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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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 1, 2003
Commission file number 1-10738
ANNTAYLOR STORES CORPORATION
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3499319
(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 .
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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 November 28, 2003
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COMMON STOCK, $.0068 PAR VALUE 45,257,594
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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 1, 2003 and November 2, 2002.............. 3
Condensed Consolidated Balance Sheets at
November 1, 2003 and February 1, 2003.............. 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended November 1, 2003 and
November 2, 2002................................... 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations................11
Item 4.Controls and Procedures..............................17
PART II.OTHER INFORMATION
-------------------------
Item 2. Changes in Securities and Use of Proceeds.........18
Item 6. Exhibits and Reports on Form 8-K..................18
SIGNATURES ..................................................20
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EXHIBIT INDEX .................................................21
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2
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
ANNTAYLOR STORES CORPORATION
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
FOR THE QUARTERS AND NINE MONTHS ENDED NOVEMBER 1, 2003 AND
NOVEMBER 2, 2002
(UNAUDITED)
QUARTERS ENDED NINE MONTHS ENDED
--------------------- -----------------------
NOV. 1, NOV. 2, NOV. 1, NOV. 2,
2003 2002 2003 2002
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ................. $ 396,807 $ 340,218 $1,139,031 $1,028,753
Cost of sales ............. 168,031 143,760 518,679 464,554
------- ------- ------- -------
Gross margin .............. 228,776 196,458 620,352 564,199
Selling, general and
administrative expenses . 177,356 154,906 502,634 456,412
------- ------- ------- -------
Operating income .......... 51,420 41,552 117,718 107,787
Interest income ........... 803 923 2,268 2,352
Interest expense .......... 1,716 1,638 5,084 5,163
------- ------- ------- -------
Income before income taxes 50,507 40,837 114,902 104,976
Income tax provision ...... 20,202 15,926 45,492 40,941
------- ------- ------- -------
Net income ............ $ 30,305 $ 24,911 $ 69,410 $ 64,035
========== ========== ========== ==========
Basic earnings per share
of common stock ....... $ 0.68 $ 0.56 $ 1.57 $ 1.45
========== ========== ========== ==========
Diluted earnings per share
of common stock ....... $ 0.63 $ 0.53 $ 1.48 $ 1.37
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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3
ANNTAYLOR STORES CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
NOVEMBER 1, 2003 AND FEBRUARY 1, 2003
(UNAUDITED)
NOVEMBER 1, FEBRUARY 1,
2003 2003
----------- -----------
ASSETS (IN THOUSANDS)
Current assets
Cash and cash equivalents .................... $ 270,413 $ 212,821
Accounts receivable, net ..................... 17,576 10,367
Merchandise inventories ...................... 227,234 185,484
Prepaid expenses and other current assets .... 57,994 46,599
----------- -----------
Total current assets ..................... 573,217 455,271
Property and equipment, net .................... 261,424 247,115
Goodwill, net .................................. 286,579 286,579
Deferred financing costs, net .................. 3,506 4,170
Other assets ................................... 14,812 17,691
----------- -----------
Total assets ............................. $ 1,139,538 $ 1,010,826
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................. $ 79,544 $ 57,058
Accrued expenses ............................. 112,859 94,137
----------- -----------
Total current liabilities ................ 192,403 151,195
Long-term debt, net ............................ 124,265 121,652
Deferred lease costs and other liabilities ..... 30,128 23,561
Stockholders' equity
Common stock, $.0068 par value;
120,000,000 shares authorized;
49,347,471 and 48,932,860 shares
issued, respectively ...................... 336 332
Additional paid-in capital ................... 511,767 500,061
Retained earnings ............................ 362,804 296,113
Deferred compensation on restricted stock .... (4,249) (3,968)
----------- -----------
870,658 792,538
Treasury stock, at cost
4,235,176 and 4,050,972 shares,
respectively .......................... (77,916) (78,120)
----------- -----------
Total stockholders' equity ............... 792,742 714,418
----------- -----------
Total liabilities and stockholders' equity $ 1,139,538 $ 1,010,826
=========== ===========
See accompanying notes to condensed consolidated financial
statements.
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4
ANNTAYLOR STORES CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE NINE MONTHS ENDED NOVEMBER 1, 2003 AND NOVEMBER 2,
2002
(UNAUDITED)
NINE MONTHS ENDED
------------------------
NOVEMBER 1, NOVEMBER 2,
2003 2002
--------- ---------
(IN THOUSANDS)
Operating activities:
Net income ...................................... $ 69,410 $ 64,035
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of deferred compensation ......... 2,419 4,234
Deferred income taxes ......................... 1,073 3,685
Depreciation and amortization ................. 39,208 36,076
Gain on sale of proprietary credit
card accounts receivable .................... -- (2,095)
Loss on disposal or write down of
property and equipment ...................... 724 631
Non-cash interest ............................. 3,277 3,184
Tax benefit from exercise of stock options .... 3,100 3,490
Changes in assets and liabilities:
Receivables ................................. (7,209) (4,515)
Merchandise inventories ..................... (41,750) (27,969)
Prepaid expenses and other current assets ... (9,810) (1,149)
Accounts payable and accrued expenses ....... 41,208 26,265
Other non-current assets and liabilities, net 6,788 (1,354)
--------- ---------
Net cash provided by operating activities ....... 108,438 104,518
--------- ---------
Investing activities:
Purchases of property and equipment ............. (54,241) (37,084)
Net proceeds from sale of proprietary
credit card accounts receivable ............. -- 57,800
--------- ---------
Net cash provided (used) by investing activities (54,241) 20,716
--------- ---------
Financing activities
Payment of deferred financing costs ............. -- (15)
Payments on mortgage ............................ -- (1,250)
Common stock activity related to stock
based compensation programs, net .............. 16,176 11,847
Repurchase of common stock ...................... (12,781) --
--------- ---------
Net cash provided by financing activities ....... 3,395 10,582
--------- ---------
Net increase in cash .............................. 57,592 135,816
Cash and cash equivalents, beginning of period .... 212,821 30,037
--------- ---------
Cash and cash equivalents, end of period .......... $ 270,413 $ 165,853
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest ........ $ 1,442 $ 1,564
========= =========
Cash paid during the period for income taxes .... $ 22,940 $ 27,640
========= =========
See accompanying notes to condensed consolidated financial
statements.
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5
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 November 1, 2003 and November 2, 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)
------------------------------
QUARTERS ENDED
---------------------------------------------------------
NOVEMBER 1, 2003 NOVEMBER 2, 2002
------------------------- ---------------------------
(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 $30,305 44,697 $0.68 $24,911 44,328 $0.56
===== =====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options and restricted stock -- 1,040 -- 430
Convertible Debentures 722 3,606 714 3,606
------- ------ ------- ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available to common
stockholders $31,027 49,343 $0.63 $25,625 48,364 $0.53
======= ====== ===== ======= ====== =====
NINE MONTHS ENDED
---------------------------------------------------------
NOVEMBER 1, 2003 NOVEMBER 2, 2002
------------------------- ---------------------------
(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 $69,410 44,255 $1.57 $64,035 44,206 $1.45
===== =====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options and restricted stock -- 588 -- 561
Convertible Debentures 2,168 3,606 2,129 3,606
------- ------ ------- ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available to common
stockholders $71,578 48,449 $1.48 $66,164 48,373 $1.37
======= ====== ===== ======= ====== =====
Options to purchase 15,000 and 908,061 shares of common stock
during the quarter and nine months ended November 1, 2003,
respectively, and 2,660,136 and 1,016,936 shares of common stock
during the quarter and nine months ended November 2, 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 price 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
------------------
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 NINE MONTHS ENDED
------------------ ------------------
NOV. 1, NOV. 2, NOV. 1, NOV. 2,
2003 2002 2003 2002
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income:
As reported ........................ $30,305 $24,911 $69,410 $64,035
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects .................... (567) (798) (2,412) (2,702)
------- ------- ------- -------
Pro forma .......................... $29,738 $24,113 $66,998 $61,333
======= ======= ======= =======
Basic earnings per share:
As reported ........................ $ 0.68 $ 0.56 $ 1.57 $ 1.45
======= ======= ======= =======
Pro forma .......................... $ 0.67 $ 0.54 $ 1.51 $ 1.39
======= ======= ======= =======
Diluted earnings per share:
As reported ........................ $ 0.63 $ 0.53 $ 1.48 $ 1.37
======= ======= ======= =======
Pro forma .......................... $ 0.62 $ 0.51 $ 1.43 $ 1.31
======= ======= ======= =======
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ANNTAYLOR STORES CORPORATION
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
4. LONG-TERM DEBT
--------------
Long-term debt outstanding at November 1, 2003 was
$124,265,000, which represents the net carrying value of the
Company's convertible debentures on that date.
The Company's obligations with respect to the convertible
debentures are unconditionally guaranteed on a subordinated basis
by the Company's wholly owned operating subsidiary AnnTaylor,
Inc. ("Ann Taylor"). The Company's quarterly report need not
include financial statements for the subsidiary guarantor, Ann
Taylor, based on the criteria listed in the Securities and
Exchange Commission's Regulation S-X, Rule 3-10(e). The Company
has no independently owned assets and conducts no business other
than the management of Ann Taylor.
On November 14, 2003, Ann Taylor and certain of its
subsidiaries entered into a Second Amended and Restated
$175,000,000 senior secured revolving credit facility (the
"Credit Facility") with Bank of America N.A. and a syndicate of
lenders. The Credit Facility, which provides for an increase in
the total facility and the aggregate commitments thereunder up to
$250,000,000, amended Ann Taylor's then existing $175,000,000
bank credit agreement scheduled to expire in April 2004. The
Credit Facility matures on November 13, 2008 and will be used by
Ann Taylor and certain of its subsidiaries for working capital,
letters of credit and other general corporate purposes.
Loans outstanding under the Credit Facility at any time may
not exceed $75,000,000. Maximum availability for loans and
letters of credit under the Credit Facility is governed by a
monthly borrowing base, determined by the application of
specified advance rates against certain eligible assets. There
were no loans outstanding under the Credit Facility as of the
date of this filing.
Amounts outstanding under the Credit Facility bear interest at
a rate equal to, at Ann Taylor's option, the Bank of America Base
Rate, or Eurodollar Rate, plus a margin of up to 0.25%, and 1.25%
to 2.00%, respectively. In addition, Ann Taylor is required to
pay the lenders a quarterly commitment fee on the unused
revolving loan commitment amount at a rate ranging from 0.325% to
0.40% per annum. Fees for outstanding commercial and standby
letters of credit range from 0.50% to 0.75% and from 1.25% to
2.00%, respectively. The Credit Facility contains financial and
other covenants, including limitations on indebtedness and liens.
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9
ANNTAYLOR STORES CORPORATION
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
4. LONG-TERM DEBT (CONTINUED)
--------------------------
The Credit Facility permits the payment of cash dividends by
the Company (and dividends by certain of its subsidiaries to fund
such cash dividends) if Liquidity (as defined in the Credit
Facility) is at least $35,000,000. Certain subsidiaries of the
Company are also permitted to pay dividends to the Company to
fund certain taxes owed by the Company; fund ordinary operating
expenses of the Company not in excess of $500,000 per annum; for
repurchases of Common Stock held by employees not in excess of
$100,000 per annum; and for certain other stated purposes.
The lenders have been granted a pledge of the common stock of
Ann Taylor and certain of its subsidiaries, and a security
interest in substantially all real and personal property (other
than leasehold interests) and all other assets of Ann Taylor and
certain of its subsidiaries, as collateral for Ann Taylor's
obligations under the Credit Facility.
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10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTERS ENDED NINE MONTHS ENDED
-------------- -----------------
NOV. 1, NOV.2, NOV. 1, NOV. 2,
2003 2002 2003 2002
---- ---- ---- ----
Number of Stores:
Open at beginning of period ...... 603 555 584 538
Opened during period ............. 36 26 57 43
Expanded during period* ......... 1 -- 5 --
Closed during period ............. -- 1 2 1
Open at end of period ............ 639 580 639 580
Type of Stores Open at End of Period:
Ann Taylor stores ................ 355 350
Ann Taylor Loft stores ........... 257 202
Ann Taylor Factory stores ........ 27 28
- -------------------------
* Expanded stores are excluded from comparable store sales for
the first year following expansion.
QUARTER ENDED NOVEMBER 1, 2003 COMPARED TO QUARTER ENDED NOVEMBER 2, 2002
The Company's net sales for the third quarter of fiscal 2003
increased to $396,807,000 from $340,218,000 in the third quarter
of fiscal 2002, an increase of $56,589,000 or 16.6 percent. By
division, net sales for the third quarter of fiscal 2003, were
$207,077,000 for Ann Taylor and $157,023,000 for Ann Taylor
Loft. Comparable store sales for the third quarter of 2003
increased 6.2 percent, compared to a comparable store sales
decrease of 1.1 percent for the same period last year.
Comparable store sales by division, for the quarter, were up 1.9
percent for Ann Taylor, and up 13.4 percent for Ann Taylor Loft.
The increase in net sales is primarily due to the opening of new
stores and an increase in comparable store sales. Management
believes that third quarter performance was driven by positive
client acceptance across all product categories at Ann Taylor
Loft, combined with positive comparable store sales results at
Ann Taylor.
Gross margin as a percentage of net sales for the third
quarter of fiscal 2003 was unchanged from last year at 57.7
percent.
Selling, general and administrative expenses during the third
quarter of fiscal 2003 were $177,356,000, or 44.7 percent of net
sales, compared to $154,906,000, or 45.5 percent of net sales in the
third quarter of fiscal 2002. The decrease in selling, general and
administrative expenses as a percentage of net sales was due to
increased leverage on tenancy and other fixed expenses resulting
from positive comparable store sales.
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11
As a result of the foregoing, the Company had operating income
of $51,420,000, or 13.0 percent of net sales, in the third
quarter of fiscal 2003, compared to operating income of
$41,552,000, or 12.2 percent of net sales, in the third quarter
of fiscal 2002.
Interest income was $803,000 in the third quarter of fiscal
2003, compared to $923,000 in the third quarter of fiscal 2002.
The decrease is primarily attributable to lower interest rates
partially offset by a higher cash on hand balance.
Interest expense was $1,716,000 in the third quarter of fiscal
2003, compared to $1,638,000 in the third quarter of fiscal 2002.
The income tax provision was $20,202,000, or 40.0 percent of
income before income taxes, in the third quarter of fiscal 2003,
compared to $15,926,000, or 39.0 percent of income before income
taxes, in the third 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 $30,305,000, or 7.6 percent of net sales, for the third
quarter of fiscal 2003, compared to net income of $24,911,000, or
7.3 percent of net sales, for the third quarter of fiscal 2002.
NINE MONTHS ENDED NOVEMBER 1, 2003 COMPARED TO NINE MONTHS ENDED
NOVEMBER 2, 2002
The Company's net sales for the nine month period ended
November 1, 2003 increased $110,278,000, or 10.7 percent, to
$1,139,031,000, up from $1,028,753,000 for the same period last
year. By division, net sales for the first nine months of fiscal
2003 were $624,441,000 for Ann Taylor and $416,954,000 for Ann
Taylor Loft. Comparable store sales for the period increased 1.7
percent, compared to a 0.4 percent decrease for the same period
last year. Comparable store sales by division were down 0.6
percent for Ann Taylor, and up 5.7 percent for Ann Taylor Loft.
The increase in net sales is due to the combined effect of
positive comparable store sales, driven primarily by positive
acceptance of Ann Taylor Loft product, and 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 1, 2003 was 54.5 percent, compared to 54.8
percent for the same period last year.
Selling, general and administrative expenses for the nine
month period ended November 1, 2003 were $502,634,000, or 44.1
percent of net sales, compared to $456,412,000, or 44.4 percent
of net sales, for the same period last year.
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12
As a result of the foregoing, the Company had operating income
of $117,718,000, or 10.3 percent of net sales, for the nine month
period ended November 1, 2003, compared to operating income of
$107,787,000, or 10.5 percent of net sales, in the first nine
months of fiscal 2002.
Interest income was $2,268,000 for the first nine months of
fiscal 2003, compared to $2,352,000 for the same period last year.
Interest expense was $5,084,000 for the first nine months of
fiscal 2003, compared to $5,163,000 for the same period last year.
The income tax provision was $45,492,000, or 39.6 percent of
income before income taxes, for the nine month period ended
November 1, 2003, compared to $40,941,000, or 39.0 percent of
income before income 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 $69,410,000, or 6.1 percent of net sales, for the nine
month period ended November 1, 2003, compared to net income of
$64,035,000, or 6.2 percent of net sales, for the same period
last year.
FINANCIAL CONDITION
For the first nine months of fiscal 2003, net cash provided by
operating activities totaled $108,438,000, primarily as a result
of earnings adjusted for non-cash items. Cash used by investing
activities during the first nine months of fiscal 2003 amounted
to $54,241,000, for the purchase of property and equipment. Cash
provided by financing activities during the first nine months of
fiscal 2003 amounted to $3,395,000, due primarily to the cash
received from the exercise of stock options, partially offset by
cash paid for the Company's repurchase of common stock.
Merchandise inventories were $227,234,000 at November 1, 2003,
compared to $185,484,000 at February 1, 2003. On a per square
foot basis, inventories at November 1, 2003 were up approximately
12 percent compared to the inventories at the end of fiscal
2002. The increase in inventory is primarily due to higher
inventory levels in anticipation of fourth quarter selling.
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 $72,000,000. For the
nine months ended November 1, 2003, capital expenditures totaled
$54,241,000, net of landlord construction allowances. During the
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13
first nine months of fiscal 2003, the Company opened six new Ann
Taylor stores, 50 new Ann Taylor Loft stores and one new Ann
Taylor Factory store. During the first nine months of fiscal
2003 the Company closed one Ann Taylor store and one Ann Taylor
Factory store. For the remainder of fiscal 2003, the Company
expects to open two additional Ann Taylor stores and 11
additional Ann Taylor Loft stores.
On November 14, 2003, Ann Taylor and certain of its
subsidiaries entered into a Second Amended and Restated
$175,000,000 senior secured revolving Credit Facility with Bank
of America N.A. and a syndicate of lenders. The Credit Facility,
which provides for an increase in the total facility and the
aggregate commitments thereunder up to $250,000,000, amended Ann
Taylor's then existing $175,000,000 bank credit agreement
scheduled to expire in April 2004. The Credit Facility matures on
November 13, 2008 and will be used by Ann Taylor and certain of
its subsidiaries for working capital, letters of credit and other
general corporate purposes. The terms of the Credit Facility are
described more fully in Note 4 to the Condensed Consolidated
Financial Statements.
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 nine months of 2003 in connection
with this securities repurchase program, at a total cost of
approximately $12,800,000.
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.
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14
CRITICAL ACCOUNTING POLICIES
Management has determined that the Company's most critical
accounting policies include those related to merchandise
inventory valuation, 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 testing
annually 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
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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.
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 infectious diseases,
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
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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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See discussion of the Credit Facility in Note 4 of the
Condensed Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
10.1 Second Amended and Restated Credit Agreement,
dated as of November 14, 2003, by and among
AnnTaylor, Inc., Annco, Inc., AnnTaylor
Distribution Services, Inc., AnnTaylor
Retail, Inc., the financial institutions from
time to time parties thereto, and Bank of
America, N.A., as Administrative Agent and as
Collateral Agent. Incorporated by reference
to Exhibit 10.1 on Form 8-K of the Company
filed on November 14, 2003.
10.2 Second Amended and Restated Pledge and
Security Agreement, dated as of November 14,
2003, by AnnTaylor, Inc., AnnTaylor Stores
Corporation, Annco, Inc., AnnTaylor
Distribution Services, Inc. and AnnTaylor
Retail, Inc. in favor of Bank of America,
N.A., in its capacity as administrative agent
for each of the Lenders party to the Credit
Agreement. Incorporated by reference to
Exhibit 10.2 on Form 8-K of the Company filed
on November 14, 2003.
10.3 Second Amended and Restated Parent Guaranty,
dated as of November 14, 2003, made by
AnnTaylor Stores Corporation in favor of Bank
of America, N.A., in its capacity as
administrative agent for each of the Lenders
party to the Credit Agreement. Incorporated
by reference to Exhibit 10.3 on Form 8-K of
the Company filed on November 14, 2003.
31.1* Certification of chief executive officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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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.
* Filed electronically herewith.
(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
-------------- ----------------
8/7/03 Item 7 and Item 12
8/13/03 Item 7 and Item 12
9/4/03 Item 7 and Item 9
9/17/03 Item 5 and Item 7
10/9/03 Item 7 and Item 9
The report on Form 8-K dated August 13, 2003 included
the Company's Condensed Consolidated Statements of
Operations for the quarters and six months ended August 2,
2003 and August 3, 2002 and Condensed Consolidated Balance
Sheets at August 2, 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: December 12, 2003 By: /s/J. Patrick Spainhour
---------------- -----------------------
J. Patrick Spainhour
Chairman, Chief Executive
Officer
Date: December 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
- ------ -----------
10.1 Second Amended and Restated Credit Agreement, dated as
of November 14, 2003, by and among AnnTaylor, Inc.,
Annco, Inc., AnnTaylor Distribution Services, Inc.,
AnnTaylor Retail, Inc., the financial institutions from
time to time parties thereto, and Bank of America,
N.A., as Administrative Agent and as Collateral Agent.
Incorporated by reference to Exhibit 10.1 on Form 8-K
of the Company filed on November 14, 2003.
10.2 Second Amended and Restated Pledge and Security
Agreement, dated as of November 14, 2003, by AnnTaylor,
Inc., AnnTaylor Stores Corporation, Annco, Inc.,
AnnTaylor Distribution Services, Inc. and AnnTaylor
Retail, Inc. in favor of Bank of America, N.A., in its
capacity as administrative agent for each of the
Lenders party to the Credit Agreement. Incorporated by
reference to Exhibit 10.2 on Form 8-K of the Company
filed on November 14, 2003.
10.3 Second Amended and Restated Parent Guaranty, dated as
of November 14, 2003, made by AnnTaylor Stores
Corporation in favor of Bank of America, N.A., in its
capacity as administrative agent for each of the
Lenders party to the Credit Agreement. Incorporated by
reference to Exhibit 10.3 on Form 8-K of the Company
filed on November 14, 2003.
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.
* Filed electronically herewith.
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