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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 2, 2003
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 .
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No .
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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 29, 2003
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COMMON STOCK, $.0068 PAR VALUE 45,092,384
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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 2, 2003 and August 3, 2002........................... 3
Condensed Consolidated Balance Sheets at
August 2, 2003 and February 1, 2003......................... 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended August 2, 2003 and
August 3, 2002.............................................. 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.......................................17
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K..............................18
SIGNATURES .............................................................19
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EXHIBIT INDEX .............................................................20
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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 2, 2003 AND AUGUST 3, 2002
(UNAUDITED)
QUARTERS ENDED SIX MONTHS ENDED
-------------------- --------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ........................... $390,207 $343,143 $742,224 $688,535
Cost of sales ....................... 187,646 161,965 350,648 320,794
------- ------- ------- -------
Gross margin ........................ 202,561 181,178 391.586 367,741
Selling, general and administrative
expenses .......................... 166,660 150,425 325,278 301,506
------- ------- ------- -------
Operating income .................... 35,901 30,753 66,298 66,235
Interest income ..................... 777 913 1,465 1,429
Interest expense .................... 1,674 1,826 3,368 3,525
------- ------- ------- -------
Income before income taxes .......... 35,004 29,840 64,395 64,139
Income tax provision ................ 13,827 11,638 25,290 25,015
------- ------- ------- -------
Net income ...................... $ 21,177 $ 18,202 $ 39,105 $ 39,124
======= ======= ======= =======
Basic earnings per share of
common stock..................... $ 0.48 $ 0.41 $ 0.89 $ 0.89
======= ======= ======= =======
Diluted earnings per share of
common stock..................... $ 0.45 $ 0.39 $ 0.84 $ 0.84
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
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ANNTAYLOR STORES CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AUGUST 2, 2003 AND FEBRUARY 1, 2003
(UNAUDITED)
AUGUST 2, FEBRUARY 1,
2003 2003
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ASSETS (IN THOUSANDS)
Current assets
Cash and cash equivalents ...................... $ 259,594 $ 212,821
Accounts receivable, net ....................... 14,830 10,367
Merchandise inventories ........................ 168,683 185,484
Prepaid expenses and other current assets ...... 51,494 46,599
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Total current assets ....................... 494,601 455,271
Property and equipment, net ...................... 253,892 247,115
Goodwill, net .................................... 286,579 286,579
Deferred financing costs, net .................... 3,727 4,170
Other assets ..................................... 15,492 17,691
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Total assets ............................... $1,054,291 $1,010,826
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................... $ 68,842 $ 57,058
Accrued expenses ............................... 88,217 94,137
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Total current liabilities .................. 157,059 151,195
Long-term debt, net .............................. 123,386 121,652
Deferred lease costs and other liabilities ....... 27,066 23,561
Stockholders' equity
Common stock, $.0068 par value;
120,000,000 shares authorized;
49,106,344 and 48,932,860 shares
issued, respectively ........................ 334 332
Additional paid-in capital ..................... 503,683 500,061
Retained earnings .............................. 334,013 296,113
Deferred compensation on restricted stock ...... (4,834) (3,968)
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833,196 792,538
Treasury stock, at cost
4,568,506 and 4,050,972
shares, respectively .................... (86,416) (78,120)
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Total stockholders' equity ................. 746,780 714,418
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Total liabilities and stockholders' equity.. $1,054,291 $1,010,826
========== ==========
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 2, 2003 AND AUGUST 3, 2002
(UNAUDITED)
SIX MONTHS ENDED
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AUGUST 2, AUGUST 3,
2003 2002
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(IN THOUSANDS)
Operating activities:
Net income ......................................... $ 39,105 $ 39,124
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization of deferred compensation ............ 1,540 2,167
Deferred income taxes ............................ (471) 1,340
Depreciation and amortization .................... 25,640 23,736
Gain on sale of proprietary credit
card accounts receivable ....................... -- (2,095)
Loss on disposal of property and equipment ....... 725 347
Non-cash interest ................................ 2,177 2,117
Tax benefit from exercise of stock options ....... 666 3,524
Changes in assets and liabilities:
Receivables .................................... (4,463) (1,809)
Merchandise inventories ........................ 16,801 10,662
Prepaid expenses and other current assets ...... (3,791) 115
Accounts payable and accrued expenses .......... 5,864 18,155
Other non-current assets and
liabilities, net ............................. 5,070 1,629
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Net cash provided by operating activities .......... 88,863 99,012
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Investing activities:
Purchases of property and equipment ................ (33,141) (17,572)
Net proceeds from sale of proprietary
credit card accounts receivable .................. -- 57,800
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Net cash provided (used) by investing activities ... (33,141) 40,228
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Financing activities:
Payments on mortgage ............................... -- (1,250)
Payment of financing costs ......................... -- (14)
Common stock activity related to stock
based compensation programs, net ................ 3,832 12,439
Repurchase of common stock ......................... (12,781) --
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Net cash provided (used) by financing activities ... (8,949) 11,175
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Net increase in cash ................................. 46,773 150,415
Cash and cash equivalents, beginning of period ....... 212,821 30,037
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Cash and cash equivalents, end of period ............. $ 259,594 $ 180,452
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest ........... $ 1,133 $ 1,260
========= =========
Cash paid during the period for income taxes ....... $ 19,239 $ 8,234
========= =========
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 2003 interim periods shown in
this report are not necessarily indicative of results to be expected for the
fiscal year.
The February 1, 2003 condensed consolidated balance sheet amounts have
been derived from the previously audited consolidated balance sheet of
AnnTaylor Stores Corporation (the "Company").
Detailed footnote information is not included for the quarters ended
August 2, 2003 and August 3, 2002. 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 2002 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 by the Company upon exercise of all outstanding stock options,
conversion of all outstanding convertible securities and vesting of unvested
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.
[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)
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QUARTERS ENDED
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AUGUST 2, 2003 AUGUST 3, 2002
---------------------- -----------------------
(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 $21,177 44,024 $0.48 $18,202 44,311 $0.41
==== ====
EFFECT OF DILUTIVE SECURITIES
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Stock options and restricted
stock --- 665 --- 583
Convertible Debentures 722 3,606 709 3,606
------ ------ ------ ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available to common
stockholders $21,899 48,295 $0.45 $18,911 48,500 $0.39
====== ====== ==== ====== ====== ====
SIX MONTHS ENDED
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AUGUST 2, 2003 AUGUST 3, 2002
---------------------- -----------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
BASIC EARNINGS PER SHARE
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Income available to common
stockholders $39,105 44,034 $0.89 $39,124 44,145 $0.89
==== ====
EFFECT OF DILUTIVE SECURITIES
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Stock options and restricted
stock --- 439 --- 634
Convertible Debentures 1,446 3,606 1,444 3,606
------ ------ ------ ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available to common
stockholders $40,551 48,079 $0.84 $40,568 48,385 $0.84
====== ====== ==== ====== ====== ====
Options to purchase 980,999 and 2,538,801 shares of common stock during
the quarter and six months ended August 2, 2003, respectively, and 989,749
and 975,749 shares of common stock during the quarter and six months ended
August 3, 2002, 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 prices as compared to the
average market price of the common shares during those periods.
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ANNTAYLOR STORES CORPORATION
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
3. STOCK-BASED AWARDS
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The Company accounts for stock-based awards and employees' purchase
rights under the Associate Discount Stock Purchase Plan using the intrinsic
value-based method of accounting in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation cost is recognized for
stock option awards granted at fair market value and employees' purchase
rights under the Associate Discount Stock Purchase Plan. The Company has
considered the optional fair value accounting allowed under Statement of
Financial Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of Financial
Accounting Standards Board ("FASB") Statement No. 123", and has elected to
continue using the intrinsic value method. Had compensation costs of option
awards and employees' purchase rights been determined under a fair value
alternative method as stated in SFAS No. 148, the Company would have been
required to prepare a fair value model for such options and employees'
purchase rights, and record such amount in the consolidated financial
statements as compensation expense. Restricted stock awards result in the
recognition of deferred compensation. Deferred compensation is shown as a
reduction of stockholders' equity and is amortized to operating expense over
the vesting period of the stock award. Pro forma stock based employee
compensation costs, net income and earnings per share, as they would have
been recognized if the fair value method had been applied to all awards, are
presented in the table below:
QUARTERS ENDED SIX MONTHS ENDED
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AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income:
As reported ........................ $21,177 $18,202 $39,105 $39,124
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (955) (1,031) (1,928) (1,929)
------- ------- ------- -------
Pro forma ........................... $20,222 $17,171 $37,177 $37,195
======= ======= ======= =======
Basic earnings per share:
As reported ......................... $ 0.48 $ 0.41 $ 0.89 $ 0.89
======= ======= ======= =======
Pro forma ........................... $ 0.45 $ 0.39 $ 0.84 $ 0.84
======= ======= ======= =======
Diluted earnings per share:
As reported ......................... $ 0.45 $ 0.39 $ 0.84 $ 0.84
======= ======= ======= =======
Pro forma ........................... $ 0.43 $ 0.37 $ 0.80 $ 0.80
======= ======= ======= =======
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4. LONG-TERM DEBT
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Long-term debt outstanding at August 2, 2003 was $123,386,000, which
represents the net carrying value of the Company's convertible debentures on
that date.
5. RECENT ACCOUNTING PRONOUNCEMENTS
- -- --------------------------------
On May 15, 2003 the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". SFAS No. 150 requires that
an issuer classify financial instruments that are within its scope as a
liability. Many of those instruments were classified as equity under
previous guidance. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 has had no impact on the
Company's consolidated financial statements for the periods presented. The
Company will record financial instruments entered into or modified in future
periods in accordance with the provisions of SFAS No. 150.
On April 30, 2003 the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No 149 is effective for contracts entered
into or modified after June 30, 2003. Management has evaluated the
provisions of SFAS No. 149, and determined that it has had no impact on the
Company's consolidated financial statements for the periods presented. The
Company will evaluate contracts entered into or modified in future periods
and record them in accordance with the provisions of SFAS No. 149.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTERS ENDED SIX MONTHS ENDED
------------------- -------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
---- ---- ---- ----
Number of Stores:
Open at beginning of period............ 602 551 584 538
Opened during period................... 3 4 21 17
Expanded or remodeled during period*... 3 --- 4 ---
Closed during period................... 2 --- 2 ---
Open at end of period.................. 603 555 603 555
Type of Stores Open at End of Period:
Ann Taylor stores...................... 350 344
Ann Taylor Loft stores................. 226 183
Ann Taylor Factory Stores.............. 27 28
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* Expanded stores are excluded from comparable store sales for the first year
following expansion.
QUARTER ENDED AUGUST 2, 2003 COMPARED TO THE QUARTER ENDED AUGUST 3, 2002
The Company's net sales in the second quarter of fiscal 2003 increased to
$390,207,000 from $343,143,000 in the second quarter of fiscal 2002, an
increase of $47,064,000 or 13.7 percent. By division, net sales for the
second quarter of fiscal 2003, were $216,038,000 for Ann Taylor and
$140,008,000 for Ann Taylor Loft. Comparable store sales for the second
quarter of fiscal 2003 increased 5.3 percent, compared to a 0.2 percent
decrease in the second quarter of fiscal 2002. Comparable store sales by
division were up 4.9 percent for Ann Taylor and up 5.7 percent for Ann Taylor
Loft. The increase in sales was primarily attributable to the opening of new
stores and the increase in comparable store sales. Management believes the
comparable store sales increase was due to strategically managed promotions
that helped optimize selling of product that continued to border on being too
safe, lacking color and sophistication at AnnTaylor and continued product
successes at Ann Taylor Loft.
Gross margin as a percentage of net sales decreased to 51.9 percent in the
second quarter of fiscal 2003 from 52.8 percent in the second quarter of
fiscal 2002. The decrease is primarily due to the combined effect of lower
full price sales at Ann Taylor and lower margin rates achieved on non-full
price sales at both divisions.
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Selling, general and administrative expenses were $166,660,000 or 42.7
percent of net sales, in the second quarter of fiscal 2003, compared to
$150,425,000, or 43.8 percent of net sales, in the second quarter of fiscal
2002. The decrease in selling, general and administrative expenses as a
percentage of net sales was primarily due to increased leverage on fixed
expenses resulting from higher comparable store sales.
As a result of the foregoing, the Company had operating income of
$35,901,000, or 9.2 percent of net sales, in the second quarter of fiscal
2003, compared to $30,753,000, or 9.0 percent of net sales, in the second
quarter of fiscal 2002.
Interest income was $777,000 in the second quarter of fiscal 2003,
compared to $913,000 in the second quarter of fiscal 2002. The decrease is
due to lower interest rates partially offset by a higher cash on hand balance.
Interest expense was $1,674,000 in the second quarter of fiscal 2003,
compared to $1,826,000 in the second quarter of fiscal 2002. The decrease is
due to lower rates on commitment fees related to the Company's credit
facility.
The income tax provision was $13,827,000, or 39.5 percent of income before
taxes, in the second quarter of fiscal 2003, compared to $11,638,000, or
39.0 percent of income before taxes, in the second quarter of fiscal 2002.
During the second quarter of fiscal 2003, the Company increased its effective
income tax rate from 39 percent to 40 percent to reflect higher state taxes.
As a result of the foregoing factors, the Company had net income of
$21,177,000, or 5.4 percent of net sales, for the second quarter of fiscal
2003, compared to $18,202,000, or 5.3 percent of net sales, for the second
quarter of fiscal 2002.
AnnTaylor Stores Corporation conducts no business other than the
management of Ann Taylor.
SIX MONTHS ENDED AUGUST 2, 2003 COMPARED TO THE SIX MONTHS ENDED AUGUST 3, 2002
The Company's net sales in the first six months of fiscal 2003 increased
to $742,224,000 from $688,535,000 for the same period last year, an increase
of $53,689,000 or 7.8 percent. By division, net sales for the first six
months of fiscal 2003 were $417,364,000 for Ann Taylor and $259,931,000 for
Ann Taylor Loft. Comparable store sales for the first six months of fiscal
2003 decreased 0.5 percent compared to a decrease of 0.1 percent during the
same period in fiscal 2002. Comparable store sales by division were down 1.8
percent for Ann Taylor and up 1.7 percent for Ann Taylor Loft. The overall
sales increase was primarily the result of an increase in the number of
stores open as compared to last year.
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12
Gross margin as a percentage of net sales decreased to 52.8 percent for
the first six months of fiscal 2003 from 53.4 percent during the same period
last year. The decrease in gross margin as a percentage of net sales is
primarily due to lower full price sales and lower margin on non-full price
sales at Ann Taylor.
Selling, general and administrative expenses as a percent of net sales for
the first six months of fiscal 2003 were flat compared to the same period
last year, at 43.8 percent of net sales.
As a result of the foregoing, the Company had operating income of
$66,298,000, or 8.9 percent of net sales, in the first six months of fiscal
2003, compared to $66,235,000, or 9.6 percent of net sales, in the first six
months of fiscal 2002.
Interest income was $1,465,000 in the first six months of fiscal 2003,
compared to $1,429,000 in the first six months of fiscal 2002.
Interest expense was $3,368,000 in the first six months of fiscal 2003,
compared to $3,525,000 in the first six months of fiscal 2002.
The income tax provision was $25,290,000, or 39.3 percent of income before
taxes, in the first six months of fiscal 2003, compared to $25,015,000, or
39.0 percent of income before taxes, for the same period last year. During
the second quarter of fiscal 2003, the Company increased its effective income
tax rate from 39 percent to 40 percent to reflect higher state taxes.
As a result of the foregoing factors, the Company had net income of
$39,105,000, or 5.3 percent of net sales, for the first six months of fiscal
2003, compared to net income of $39,124,000, or 5.7 percent of net sales, for
the first six months of fiscal 2002.
FINANCIAL CONDITION
For the first six months of fiscal 2003, net cash provided by operating
activities totaled $88,863,000, primarily as a result of earnings, adjusted
for non-cash items and a decrease in merchandise inventories. Cash used by
investing activities during the first six months of fiscal 2003 amounted to
$33,141,000, for the purchase of property and equipment. Cash used by
financing activities during the first six months of fiscal 2003 amounted to
$8,949,000, due primarily to the Company's repurchase of common stock
partially offset by cash received from the exercise of stock options.
Merchandise inventories were $168,683,000 at August 2, 2003, compared to
$185,484,000 at February 1, 2003. On a per square foot basis, inventories at
August 2, 2003 were down approximately 12 percent compared to the inventories
-12-
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13
at the end of fiscal 2002. The decrease is primarily due to lower in-transit
inventory levels and the timing of merchandise reciepts.
Total fiscal 2003 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
$80,000,000. For the six months ended August 2, 2003, capital expenditures
totaled $33,141,000 net of landlord construction allowances. During the
first six months of fiscal 2003, the Company opened one new Ann Taylor store,
19 new Ann Taylor Loft stores and one Ann Taylor Factory store and closed one
Ann Taylor store and one Ann Taylor Factory store. For the remainder of
fiscal 2003, the Company expects to open 8 additional Ann Taylor stores and
44 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 the credit facility are sufficient to
enable it to meet its on-going cash needs for its business, as presently
conducted, for the foreseeable future.
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.
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 credit facility. 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. The Company
repurchased 680,000 shares of its common stock during the first six months of
2003 in connection with this securities repurchase program, at a total cost
of approximately $12,800,000. A portion of the shares repurchased have
subsequently been reissued under the Company's stock based compensation
programs.
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14
RECENT ACCOUNTING PRONOUNCEMENTS
On May 15, 2003 the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". SFAS No. 150 requires that
an issuer classify financial instruments that are within its scope as a
liability. Many of those instruments were classified as equity under
previous guidance. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 has had no impact on the
Company's consolidated financial statements for the periods presented. The
Company will record financial instruments entered into or modified in future
periods in accordance with the provisions of SFAS No. 150.
On April 30, 2003 the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No 149 is effective for contracts entered
into or modified after June 30, 2003. Management has evaluated the
provisions of SFAS No. 149, and determined that it has had no impact on the
Company's consolidated financial statements for the periods presented. The
Company will evaluate contracts entered into or modified in future periods
and record them in accordance with the provisions of SFAS No. 149.
CRITICAL ACCOUNTING POLICIES
Management has determined that the Company's most critical accounting
policies include those related to merchandise inventory valuations,
intangible asset impairment, income taxes and pension accounting.
Inventory is valued at the lower of average cost or market, at the
individual item level. Market is determined based on the estimated net
realizable value, which is generally the merchandise selling price.
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.
The Company follows SFAS No. 142, "Goodwill and Other Intangible
Assets". This accounting standard requires that goodwill and indefinite life
intangible assets are no longer amortized but are subject to annual
impairment tests. Other intangible assets with finite lives will continue to
be amortized over their useful lives. The Company performs impairment
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testing annually using net discounted future cash flows to determine whether
an impairment charge related to the carrying value of the Company's recorded
goodwill is necessary. The most recent impairment tests did not result in an
impairment charge. In the case of long-lived tangible assets, if the
undiscounted 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 judgments 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 judgment of
expected tax liabilities in the various taxing jurisdictions within which it
is subject to tax. The Company is involved in both foreign and domestic tax
audits. At any given time, many tax years are subject to audit by various
taxing authorities.
All full-time employees of the Company who have been employed by the
Company for at least one year are covered under a noncontributory defined
benefit pension plan. The Company's funding obligations and liability under
the terms of the plan are determined using certain actuarial assumptions,
including a discount rate and an expected long-term rate of return on plan
assets. The assumptions used are based on current market conditions and
historical analysis, and can be affected by a variety of factors. Management
believes that it has taken reasonable steps to ensure that the plan is
adequately funded and the Company is adequately accrued for costs related to
the pension plan.
Management believes these critical accounting policies represent the
more significant judgments and estimates used in the preparation of the
Company's consolidated financial statements.
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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 client 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; the potential impact of health
concerns relating to severe acute respiratory syndrome, particularly on
manufacturing operations of the Company's vendors in Asia and elsewhere; 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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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-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) as of the end of the period covered
by this report (the "Evaluation Date"). There are inherent limitations to
the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding
of the controls and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurance of achieving
their control objectives. 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 was no change in the Company's internal control over financial
reporting during the quarterly period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
31.1 Certification of chief executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of chief financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of chief executive officer and chief
financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(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
-------------- ----------------
5/8/03 Item 7 and Item 12
5/14/03 Item 7 and Item 12
6/5/03 Item 7 and Item 9
7/10/03 Item 7 and Item 9
The report on Form 8-K dated May 14, 2003 included the Company's
Condensed Consolidated Statements of Operations for the quarters ended
May 3, 2003 and May 4, 2002 and Condensed Consolidated Balance Sheets at
May 3, 2003 and February 1, 2003.
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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 12, 2003 By: /s/J. Patrick Spainhour
---------------------------
J. Patrick Spainhour
Chairman, Chief Executive
Officer
Date: September 12, 2003 By: /s/James M. Smith
---------------------------
James M. Smith
Senior Vice President,
Chief Financial Officer and
Treasurer
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Exhibit Index
- -------------
Exhibit
Number Description
- ------ -----------
31.1 Certification of chief executive officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of chief financial officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of chief executive officer and chief financial
officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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