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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
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SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED NOVEMBER 2, 2002
Commission file number 1-10738
ANNTAYLOR STORES CORPORATION
----------------------------
(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
- ---------------------------------- -----
(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 the 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 is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes |X| No ____.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Outstanding as of
Class November 29, 2002
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COMMON STOCK, $.0068 PAR VALUE 44,833,815
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2
INDEX TO FORM 10-Q
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PAGE NO.
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PART I. FINANCIAL INFORMATION
-----------------------------
Item 1.Financial Statements
Condensed Consolidated Statements of Income
for the Quarters and Nine Months Ended
November 2, 2002 and November 3, 2001............... 3
Condensed Consolidated Balance Sheets at
November 2, 2002 and February 2, 2002............... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended November 2, 2002 and
November 3, 2001.................................... 5
Notes to Condensed Consolidated Financial Statements.. 6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 10
Item 4.Controls and Procedures.............................. 18
PART II.OTHER INFORMATION
-------------------------
Item 6.Exhibits and Reports on Form 8-K..................... 19
CERTIFICATIONS.................................................. 21
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3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
ANNTAYLOR STORES CORPORATION
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
FOR THE QUARTERS AND NINE MONTHS ENDED NOVEMBER 2, 2002 AND
NOVEMBER 3, 2001
(UNAUDITED)
QUARTERS ENDED NINE MONTHS ENDED
--------------------- -------------------
NOV. 2, NOV. 3, NOV. 2, NOV. 3,
2002 2001 2002 2001
------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net sales ................... $ 340,218 $ 310,804 $1,028,753 $ 928,187
Cost of sales ............... 143,760 142,929 464,554 448,657
------- ------- ------- -------
Gross margin ................ 196,458 167,875 564,199 479,530
Selling, general and
administrative expenses.. 154,906 142,212 456,412 413,763
Amortization of goodwill .... --- 2,760 --- 8,280
------- ------- ------- -------
Operating income ............ 41,552 22,903 107,787 57,487
Interest income ............. 923 242 2,352 1,100
Interest expense ............ 1,638 1,516 5,163 5,015
------- ------- ------- -------
Income before income taxes .. 40,837 21,629 104,976 53,572
Income tax provision ........ 15,926 9,535 40,941 24,135
------- ------- ------- -------
Net income .............. $ 24,911 $ 12,094 $ 64,035 $ 29,437
======= ======= ======= =======
Basic earnings per share
of common stock ......... $ 0.56 $ 0.28 $ 1.45 $ 0.68
Diluted earnings per share
of common stock ......... $ 0.53 $ 0.27 $ 1.37 $ 0.67
See accompanying notes to condensed consolidated financial statements.
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ANNTAYLOR STORES CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
NOVEMBER 2, 2002 AND FEBRUARY 2, 2002
(UNAUDITED)
NOVEMBER 2, FEBRUARY 2,
2002 2002
--------- ---------
ASSETS (IN THOUSANDS)
Current assets
Cash and cash equivalents .................... $ 165,853 $ 30,037
Accounts receivable, net ..................... 14,407 65,598
Merchandise inventories ...................... 208,086 180,117
Prepaid expenses and other current assets .... 49,845 50,314
--------- ---------
Total current assets ..................... 438,191 326,066
Property and equipment, net .................... 251,116 250,735
Goodwill, net .................................. 286,579 286,579
Deferred financing costs, net .................. 4,392 5,044
Other assets ................................... 16,392 14,742
--------- ---------
Total assets ............................. $ 996,670 $ 883,166
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................. $ 60,216 $ 52,011
Accrued expenses ............................. 101,428 83,364
Current portion of long-term debt ............ -- 1,250
--------- ---------
Total current liabilities ................ 161,644 136,625
Long-term debt, net ............................ 120,797 118,280
Deferred lease costs and other liabilities ..... 18,494 16,132
Stockholders' equity
Common stock, $.0068 par value;
120,000,000 shares authorized;
48,883,932 and 48,275,957 shares
issued, respectively ...................... 332 219
Additional paid-in capital ................... 499,226 484,582
Retained earnings ............................ 279,988 218,709
Deferred compensation on restricted stock .... (5,717) (9,296)
--------- ---------
773,829 694,214
Treasury stock, at cost
4,050,117 and 4,210,232 shares,
respectively .......................... (78,094) (82,085)
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Total stockholders' equity ............... 695,735 612,129
--------- ---------
Total liabilities and stockholders' equity $ 996,670 $ 883,166
========= =========
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
-----------------------------------------------
FOR THE NINE MONTHS ENDED NOVEMBER 2, 2002 AND NOVEMBER 3, 2001
(UNAUDITED)
NINE MONTHS ENDED
------------------------
NOVEMBER 2, NOVEMBER 3,
2002 2001
--------- ---------
(IN THOUSANDS)
Operating activities:
Net income ...................................... $ 64,035 $ 29,437
Adjustments to reconcile net
income to net cash provided by
operating activities:
Amortization of deferred compensation ......... 4,234 998
Amortization of goodwill ...................... -- 8,280
Deferred income taxes ......................... 3,685 2,025
Depreciation and amortization ................. 36,076 31,330
Gain on sale of proprietary credit
card accounts receivable .................... (2,095) --
Loss on disposal or write down
of property and equipment ................... 631 1,502
Non-cash interest ............................. 3,184 3,021
Provision for loss on accounts receivable ..... -- 1,087
Tax benefit from exercise of stock options .... 3,490 793
Changes in assets and liabilities:
Receivables ................................. (4,515) (13,850)
Merchandise inventories ..................... (27,969) (54,179)
Prepaid expenses and other current assets ... (1,149) (2,192)
Accounts payable and accrued expenses ....... 26,265 18,974
Other non-current assets and liabilities, net (1,354) (7,350)
--------- ---------
Net cash provided by operating activities ....... 104,518 19,876
--------- ---------
Investing activities:
Purchases of property and equipment ............. (37,084) (65,586)
Net proceeds from sale of proprietary
credit card accounts receivable ............. 57,800 --
--------- ---------
Net cash provided by (used by)
investing activities ........................ 20,716 (65,586)
--------- ---------
Financing activities:
Net borrowings under revolving credit facility .. -- 14,250
Payment of deferred financing costs ............. (15) (1,033)
Payments on mortgage ............................ (1,250) (1,040)
Issuance of common stock, net ................... 11,847 5,220
--------- ---------
Net cash provided by financing activities ....... 10,582 17,397
--------- ---------
Net increase (decrease) in cash ................... 135,816 (28,313)
Cash and cash equivalents, beginning of period .... 30,037 31,962
--------- ---------
Cash and cash equivalents, end of period .......... $ 165,853 $ 3,649
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest ........ $ 1,564 $ 1,522
========= =========
Cash paid during the period for income taxes .... $ 27,640 $ 11,984
========= =========
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 November 2, 2002 and November 3, 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 and convertible securities and vesting of restricted
stock, 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
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
2. EARNINGS PER SHARE (CONTINUED)
- -- ------------------------------
QUARTERS ENDED
---------------------------------------------------------
NOVEMBER 2, 2002 NOVEMBER 3, 2001
--------------------------- ---------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
BASIC EARNINGS PER SHARE
- ------------------------
Income available to
common stockholders ............ $24,911 44,328 $0.56 $12,094 43,419 $0.28
===== =====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options and restricted stock -- 430 -- 273
Convertible Debentures ........... 714 3,606 648 3,606
------- ------ ------- ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available to
common stockholders ............ $25,625 48,364 $0.53 $12,742 47,298 $0.27
======= ====== ===== ======= ====== =====
NINE MONTHS ENDED
---------------------------------------------------------
NOVEMBER 2, 2002 NOVEMBER 3, 2001
--------------------------- ---------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
BASIC EARNINGS PER SHARE
- ------------------------
Income available to
common stockholders ............ $64,035 44,206 $1.45 $29,437 43,298 $0.68
===== =====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options and restricted stock -- 561 -- 358
Convertible Debentures ........... 2,129 3,606 2,044 3,606
------- ------ ------- ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available to
common stockholders ............ $66,164 48,373 $1.37 $31,481 47,262 $0.67
======= ====== ===== ======= ====== =====
Options to purchase 2,660,136 and 1,016,936 shares of common
stock during the quarter and nine months ended November 2, 2002,
respectively, and 1,683,510 and 1,650,510 shares of common stock
during the quarter and nine months ended November 3, 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.
3. LONG-TERM DEBT
- -- --------------
Long-term debt outstanding at November 2, 2002 was
$120,797,000, which represents the net carrying value of the
Company's convertible debentures on that date.
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ANNTAYLOR STORES CORPORATION
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
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, or when events or circumstances indicate
an impairment test is necessary, 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 quarter and nine months ended November 3,
2001 to adjusted net income and earnings per share had SFAS No.
142 been applied as of the beginning of fiscal 2001:
QUARTER ENDED NOVEMBER 3, 2001
------------------------------
BASIC DILUTED
EARNINGS EARNINGS
INCOME PER SHARE PER SHARE
------ --------- ---------
Income available to common stockholders .......... $12,094 $0.28 $0.27
Impact of adopting SFAS No. 142 in fiscal 2001 ... 2,662 0.06 0.06
----- ---- ----
Adjusted income available to common stockholders.. $14,756 $0.34 $0.33
======= ==== =====
NINE MONTHS ENDED NOVEMBER 3, 2001
----------------------------------
BASIC DILUTED
EARNINGS EARNINGS
INCOME PER SHARE PER SHARE
------ --------- ---------
Income available to common stockholders .......... $29,437 $0.68 $0.67
Impact of adopting SFAS No. 142 in fiscal 2001 ... 7,984 0.18 0.17
----- ---- ----
Adjusted income available to common stockholders.. $37,421 $0.86 $0.84
======= ==== =====
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ANNTAYLOR STORES CORPORATION
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
4. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
- -- --------------------------------------------
In June 2002, the Financial Accounting Standards Board (the
"FASB"), issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred, rather than at the date of a
commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and
certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other
exit or disposal activity. Previous accounting guidance was
provided by Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 replaces EITF No.
94-3, and is required to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The
Company will adopt SFAS No. 146 in the fourth quarter of fiscal
2002, and does not expect it will have a material impact on its
consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of
Certain Financial Institutions - an amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9". SFAS No. 147
removes acquisitions of financial institutions, except for
transactions between two or more mutual enterprises, from the
scope of both Statement No. 72 and Interpretation No. 9, and
requires that those transactions be accounted for in accordance
with FASB Statements No. 141 "Business Combinations" and No. 142
"Goodwill and Other Intangible Assets". In addition, SFAS No. 147
amends FASB Statement No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" to include in its scope long-term
customer-relationship intangible assets of financial
institutions. Management has determined that SFAS No. 147 has no
applicability to the Company's operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
------------------------------------
RESULTS OF OPERATIONS
QUARTERS ENDED NINE MONTHS ENDED
----------------- -----------------
NOV. 2, NOV. 3, NOV. 2, NOV. 3,
2002 2001 2002 2001
---- ---- ---- ----
Number of Stores:
Open at beginning of period ...... 555 500 538 478
Opened during period ............. 26 33 43 58
Expanded during period* ......... -- 1 -- 6
Closed during period ............. 1 1 1 4
Open at end of period ............ 580 532 580 532
Type of Stores Open at End of Period:
Ann Taylor stores....... 350 341
Ann Taylor Loft stores.. 202 178
Ann Taylor Factory Stores 28 13
- ---------------
* Expanded stores are excluded from comparable store sales for
the first year following expansion.
QUARTER ENDED NOVEMBER 2, 2002 COMPARED TO QUARTER ENDED NOVEMBER 3, 2001
The Company's net sales for the third quarter of fiscal 2002
increased $29,414,000, or 9.5 percent, to $340,218,000, up from
$310,804,000 in the third quarter of fiscal 2001. Comparable
store sales for period decreased 1.1 percent, compared to a
comparable store sales decrease of 10.6 percent for the same
period last year. Comparable store sales by division were down
2.9 percent for Ann Taylor, and up 1.7 percent for Ann Taylor
Loft. The increase in net sales is primarily due to an increase
in the number of stores open during the third quarter of fiscal
2002 as compared to the same period last year.
Gross margin as a percentage of net sales increased to 57.7
percent in the third quarter of fiscal 2002 from 54.0 percent in
the third quarter of fiscal 2001. The increase in gross margin
as a percentage of net sales is the combined result of higher
full price sales and higher margin rates achieved on both full
price and non-full price sales at both divisions.
Selling, general and administrative expenses during the third
quarter of fiscal 2002 were $154,906,000, or 45.5 percent of net
sales, compared to $142,212,000, or 45.8 percent of net sales in
the third quarter of fiscal 2001. The decrease in selling,
general and administrative expenses as a percentage of net sales
is the result of efficiencies in store operations, lower internet
costs, and reduced marketing spending, partially offset by an
increase in the provision for management performance bonus.
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As a result of the foregoing, the Company had operating income
of $41,552,000, or 12.2 percent of net sales, in the third
quarter of fiscal 2002, compared to operating income of
$22,903,000, or 7.4 percent of net sales, in the third quarter of
fiscal 2001. There was no goodwill amortization recorded in the
third quarter of fiscal 2002 in accordance with SFAS No. 142,
which the Company adopted in February 2002. Amortization of
goodwill was $2,760,000 in the third quarter of fiscal 2001.
Operating income in the third quarter of fiscal 2001, without
giving effect to goodwill amortization, was $25,663,000, or 8.3
percent of net sales.
Interest income was $923,000 in the third quarter of fiscal
2002 compared to $242,000 in the third quarter of fiscal 2001.
The increase is primarily attributable to higher cash on hand,
offset somewhat by lower interest rates.
Interest expense was $1,638,000 in the third quarter of fiscal
2002 compared to $1,516,000 in the third quarter of fiscal 2001.
The income tax provision was $15,926,000, or 39.0 percent of
income before income taxes, in the third quarter of fiscal 2002,
compared to $9,535,000, or 44.1 percent of income before income
taxes, in the third quarter of fiscal 2001. The decrease in the
effective income tax rate is 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 $24,911,000, or 7.3 percent of net sales, for the third
quarter of fiscal 2002, compared to net income of $12,094,000, or
3.9 percent of net sales, in the third quarter of fiscal 2001.
As previously discussed, third quarter fiscal 2001 net income was
reduced by $2,662,000 in goodwill amortization (net of related
taxes), which was not recorded in the third quarter of fiscal
2002. Excluding the deduction of goodwill, net income in the
third quarter of fiscal 2001 would have been $14,756,000, or 4.7
percent of net sales.
AnnTaylor Stores Corporation conducts no business other than
the management of Ann Taylor.
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NINE MONTHS ENDED NOVEMBER 2, 2002 COMPARED TO NINE MONTHS ENDED
NOVEMBER 3, 2001
The Company's net sales for the nine month period ended
November 2, 2002 increased $100,566,000, or 10.8 percent, to
$1,028,753,000, up from $928,187,000 for the same period last
year. Comparable store sales for the period decreased 0.4
percent, compared to a 9.1 percent decrease for the same period
last year. Comparable store sales by division were down 1.6
percent for Ann Taylor, and up 1.7 percent for Ann Taylor Loft.
The increase in net sales is primarily due to an increase in the
number of stores open during the period as compared to the same
period last year.
Gross margin as a percentage of net sales for the nine month
period ended November 2, 2002 increased to 54.8 percent, up from
51.7 percent for the same period last year. The increase in
gross margin as a percentage of net sales is the combined result
of higher full price sales and higher margin rates achieved on
both full price and non-full price sales at both divisions.
Selling, general and administrative expenses for the nine
month period ended November 2, 2002 were $456,412,000, or 44.4
percent of net sales, compared to $413,763,000, or 44.6 percent
of net sales, for the same period last year. The decrease in
selling, general and administrative expenses as a percentage of
net sales is primarily the result of efficiencies gained in 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 $107,787,000, or 10.5 percent of net sales, for the nine month
period ended November 2, 2002, compared to operating income of
$57,487,000, or 6.2 percent of net sales, for the same period
last year. There was no goodwill amortization recorded in fiscal
2002, in accordance with SFAS No. 142, which the Company adopted
in February 2002. The Company recorded $8,280,000 in goodwill
amortization during the nine month period ended November 3,
2001. Operating income for the fiscal 2001 year-to-date period,
without giving effect to goodwill amortization, was $65,767,000,
or 7.1 percent of net sales.
Interest income for the nine month period ended November 2,
2002 was $2,352,000, compared to $1,100,000 for the same period
last year. The increase is primarily attributable to higher cash
on hand, offset somewhat by lower interest rates.
Interest expense for the nine month period ended November 2,
2002 was $5,163,000, compared to $5,015,000 for the same period
last year.
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13
The income tax provision was $40,941,000, or 39.0 percent of
income before income taxes, for the nine month period ended
November 2, 2002, compared to $24,135,000, or 45.1 percent of
income before income taxes, for the same period last year. The
decrease in the effective income tax rate is 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 $64,035,000, or 6.2 percent of net sales, for the nine
month period ended November 2, 2002, compared to net income of
$29,437,000, or 3.2 percent of net sales, for the same period
last year. Excluding the amortization of goodwill, net income
during the nine month period ended November 3, 2001 would have
been $37,421,000, or 4.0 percent of net sales.
FINANCIAL CONDITION
For the first nine months of fiscal 2002, net cash provided by
operating activities totaled $104,518,000, primarily as a result
of earnings, non-cash charges, and increases in accounts payable
and accrued expenses, partially offset by an increase in
merchandise inventories. Cash provided by investing activities
during the first nine months of fiscal 2002 amounted to
$20,716,000, which represents 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 nine months of fiscal 2002
amounted to $10,582,000, primarily as a result of proceeds
received from the exercise of stock options and the issuance of
common stock in connection with the Associate Discount Stock
Purchase Plan offset, in part, by payment of the remaining
outstanding balance of the mortgage on the Company's Louisville
Distribution Center.
Merchandise inventories were $208,086,000 at November 2, 2002,
compared to $180,117,000 at February 2, 2002. Merchandise
inventories at November 2, 2002 and February 2, 2002 included
approximately $36,765,000 and $37,558,000, respectively, of
inventory associated with the Company's sourcing division, which
is primarily finished goods in transit from factories.
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 $45,500,000. For the
nine months ended November 2, 2002, capital expenditures totaled
$37,084,000, net of landlord construction allowances. During the
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14
first nine months of fiscal 2002, the Company opened 9 new Ann
Taylor stores and 34 new Ann Taylor Loft stores and closed 1
existing AnnTaylor store. For the remainder of fiscal 2002, the
Company expects to open 1 additional Ann Taylor store, 5
additional Ann Taylor Loft stores, and close 1 existing Ann
Taylor store.
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.
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, which was amended on August 29, 2002 to adjust
certain ratio provisions in the event securities are repurchased
in connection with the program. Pursuant to the securities
repurchase 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,
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.
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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
requires companies to recognize costs associated with exit or
disposal activities when they are incurred, rather than at the
date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other
exit or disposal activity. Previous accounting guidance was
provided by EITF No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No.
146 replaces EITF No. 94-3, and is required to be applied
prospectively to exit or disposal activities initiated after
December 31, 2002. The Company will adopt SFAS No. 146 in the
fourth quarter of fiscal 2002, and does not expect it will have a
material impact on its consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of
Certain Financial Institutions - an amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9". SFAS No. 147
removes acquisitions of financial institutions, except for
transactions between two or more mutual enterprises, from the
scope of both Statement No. 72 and Interpretation No. 9, and
requires that those transactions be accounted for in accordance
with FASB Statements No. 141 "Business Combinations" and No. 142
"Goodwill and Other Intangible Assets". In addition, SFAS No. 147
amends FASB Statement No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" to include in its scope long-term
customer-relationship intangible assets of financial
institutions. Management has determined that SFAS No. 147 has no
applicability to the Company's operations.
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.
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16
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 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
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17
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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18
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
Under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and
Chief Financial Officer, the Company has conducted an evaluation
of the effectiveness of the design and operation of its
disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) as of a date within 90
days of the filing of this quarterly report (the "Evaluation
Date"). Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's reports
filed or submitted under the Exchange Act. There were no
significant changes in the Company's internal controls or in
other factors that could significantly affect such controls
subsequent to the Evaluation Date, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
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19
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits:
Exhibit
Number Description
------ -----------
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.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during
the quarter covered by this report:
DATE OF REPORT ITEM(S) REPORTED
-------------- ----------------
8/14/2002 Item 5 and Item 7
8/14/2002 Item 7 and Item 9
8/29/2002 Item 7
The report on Form 8-K dated August 14, 2002 included
the Company's Condensed Consolidated Statements of
Operations for the quarters and six months ended August 3,
2002 and August 4, 2001 and Condensed Consolidated Balance
Sheets at August 3, 2002 and February 2, 2002.
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20
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: December 13, 2002 By:/s/J. Patrick Spainhour
------------------------ -----------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
Date: December 13, 2002 By:/s/James M. Smith
------------------------ -----------------------
James M. Smith
Senior Vice President,
Chief Financial Officer and
Treasurer
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21
CERTIFICATION
-------------
I, J. Patrick Spainhour, 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;
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;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
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22
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: December 13, 2002 /s/J. Patrick Spainhour
------------------------- -------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
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23
CERTIFICATION
-------------
I, James M. Smith, 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;
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;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
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24
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: December 13, 2002 /s/James M. Smith
--------------------- ---------------------------
James M. Smith
Senior Vice President,
Chief Financial Officer and
Treasurer
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25
Exhibit Index
- -------------
Exhibit
Number Description
- ------ -----------
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.
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