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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED AUGUST 3, 2002
Commission file number 1-10738
ANNTAYLOR STORES CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3499319
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
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(Address of principal executive offices) (Zip Code)
(212) 541-3300
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(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No___.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Outstanding as of
Class August 30, 2002
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COMMON STOCK, $.0068 PAR VALUE 44,833,005
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2
INDEX TO FORM 10-Q
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PAGE NO.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Statements of Income
for the Quarters and Six Months Ended
August 3, 2002 and August 4, 2001....................... 3
Condensed Consolidated Balance Sheets at
August 3, 2002 and February 2, 2002..................... 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended August 3, 2002 and
August 4, 2001.......................................... 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................10
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings.........................................17
Item 6. Exhibits and Reports on Form 8-K..........................17
CERTIFICATIONS.........................................................19
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
ANNTAYLOR STORES CORPORATION
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
FOR THE QUARTERS AND SIX MONTHS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
(UNAUDITED)
QUARTERS ENDED SIX MONTHS ENDED
--------------------- --------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ........................ $343,143 $310,292 $688,535 $617,382
Cost of sales .................... 161,965 158,289 320,794 305,727
------- ------- ------- -------
Gross margin ..................... 181,178 152,003 367,741 311,655
Selling, general and
administrative expenses......... 150,425 135,833 301,506 271,551
Amortization of goodwill ......... -- 2,760 -- 5,520
------- ------- ------- -------
Operating income ................. 30,753 13,410 66,235 34,584
Interest income .................. 913 523 1,429 858
Interest expense ................. 1,826 1,719 3,525 3,499
------- ------- ------- -------
Income before income taxes ....... 29,840 12,214 64,139 31,943
Income tax provision ............. 11,638 5,815 25,015 14,600
------- ------- ------- -------
Net income ................... $ 18,202 $ 6,399 $ 39,124 $ 17,343
======= ======= ======= =======
Basic earnings per share of
common stock.................. $ 0.41 $ 0.15 $ 0.89 $ 0.40
======= ======= ======= =======
Diluted earnings per share
of common stock............... $ 0.39 $ 0.15 $ 0.84 $ 0.40
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
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4
ANNTAYLOR STORES CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AUGUST 3, 2002 AND FEBRUARY 2, 2002
(UNAUDITED)
AUGUST 3, FEBRUARY 2,
2002 2002
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ASSETS (IN THOUSANDS)
Current assets
Cash and cash equivalents ..................... $ 180,452 $ 30,037
Accounts receivable, net ...................... 11,400 65,296
Merchandise inventories ....................... 169,455 180,117
Prepaid expenses and other current assets ..... 49,908 50,403
--------- ---------
Total current assets ...................... 411,215 325,853
Property and equipment, net ..................... 244,222 250,735
Goodwill, net ................................... 286,579 286,579
Deferred financing costs, net ................... 4,614 5,044
Other assets .................................... 14,969 14,775
--------- ---------
Total assets .............................. $ 961,599 $ 882,986
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .............................. $ 69,582 $ 59,482
Accrued expenses .............................. 83,942 75,882
Current portion of long-term debt ............. -- 1,250
--------- ---------
Total current liabilities ................. 153,524 136,614
Long-term debt, net ............................. 119,951 118,280
Deferred lease costs and other liabilities ...... 18,742 15,963
Stockholders' equity
Common stock, $0.0068 par value;
120,000,000 shares authorized;
48,883,809 and 48,275,957 shares
issued, respectively ....................... 332 219
Additional paid-in capital .................... 499,262 484,582
Retained earnings ............................. 255,047 218,709
Deferred compensation on restricted stock ..... (7,129) (9,296)
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747,512 694,214
Treasury stock, at cost
4,051,553 and 4,210,232
shares, respectively ................ (78,130) (82,085)
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Total stockholders' equity ................ 669,382 612,129
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Total liabilities and stockholders' equity $ 961,599 $ 882,986
========= =========
See accompanying notes to condensed consolidated financial statements.
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ANNTAYLOR STORES CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE SIX MONTHS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
(UNAUDITED)
SIX MONTHS ENDED
--------------------
AUGUST 3, AUGUST 4,
2002 2001
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(IN THOUSANDS)
Operating activities:
Net income ..................................... $ 39,124 $ 17,343
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of deferred compensation ........ 2,167 1,163
Amortization of goodwill ..................... --- 5,520
Deferred income taxes ........................ 1,340 ---
Depreciation and amortization ................ 23,736 19,974
Gain on sale of proprietary credit
card accounts receivable ................... (2,095) ---
Loss on disposal of property and equipment ... 347 922
Non-cash interest ............................ 2,117 2,082
Provision for loss on accounts receivable .... --- 697
Tax benefit from exercise of stock options ... 3,524 666
Changes in assets and liabilities:
Receivables ................................ (1,809) (2,289)
Merchandise inventories .................... 10,662 (3,282)
Prepaid expenses and other current assets .. 115 (4,349)
Accounts payable and accrued expenses ...... 18,155 6,145
Other non-current assets and
liabilities, net ......................... 1,629 (2,880)
Net cash provided by operating activities ...... 99,012 41,712
------- --------
Investing activities:
Purchases of property and equipment ............ (17,572) (45,976)
Net proceeds from sale of proprietary
credit card accounts receivable ............ 57,800 ---
------- --------
Net cash provided (used) by
investing activities ....................... 40,228 (45,976)
------- --------
Financing activities:
Payments on mortgage ........................... (1,250) (688)
Payment of financing costs ..................... (14) (1,016)
Issuance of common stock, net .................. 12,439 3,662
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Net cash provided by financing activities ...... 11,175 1,958
------- --------
Net increase (decrease) in cash .................. 150,415 (2,306)
Cash and cash equivalents, beginning of period ... 30,037 31,962
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Cash and cash equivalents, end of period ......... $ 180,452 $ 29,656
======= ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest ....... $ 1,260 $ 1,265
======= ========
Cash paid during the period for income taxes ... $ 8,234 $ 2,646
======= ========
See accompanying notes to condensed consolidated financial statements.
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ANNTAYLOR STORES CORPORATION
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
1. BASIS OF PRESENTATION
- -- ---------------------
The condensed consolidated financial statements are unaudited but, in the
opinion of management, contain all adjustments (which are of a normal
recurring nature) necessary to present fairly the financial position, results
of operations and cash flows for the periods presented. All significant
intercompany accounts and transactions have been eliminated.
The results of operations for the fiscal 2002 interim periods shown in
this report are not necessarily indicative of results to be expected for the
fiscal year.
The February 2, 2002 condensed consolidated balance sheet amounts have
been derived from the previously audited consolidated balance sheet of
AnnTaylor Stores Corporation (the "Company").
Certain fiscal 2001 amounts have been reclassified to conform to the
fiscal 2002 presentation.
Detailed footnote information is not included for the quarters ended
August 3, 2002 and August 4, 2001. The financial information set forth
herein should be read in conjunction with the Notes to the Company's
Consolidated Financial Statements contained in the AnnTaylor Stores
Corporation 2001 Annual Report to Stockholders.
2. EARNINGS PER SHARE
- -- ------------------
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share assumes the issuance of additional shares of
common stock that are issuable by the Company upon the conversion of all
outstanding stock options, restricted stock and convertible securities, if
the effect is dilutive.
In April 2002, the Company's Board of Directors approved a 3-for-2 split
of the Company's Common Stock, in the form of a stock dividend. One
additional share of Common Stock for every two shares owned was distributed
on May 20, 2002 to stockholders of record at the close of business on May 2,
2002. Shares outstanding, as well as basic and diluted earnings per share
(restated for the effect of the stock split) follow:
[Tables on next page]
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ANNTAYLOR STORES CORPORATION
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
2. EARNINGS PER SHARE (CONTINUED)
- -- ------------------------------
QUARTERS ENDED
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AUGUST 3, 2002 AUGUST 4, 2001
--------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
BASIC EARNINGS PER SHARE
- ------------------------
Income available to common
stockholders ................ $18,202 44,311 $0.41 $ 6,339 43,347 $0.15
==== ====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options and
restricted stock.............. -- 583 -- 569
Convertible Debentures ......... 709 3,606 -- --
------- ------ ------- ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available to common
stockholders ................ $18,911 48,500 $0.39 $ 6,399 43,916 $0.15
======= ====== ===== ======= ====== =====
SIX MONTHS ENDED
-------------------------------------------
AUGUST 3, 2002 AUGUST 4, 2001
--------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
BASIC EARNINGS PER SHARE
- ------------------------
Income available to common
stockholders ................ $39,124 44,145 $0.89 $17,343 43,236 $0.40
==== ====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options and
restricted stock.............. -- 634 -- 398
Convertible Debentures ......... 1,444 3,606 1,396 3,606
------- ------ ------- ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available to common
stockholders ................ $40,568 48,385 $0.84 $18,739 47,240 $0.40
======= ====== ===== ======= ====== =====
Options to purchase 989,749 and 975,749 shares of common stock during the
thirteen and twenty-six weeks ended August 3, 2002, respectively, and
1,253,130 and 1,420,260 shares of common stock during the thirteen and twenty
six weeks ended August 4, 2001, respectively, were excluded from the above
computations of weighted average shares for diluted earnings per share, due
to the antidilutive effect of the options' exercise price as compared to the
average market price of the common shares during those periods.
Additionally, conversion of the convertible debentures into common stock is
excluded from the computation of diluted earnings per share for the quarter
ended August 4, 2001, due to the antidilutive effect of the conversion as of
such date.
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ANNTAYLOR STORES CORPORATION
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
3. LONG-TERM DEBT
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Long-term debt outstanding at August 3, 2002 was $119,951,000, which
represents the net carrying value of the Company's convertible debentures on
that date.
4. RECENT ACCOUNTING PRONOUNCEMENTS
- -- --------------------------------
Effective February 3, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires that ratable amortization of goodwill be
replaced by periodic tests for impairment within six months of the date of
adoption, and then on a periodic basis thereafter. Based on the impairment
testing performed in February 2002, Management determined that there was no
impairment loss related to the net carrying value of the Company's recorded
goodwill. Management intends to reevaluate this on an annual basis, in
accordance with the provisions of SFAS No. 142.
The following tables provide a reconciliation of reported net income and
earnings per share (restated for the effect of the stock split) for the
quarters and six months ended August 4, 2001 to adjusted net income and
earnings per share had SFAS No. 142 been applied as of the beginning of
fiscal 2001:
QUARTER ENDED AUGUST 4, 2001
------------------------------
BASIC DILUTED
EARNINGS EARNINGS
INCOME PER SHARE PER SHARE
------ --------- ---------
Income available to common stockholders ........ $ 6,399 $ 0.15 $0.15
Impact of adopting SFAS No. 142 in fiscal 2001.. 2,562 0.06 0.05
----- ---- ----
Adjusted income available to common stockholders $ 8,961 $ 0.21 $0.20
====== ======== =====
SIX MONTHS ENDED AUGUST 4, 2001
------------------------------
BASIC DILUTED
EARNINGS EARNINGS
INCOME PER SHARE PER SHARE
------ --------- ---------
Income available to common stockholders ........ $17,343 $ 0.40 $0.40
Impact of adopting SFAS No. 142 in fiscal 2001.. 5,322 0.12 0.11
----- ---- ----
Adjusted income available to common stockholders $22,665 $ 0.52 $0.51
====== ======== =====
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ANNTAYLOR STORES CORPORATION
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
4. RECENT ACCOUNTING PRONOUNCEMENTS
- -- --------------------------------
In April 2002, the Financial Accounting Standards Board (the "FASB"),
issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145
primarily affects the reporting requirements and classification of gains and
losses from the extinguishment of debt, rescinds the transitional accounting
requirements for intangible assets of motor carriers, and requires that
certain lease modifications with economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. SFAS No. 145 is effective for financial statements issued
after April 2002, with the exception of the provisions affecting the
accounting for lease transactions, which should be applied for transactions
entered into after May 15, 2002, and the provisions affecting classification
of gains and losses from the extinguishment of debt, which should be applied
in fiscal years beginning after May 15, 2002. Management has determined that
the adoption of SFAS No. 145 will have no immediate impact on the Company's
consolidated financial statements, but will evaluate in future periods the
classification of any debt extinguishment costs in accordance with APB
Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions".
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002.
Management is in the process of evaluating the effect that adoption of SFAS
No. 146 will have on the Company's consolidated financial statements.
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10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTERS ENDED SIX MONTHS ENDED
-------------------- --------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
---- ---- ---- ----
Number of Stores:
Open at beginning of period ...... 551 488 538 478
Opened during period ............. 4 14 17 25
Expanded during period* .......... -- 1 -- 5
Closed during period ............. -- 2 -- 3
Open at end of period ............ 555 500 555 500
Type of Stores Open at End of Period:
Ann Taylor stores ................ 344 335
Ann Taylor Loft stores ........... 183 153
Ann Taylor Factory Stores ........ 28 12
- -----------------
* Expanded stores are excluded from comparable store sales for the first year
following expansion.
QUARTER ENDED AUGUST 3, 2002 COMPARED TO THE QUARTER ENDED AUGUST 4, 2001
The Company's net sales in the second quarter of fiscal 2002 increased to
$343,143,000 from $310,292,000 in the second quarter of fiscal 2001, an
increase of $32,851,000 or 10.6 percent. Comparable store sales for the
second quarter of fiscal 2002 decreased 0.2 percent, compared to a 12.9
percent decrease in the second quarter of fiscal 2001. Comparable store
sales by division were up 0.3 percent for Ann Taylor stores and down 1.5
percent for Ann Taylor Loft stores. The sales increase was primarily the
result of an increase in the number of stores open as compared to last year.
Gross margin as a percentage of net sales increased to 52.8 percent in the
second quarter of fiscal 2002 from 49.0 percent in the second quarter of
fiscal 2001. The increase in gross margin as a percentage of net sales is
primarily due to higher margin rates achieved on both full price and non-full
price sales at both divisions.
Selling, general and administrative expenses during the second quarter of
fiscal 2002 as a percentage of net sales were flat to last year, at
$150,425,000 or 43.8 percent of net sales, compared to $135,833,000 or 43.8
percent of net sales in the second quarter of fiscal 2001. Efficiencies in
Ann Taylor store operations, lower internet costs, and reduced marketing
spending were offset by an increase in the provision for management
performance bonus.
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11
As a result of the foregoing, the Company had operating income of
$30,753,000, or 9.0 percent of net sales, in the second quarter of fiscal
2002, compared to $13,410,000, or 4.3 percent of net sales, in the second
quarter of fiscal 2001. There was no goodwill amortization recorded in the
second quarter of fiscal 2002, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets",
which the Company adopted in February 2002. Amortization of goodwill was
$2,760,000 in the second quarter of fiscal 2001. Operating income in the
second quarter of fiscal 2001, without giving effect to goodwill
amortization, was $16,170,000, or 5.2 percent of net sales.
Interest income was $913,000 in the second quarter of fiscal 2002,
compared to $523,000 in the second quarter of fiscal 2001. The increase was
primarily attributable to higher cash on hand offset somewhat by lower
interest rates during the second quarter of fiscal 2002, as compared to the
second quarter of fiscal 2001.
Interest expense was $1,826,000 in the second quarter of fiscal 2002,
compared to $1,719,000 in the second quarter of fiscal 2001.
The income tax provision was $11,638,000, or 39.0 percent of income before
income taxes, in the second quarter of fiscal 2002, compared to $5,815,000,
or 47.6 percent of income before income taxes, in the second quarter of
fiscal 2001. The decrease in the effective income tax rate was primarily the
result of non-deductible goodwill expense, which as previously discussed, was
not recorded in fiscal 2002.
As a result of the foregoing factors, the Company had net income of
$18,202,000, or 5.3 percent of net sales, for the second quarter of fiscal
2002, compared to $6,399,000, or 2.1 percent of net sales, for the second
quarter of fiscal 2001. As previously discussed, second quarter fiscal 2001
net income was reduced by $2,562,000 in goodwill amortization (net of related
tax benefit), which was not recorded in the second quarter of fiscal 2002.
Excluding the deduction of goodwill, net income in the second quarter of
fiscal 2001 would have been $8,961,000, or 2.9 percent of net sales.
AnnTaylor Stores Corporation conducts no business other than the
management of Ann Taylor.
SIX MONTHS ENDED AUGUST 3, 2002 COMPARED TO THE SIX MONTHS ENDED AUGUST 4, 2001
The Company's net sales in the first six months of fiscal 2002 increased
to $688,535,000 from $617,382,000 for the same period last year, an increase
of $71,153,000 or 11.5 percent. Comparable store sales for the first six
months of fiscal 2002 decreased 0.1 percent compared to a decrease of 8.4
percent during the same period in fiscal 2001. Comparable store sales by
division were down 1.0 percent for Ann Taylor stores and up 1.7 percent for
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12
Ann Taylor Loft stores. The sales increase was primarily the result of an
increase in the number of stores open as compared to last year.
Gross margin as a percentage of net sales increased to 53.4 percent for
the first six months of fiscal 2002 from 50.5 percent during the same period
last year. The increase in gross margin as a percentage of net sales is
primarily due to higher margin rates achieved on both full price and non-full
price sales at both divisions.
Selling, general and administrative expenses as a percent of net sales
were 43.8 percent in the first six months of fiscal 2002, compared to 44.0
percent in the first six months of fiscal 2001. The decrease in selling,
general and administrative expenses as a percentage of net sales was
primarily the result of efficiencies gained in Ann Taylor store operations
and lower internet costs, partially offset by an increase in the provision
for management performance bonus.
As a result of the foregoing, the Company had operating income of
$66,235,000, or 9.6 percent of net sales, in the first six months of fiscal
2002, compared to $34,584,000, or 5.6 percent of net sales, in the first six
months of fiscal 2001. There was no goodwill amortization recorded in the
first six months of fiscal 2002, in accordance with SFAS No. 142, which the
Company adopted in February 2002. Amortization of goodwill was $5,520,000
in the first six months of fiscal 2001. Operating income in the first six
months of fiscal 2001, without giving effect to goodwill amortization, was
$40,104,000, or 6.5 percent of net sales.
Interest income was $1,429,000 in the first six months of fiscal 2002,
compared to $858,000 in the first six months of fiscal 2001. The increase
was primarily attributable to higher cash on hand offset somewhat by lower
interest rates during the first six months of fiscal 2002, as compared to the
first six months of fiscal 2001.
Interest expense was $3,525,000 in the first six months of fiscal 2002,
compared to $3,499,000 in the first six months of fiscal 2001.
The income tax provision was $25,015,000, or 39.0 percent of income before
taxes, in the first six months of fiscal 2002, compared to $14,600,000, or
45.7 percent of income before income taxes, for the same period last year.
The decrease in the effective income tax rate was primarily the result of
non-deductible goodwill expense, which, as previously discussed, was not
recorded in fiscal 2002.
As a result of the foregoing factors, the Company had net income of
$39,124,000, or 5.7 percent of net sales, for the first six months of fiscal
2002, compared to net income of $17,343,000, or 2.8 percent of net sales, for
the first six months of fiscal 2001. Excluding the amortization of goodwill,
net income during the first six months of fiscal 2001 would have been
$22,665,000, or 3.7 percent of net sales.
-12-
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13
FINANCIAL CONDITION
For the first six months of fiscal 2002, net cash provided by operating
activities totaled $99,012,000, primarily as a result of earnings, non-cash
charges, a decrease in inventory, and increases in accounts payable and
accrued expenses. Cash provided by investing activities during the first six
months of fiscal 2002 amounted to $40,228,000, which represented the proceeds
received in connection with the sale of the Company's proprietary credit
card, offset by funds used to purchase property and equipment. Cash provided
by financing activities during the first six months of fiscal 2002 amounted
to $11,175,000, primarily as a result of proceeds received from the exercise
of stock options, offset in part by the pay-off of the mortgage on the
Company's Louisville Distribution Center.
Merchandise inventories were $169,455,000 at August 3, 2002, compared to
$180,117,000 at February 2, 2002. Merchandise inventories at August 3, 2002
and February 2, 2002 included approximately $49,569,000 and $37,558,000,
respectively, of inventory associated with the Company's sourcing division,
which is primarily finished goods in transit from factories. On a per
square foot basis, inventories at the end of the first six months of fiscal
2002, excluding inventories attributable to the Company's sourcing division,
were down approximately 25 percent compared to the same period last year.
This is the result of management's decision to reduce store inventory levels
during the period.
Total fiscal 2002 capital expenditures, which are primarily attributable
to the Company's store expansion, renovation and refurbishment programs, and
the investment in information systems, are expected to be approximately
$47,000,000. For the six months ended August 3, 2002, capital expenditures
totaled $17,572,000, net of landlord construction allowances. During the
first six months of fiscal 2002, the Company opened 2 new Ann Taylor stores
and 15 new Ann Taylor Loft stores. For the remainder of fiscal 2002, the
Company expects to open 5 additional Ann Taylor stores and 23 additional Ann
Taylor Loft stores.
In order to finance its operations and capital requirements, the Company
expects to use internally generated funds, trade credit and funds available
to it under its credit facility. The Company believes that cash flow from
operations and funds available under that credit facility are sufficient to
enable it to meet its on-going cash needs for its business, as presently
conducted, for the foreseeable future.
On February 4, 2002, the Company sold the net assets associated with its
Ann Taylor credit card accounts to World Financial Network National Bank.
The associated pre-tax gain of $2,095,000 is reported in selling, general and
administrative expenses in the Condensed Consolidated Statements of Income.
-13-
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14
In April 2002, the Company's Board of Directors approved a 3-for-2 stock
split of the Company's Common Stock in the form of a stock dividend. One
additional share of Common Stock for every two shares owned was distributed
on May 20, 2002 to stockholders of record at the close of business on May 2,
2002. See Note 2 of the Condensed Consolidated Financial Statements for
adjusted shares and per share data reflecting the issuance of additional
shares in connection with the stock split.
In August 2002, the Company's Board of Directors authorized a $50 million
securities repurchase program. The repurchase program is subject to
compliance with the Company's revolving credit agreement. Pursuant to this
program, purchases of shares of the Company's Common Stock and/or its
Convertible Debentures due 2019 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 will become treasury shares and may be used for general
corporate and other purposes. Repurchased Convertible Debentures will be
cancelled.
Effective February 3, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets", as described more fully in Note 4 of the
Condensed Consolidated Financial Statements. SFAS No. 142 requires that
goodwill and other intangible assets be tested for impairment within six
months of the date of adoption, and then on a periodic basis thereafter.
Pursuant to SFAS No. 142, the Company's recorded goodwill will no longer be
amortized. Based on the impairment testing performed in February 2002,
Management determined that there was no impairment loss related to the net
carrying value of the Company's recorded goodwill.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 primarily affects the reporting requirements and
classification of gains and losses from the extinguishment of debt, rescinds
the transitional accounting requirements for intangible assets of motor
carriers, and requires that certain lease modifications with economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 is effective for financial
statements issued after April 2002, with the exception of the provisions
affecting the accounting for lease transactions, which should be applied for
transactions entered into after May 15, 2002, and the provisions affecting
classification of gains and losses from the extinguishment of debt, which
should be applied in fiscal years beginning after May 15, 2002. Management
has determined that the adoption of SFAS No. 145 will have no immediate
impact on the Company's consolidated financial statements, but will evaluate
in future periods the classification of any debt extinguishment costs in
accordance with APB Opinion No. 30 "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
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15
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002.
Management is in the process of evaluating the effect that adoption of SFAS
No. 146 will have on the Company's consolidated financial statements.
In December 2001, the United States Securities and Exchange Commission
(the "SEC") issued Financial Reporting Release ("FRR") No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies", which
encourages the identification and disclosure of the most critical accounting
policies applied in the preparation of a company's financial statements. In
response to FRR No. 60, Management has determined that the Company's most
critical accounting policies include those related to merchandise inventory
valuation, intangible asset impairment, and income taxes.
Inventory is valued at the lower of average cost or market, at the
individual item level. Cost is determined on a first-in, first-out (FIFO)
method. Market is determined based on the estimated net realizable value,
which is generally the merchandise selling price. Inventory levels are
monitored to identify slow-moving merchandise and broken assortments (items
no longer in stock in a sufficient range of sizes) and markdowns are used to
clear such merchandise. Inventory value is reduced immediately when the
selling price is marked below cost. Physical inventory counts are performed
annually each January, and estimates are made for shortage during the period
between the last physical inventory count and the balance sheet date.
Pursuant to the adoption of SFAS No. 142 in February 2002, management
performed impairment testing which considered the Company's net discounted
future cash flows in determining whether an impairment charge related to the
carrying value of the Company's recorded goodwill was necessary, and
concluded that there was no such impairment loss. This will be reevaluated
annually, using similar testing. In the case of long-lived tangible assets,
if the discounted future cash flows related to the long-lived assets are less
than the assets' carrying value, a similar impairment charge would be
considered. Management's estimate of future cash flows is based on historical
experience, knowledge, and market data. These estimates can be affected by
factors such as those outlined in the Statement Regarding Forward-Looking
Disclosures.
The Company follows SFAS No. 109 "Accounting for Income Taxes," which
requires the use of the 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. Inherent in the measurement of these deferred balances
are certain judgements and interpretations of existing tax law and other
published guidance as applied to the Company's operations. No valuation
allowance has been provided for deferred tax assets, since management
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16
anticipates that the full amount of these assets should be realized in the
future. The Company's effective tax rate considers management's judgement of
expected tax liabilities within the various taxing jurisdictions it is
subject to tax. The Company has also in the past been involved in both
foreign and domestic tax audits. At any given time, many tax years are
subject to audit by various taxing authorities.
Management believes these critical accounting policies represent the
more significant judgements and estimates used in the preparation of the
Company's consolidated financial statements.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES
Sections of this Quarterly Report on Form 10-Q, including the preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain various forward-looking statements, made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements may use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar
expressions. These forward-looking statements reflect the Company's current
expectations concerning future events, and actual results may differ
materially from current expectations or historical results. Any such
forward-looking statements are subject to various risks and uncertainties,
including failure by the Company to predict accurately customer fashion
preferences; decline in the demand for merchandise offered by the Company;
competitive influences; changes in levels of store traffic or consumer
spending habits; effectiveness of the Company's brand awareness and marketing
programs; general economic conditions or a downturn in the retail industry;
the inability of the Company to locate new store sites or negotiate favorable
lease terms for additional stores or for the expansion of existing stores;
lack of sufficient consumer interest in the Company's Online Store; a
significant change in the regulatory environment applicable to the Company's
business; an increase in the rate of import duties or export quotas with
respect to the Company's merchandise; financial or political instability in
any of the countries in which the Company's goods are manufactured; acts of
war or terrorism in the United States or worldwide; work stoppages, slowdowns
or strikes; and other factors set forth in the Company's filings with the
SEC. The Company does not assume any obligation to update or revise any
forward-looking statements at any time for any reason.
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PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
On or about June 19, 2002, the United States District Court for the
Southern District of New York entered an Order and Final Judgment approving
the previously disclosed settlement of the stockholder class action Novak v.
Kasaks, et al., 96 Civ. 3073 (AGS) filed in that Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
10.1 Amendment No. 2 to the Credit Agreement, dated as of
August 29, 2002, by and among AnnTaylor, Inc., the
Guarantors and Bank of America, N.A., as Administrative
Agent for each of the Lenders pursuant to the Credit
Agreement. Incorporated by reference to Exhibit 10.1
on Form 8-K of the Company filed on September 4, 2002.
*99.1 Certification of chief executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification of chief financial officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed electronically herewith.
(b) Reports on Form 8-K:
None
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANNTAYLOR STORES CORPORATION
Date: September 17, 2002 By:/s/J. Patrick Spainhour
------------------ -----------------------
J. Patrick Spainhour
Chairman, Chief Executive
Officer and Director
Date: September 17, 2002 By:/s/James M. Smith
------------------ -----------------------
James M. Smith
Senior Vice President,
Chief Financial Officer and
Treasurer
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CERTIFICATIONS
--------------
I, J. Patrick Spainhour, principal executive officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AnnTaylor Stores
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report.
Date: September 17, 2002 /s/J. Patrick Spainhour
------------------ -----------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
I, James M. Smith, principal financial officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AnnTaylor Stores
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report.
Date: September 17, 2002 /s/James M. Smith
------------------ -----------------------
James M. Smith
Senior Vice President,
Chief Financial Officer and
Treasurer
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Exhibit Index
- -------------
Exhibit
Number Description
- ------ -----------
10.1 Amendment No. 2 to the Credit Agreement, dated as of August 29,
2002, by and among AnnTaylor, Inc., the Guarantors and Bank of
America, N.A., as Administrative Agent for each of the Lenders
pursuant to the Credit Agreement. Incorporated by reference to
Exhibit 10.1 on Form 8-K of the Company filed on September 4, 2002.
*99.1 Certification of chief executive officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification of chief financial officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Filed electronically herewith.
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