Non-Disability Benefits. With respect to a claim for benefits that are not Disability Benefits, the written or electronic notice will be given within a reasonable period of time (but no later than 60 days) from the date the Appropriate Named Fiduciary receives the request for appeal, unless special circumstances require an extension of time for reviewing the claim. In no event may the extension exceed 60 days from the end of the initial 60-day period. If an extension is necessary, prior to the expiration of the initial 60-day period, the Administrator will send the Claimant a written notice, indicating the special circumstances requiring an extension and the date by which the Appropriate Named Fiduciary expects to render a decision. |
(b) | Notice to Uphold Denial of Disability Benefits. With respect to a claim for Disability Benefits, the written or electronic notice will be given within a reasonable period of time (but no later than 45 days) from the date the Appropriate Named Fiduciary receives the request for appeal, unless special circumstances require an extension of time for reviewing the claim. In no event may the extension exceed 45 days from the end of the initial 45-day period. If an extension is necessary, prior to the expiration of the initial 45-day period, the Administrator will send the Claimant a written notice, indicating the special circumstances requiring an extension and the date by which the Appropriate Named Fiduciary expects to render a decision. |
Alternative Time for an Appeal to Be Decided. Notwithstanding the preceding section, if (1) a Committee is serving as the Appropriate Named Fiduciary, (2) the Committee holds regularly scheduled meetings on a quarterly or more frequent basis, and (3) the appeal of the initial denial is for benefits that are not Disability Benefits (however, if this Plan is a multi-Employer Plan, then this paragraph will also apply to Disability Benefits), then the Committee may make its determination of the claim on appeal at its next regularly scheduled meeting if the Committee receives the written request for appeal more than 30 days prior to its next regularly scheduled meeting or at the regularly scheduled meeting immediately following the next regularly scheduled meeting if the Committee receives the written request for appeal within 30 days of the next regularly scheduled meeting. If special circumstances require an extension, the decision may be postponed to the third regularly scheduled meeting following the Committees receipt of the written request for appeal if, prior to the expiration of the initial time period for review, the Claimant is provided with written notice, indicating the special circumstances requiring an extension and the date by which the Committee expects to render a decision. If the extension is required because the Claimant has not provided information that is necessary to decide the claim, the Committee may suspend the review period from the date on which notice of the extension is
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sent to the Claimant until the date on which the Claimant responds to the request for additional information. The Committee shall notify the Claimant of the benefit determination as soon as possible, but not later than 5 days after the benefit determination is made.
Voluntary Arbitration
If (1) a Claimant wishes to contest a final decision of the Appropriate Named Fiduciary and (2) the Claimant voluntarily chooses not to bring a civil action under ERISA §502(a) following an adverse benefit determination on appeal, then the Claimant and the Appropriate Named Fiduciary may agree to arbitration. If a Claimant agrees to arbitration, then a written request for arbitration must be filed by the Claimant (or the Claimants authorized representative) with the Administrator within 60 days (or such additional time as the Administrator may deem appropriate) after the date the Claimant receives the written decision of the Appropriate Named Fiduciary. The Claimant and the Administrator will each name an arbitrator within 20 days after the Administrator receives the Claimants written request for arbitration. The two arbitrators will jointly name a third arbitrator within 15 days after their appointment. If either party fails to select an arbitrator within the 20 day period, or if the two arbitrators fail to select a third arbitrator within 15 days after their appointment, then the Administrator will determine that either (1) the arbitration will cease, or (2) the presiding judge of the county court (or its equivalent) in the county in which the principal office of the Sponsoring Employer is located will appoint the other arbitrator or arbitrators. The arbitrators will render a decision within 60 days after the appointment of the third arbitrator and will conduct all proceedings pursuant to the laws of the state in which the Sponsoring Employers principal place of business is located and the then current Rules of the American Arbitration Association governing commercial transactions, to the extent such rules are not inconsistent with applicable state law. The cost of arbitration will be borne by the losing party or, if the decision is not clearly in favor of one party or the other, in the manner determined by the arbitrators. Pursuant to the Claimants voluntary choice to pursue arbitration, the arbitrators decision will be final, binding and unappeasable.
By |
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Date | ||||||
For the Plan Administrator |
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Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos. 33-31505, 33-50688, 33-54387, 33-52389, 33-55629, 333-32977, 333-37145, 333-79921, 333-38174, 333-53502, 333-90954, 333-97005, 333-105914, 333-138191, 333-139959, 333-155958, 333-155959, 333-168997, and 333-168998 on Form S-8 of our report dated March 11, 2011 relating to the financial statements of AnnTaylor Stores Corporation, and the effectiveness of AnnTaylor Stores Corporations internal control over financial reporting, appearing in this Annual Report on Form 10-K of AnnTaylor Stores Corporation for the year ended January 29, 2011.
/S/ Deloitte & Touche
New York, New York
March 11, 2011
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kay Krill, certify that:
1. | I have reviewed this annual report on Form 10-K of AnnTaylor Stores Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 11, 2011 | /s/ Kay Krill | |||
Kay Krill | ||||
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Nicholson, certify that:
1. | I have reviewed this annual report on Form 10-K of AnnTaylor Stores Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 11, 2011 | /s/ Michael J. Nicholson | |||
Michael J. Nicholson | ||||
Executive Vice President, | ||||
Chief Financial Officer and Treasurer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AnnTaylor Stores Corporation (the Company) on Form 10-K for the period ended January 29, 2011 as filed with the Securities and Exchange Commission (the Report), we, Kay Krill, Chief Executive Officer of the Company, and Michael J. Nicholson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of each of our knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 11, 2011 | /s/ Kay Krill | |||
Kay Krill | ||||
Chief Executive Officer | ||||
Date: March 11, 2011 | /s/ Michael J. Nicholson | |||
Michael J. Nicholson | ||||
Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to AnnTaylor Stores Corporation and will be retained by AnnTaylor Stores Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
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