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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2004

 

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

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

142 West 57th Street, New York, NY   10019
(Address of principal executive offices)   (Zip Code)

 

(212) 541-3300

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨.

 

Indicate 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.

 

Class


 

Outstanding as of

August 27, 2004


Common Stock, $.0068 par value   71,373,713

 



Table of Contents

INDEX TO FORM 10-Q

 

            Page No.

PART I.   FINANCIAL INFORMATION    
Item 1.   Financial Statements    
       

Condensed Consolidated Statements of Income for the Quarters and Six Months Ended July 31, 2004 and August 2, 2003 (unaudited)

  3
       

Condensed Consolidated Balance Sheets at July 31, 2004 and January 31, 2004 (unaudited)

  4
       

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2004 and August 2, 2003 (unaudited)

  5
        Notes to Condensed Consolidated Financial Statements (unaudited)   6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   10
Item 4.   Controls and Procedures   16
PART II.   OTHER INFORMATION    
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   17
Item 6.   Exhibits   18
SIGNATURES   19
EXHIBIT INDEX   20

 

Note: In April 2004, 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. Prior period share and per share amounts herein are presented on a post-split basis.

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Quarters and Six Months Ended July 31, 2004 and August 2, 2003

(unaudited)

 

     Quarters Ended

   Six Months Ended

    

July 31,

2004


  

August 2,

2003


  

July 31,

2004


  

August 2,

2003


     (in thousands, except per share amounts)

Net sales

   $ 472,634    $ 390,207    $ 905,880    $ 742,224

Cost of sales

     222,339      187,646      402,682      350,648
    

  

  

  

Gross margin

     250,295      202,561      503,198      391,576

Selling, general and administrative expenses

     200,159      166,660      399,447      325,278
    

  

  

  

Operating income

     50,136      35,901      103,751      66,298

Interest income

     1,295      777      2,296      1,465

Interest expense

     1,079      1,674      2,749      3,368
    

  

  

  

Income before income taxes

     50,352      35,004      103,298      64,395

Income tax provision

     20,141      13,827      41,319      25,290
    

  

  

  

Net income

   $ 30,211    $ 21,177    $ 61,979    $ 39,105
    

  

  

  

Basic earnings per share of common stock

   $ 0.43    $ 0.32    $ 0.90    $ 0.59
    

  

  

  

Diluted earnings per share of common stock

   $ 0.41    $ 0.30    $ 0.84    $ 0.56
    

  

  

  

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

July 31, 2004 and January 31, 2004

(unaudited)

 

    

July 31,

2004


   

January 31,

2004


 
     (in thousands)  
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 347,196     $ 337,087  

Merchandise inventories

     206,276       172,058  

Prepaid expenses and other current assets

     78,424       68,223  
    


 


Total current assets

     631,896       577,368  

Property and equipment, net

     271,785       265,569  

Goodwill

     286,579       286,579  

Deferred financing costs, net

     1,564       4,886  

Other assets

     13,631       17,471  
    


 


Total assets

   $ 1,205,455     $ 1,151,873  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 68,451     $ 52,170  

Accrued expenses

     116,730       109,450  
    


 


Total current liabilities

     185,181       161,620  

Long-term debt, net

     —         125,152  

Deferred lease costs and other liabilities

     35,492       34,465  

Stockholders’ equity:

                

Common stock, $.0068 par value; 120,000,000 shares authorized; 79,991,197 and 74,198,430 shares issued, respectively

     544       505  

Additional paid-in capital

     660,808       516,655  

Retained earnings

     455,303       393,926  

Deferred compensation on restricted stock

     (13,208 )     (6,148 )
    


 


       1,103,447       904,938  

Treasury stock, 7,151,863 and 6,131,430 shares, respectively, at cost

     (118,665 )     (74,302 )
    


 


Total stockholders’ equity

     984,782       830,636  
    


 


Total liabilities and stockholders’ equity

   $ 1,205,455     $ 1,151,873  
    


 


 

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended July 31, 2004 and August 2, 2003

(unaudited)

 

     Six Months Ended

 
    

July 31,

2004


   

August 2,

2003


 
     (in thousands)  

Operating activities:

                

Net income

   $ 61,979     $ 39,105  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Amortization of deferred compensation

     3,949       1,540  

Deferred income taxes

     1,278       (471 )

Depreciation and amortization

     28,594       25,640  

Loss on disposal of property and equipment

     5       725  

Non-cash interest

     1,654       2,177  

Tax benefit from exercise of stock options

     5,765       666  

Changes in assets and liabilities:

                

Receivables

     (2,131 )     (4,463 )

Merchandise inventories

     (34,219 )     16,801  

Prepaid expenses and other current assets

     (6,832 )     (3,791 )

Accounts payable and accrued expenses

     23,560       5,864  

Other non-current assets and liabilities, net

     2,352       5,070  
    


 


Net cash provided by operating activities

     85,954       88,863  
    


 


Investing activities:

                

Purchases of property and equipment

     (34,815 )     (33,141 )
    


 


Net cash used by investing activities

     (34,815 )     (33,141 )
    


 


Financing activities:

                

Common stock activity related to stock based compensation programs, net

     17,956       3,832  

Repurchases of common stock

     (58,986 )     (12,781 )
    


 


Net cash used by financing activities

     (41,030 )     (8,949 )
    


 


Net increase in cash

     10,109       46,773  

Cash and cash equivalents, beginning of period

     337,087       212,821  
    


 


Cash and cash equivalents, end of period

   $ 347,196     $ 259,594  
    


 


Supplemental disclosures of cash flow information:

                

Cash paid during the period for:

                

Interest

   $ 1,090     $ 1,133  
    


 


Income taxes

   $ 28,630     $ 19,239  
    


 


Conversion of long-term debt:

                

Conversion of Convertible Debentures into common stock, net of unamortized deferred financing costs

   $ 123,484     $ —    
    


 


 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

ANNTAYLOR STORES CORPORATION

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 2004 interim periods shown in this report are not necessarily indicative of results to be expected for the Fiscal year.

 

The January 31, 2004 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 in this Report. The financial information set forth herein should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company’s 2003 Annual Report to Stockholders. Certain Fiscal 2003 amounts have been reclassified to conform to the Fiscal 2004 presentation.

 

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. As discussed further in Note 4, the conversion of Convertible Debentures had no effect on diluted earnings per share.

 

In April 2004, 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 26, 2004 to stockholders of record at the close of business on May 11, 2004. Shares and per share data in the table below, and throughout this document, are presented on a post-split basis.

 

     Quarters Ended

     July 31, 2004

   August 2, 2003

     (in thousands, except per share amounts)
     Net
Income


   Shares

   Per
Share


   Net
Income


   Shares

   Per
Share


Basic Earnings per Share

                                     

Income available to common stockholders

   $ 30,211    70,358    $ 0.43    $ 21,177    66,036    $ 0.32
                

              

Effect of Dilutive Securities

                                     

Stock options and restricted stock

     —      1,570             —      998       

Convertible Debentures

     381    2,794             722    5,409       
    

  
         

  
      

Diluted Earnings per Share

                                     

Income available to common stockholders

   $ 30,592    74,722    $ 0.41    $ 21,899    72,443    $ 0.30
    

  
  

  

  
  

 

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Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

2. Earnings Per Share (continued)

 

     Six Months Ended

     July 31, 2004

   August 2, 2003

     (in thousands, except per share amounts)
    

Net

Income


   Shares

  

Per

Share


  

Net

Income


   Shares

   Per
Share


Basic Earnings per Share

                                     

Income available to common stockholders

   $ 61,979    69,168    $ 0.90    $ 39,105    66,051    $ 0.59
                

              

Effect of Dilutive Securities

                                     

Stock options and restricted stock

     —      1,609             —      659       

Convertible Debentures

     1,113    4,102             1,446    5,409       
    

  
         

  
      

Diluted Earnings per Share

                                     

Income available to common stockholders

   $ 63,092    74,879    $ 0.84    $ 40,551    72,119    $ 0.56
    

  
  

  

  
  

 

Options to purchase 1,348,925 and 1,301,525 shares of common stock during the quarter and six months ended July 31, 2004, respectively, and 1,471,499 and 3,808,202 shares of common stock during the quarter and six months ended August 2, 2003, 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.

 

3. Share-based Payments

 

The Company accounts for stock-based awards and employees’ purchase rights under the Associate Discount Stock Purchase Plan (“the 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 Stock Purchase Plan. Had compensation costs of option awards and employees’ purchase rights been determined under a fair value alternative method as stated in SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123”, 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 condensed financial statements as compensation expense. 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:

 

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Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

     Quarters Ended

   

Six Months Ended


 
     July 31,
2004


    August 2,
2003


    July 31,
2004


    August 2,
2003


 
     (dollars in thousands, except per share data)  

Net income:

                                

As reported

   $ 30,211     $ 21,177     $ 61,979     $ 39,105  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     (777 )     (955 )     (2,179 )     (1,928 )
    


 


 


 


Pro forma

   $ 29,434     $ 20,222     $ 59,800     $ 37,177  
    


 


 


 


Basic earnings per share:

                                

As reported

   $ 0.43     $ 0.32     $ 0.90     $ 0.59  
    


 


 


 


Pro forma

   $ 0.42     $ 0.30     $ 0.86     $ 0.56  
    


 


 


 


Diluted earnings per share:

                                

As reported

   $ 0.41     $ 0.30     $ 0.84     $ 0.56  
    


 


 


 


Pro forma

   $ 0.40     $ 0.29     $ 0.81     $ 0.53  
    


 


 


 


 

The estimated fair value of each option grant is calculated using the Black-Scholes option-pricing model, with the following weighted average assumptions:

 

     Quarters Ended

    Six Months Ended

 
     July 31, 2004

    August 2, 2003

    July 31, 2004

    August 2, 2003

 

Expected volatility

   29.6 %   52.9 %   34.3 %   53.1 %

Risk-free interest rate

   1.0 %   1.2 %   1.0 %   1.3 %

Expected life (years)

   4.0     4.0     4.0     4.0  

Dividend yield

   —       —       —       —    

 

4. Long-Term Debt

 

During Fiscal 1999, the Company issued an aggregate of $199,072,000 principal amount at maturity Convertible Subordinated Debentures due 2019 (the “Convertible Debentures”). On May 20, 2004 the Company notified the holders that it would redeem these Convertible Debentures on June 18, 2004 at $635.42 per $1,000.00 of the principal amount. The holders had the option to convert their Convertible Debentures into common stock of the Company prior to redemption. On June 18, 2004, all the Convertible Debentures were converted for an aggregate total of 5,409,867 shares of common stock. The conversion of Convertible Debentures has no effect on diluted earnings per share.

 

In November 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 matures on November 13, 2008 and is used by Ann Taylor and certain of its subsidiaries for letters of credit and other general

 

8


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

4. Long-Term Debt (continued)

 

corporate purposes. There were no borrowings outstanding under the Credit Facility at any point during the first six months of Fiscal 2004 or as of the date of this filing. 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; repurchase common stock held by employees not in excess of $100,000 per annum (with certain specified exceptions); and for certain other stated purposes.

 

5. Employee Benefits

 

The following table summarizes the components of net periodic pension cost for the Company:

 

     Quarters Ended

    Six Months Ended

 
    

July 31,

2004


   

August 2,

2003


   

July 31,

2004


   

August 2,

2003


 
     (in thousands)  

Service cost

   $ 1,051     $ 751     $ 2,103     $ 1,502  

Interest cost

     298       242       595       484  

Expected return on plan assets

     (375 )     (317 )     (750 )     (634 )

Amortization of prior service cost

     2       2       4       4  

Amortization of net loss

     164       165       328       330  
    


 


 


 


Net periodic pension cost

   $ 1,140     $ 843     $ 2,280     $ 1,686  
    


 


 


 


 

While no contributions to the Company’s pension plan are required in Fiscal 2004, the Company may make a contribution during the year.

 

6. Securities Repurchase Programs

 

During the first six months of Fiscal 2004, the Company repurchased 2,150,000 shares of its common stock at a cost of approximately $59,000,000 under the $75,000,000 securities repurchase program announced on March 9, 2004. The Company repurchased an additional 440,000 shares at a cost of approximately $10,000,000 under this program subsequent to July 31, 2004. On August 11, 2004, the Company announced a new $100,000,000 securities repurchase program, which replaced the March 9, 2004 plan. The Company has repurchased 1,100,000 shares of its common stock at a cost of approximately $27,000,000 under the August 11, 2004 plan through the date of this filing.

 

9


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management Overview

 

The Company achieved record net income for the second quarter of Fiscal 2004, driving earnings per share performance that increased 36.7% over last year. The Company’s new store growth strategy and strong comparable store sales contributed to the double-digit sales growth experienced during both the second quarter and first six months of Fiscal 2004. Significant indicators of this growth include the following:

 

  Total net sales were up 21.1% in the second quarter of Fiscal 2004 compared to the second quarter of Fiscal 2003, with Ann Taylor up 2.6% and Ann Taylor Loft up 48.9%. For the first six months of Fiscal 2004, total net sales were up 22.0% from the same period last year, with Ann Taylor up 4.2% and Ann Taylor Loft up 51.6%;

 

  Total comparable store sales for the second quarter of Fiscal 2004 were up 7.0%, with Ann Taylor up 0.8% and Ann Taylor Loft up 18.1%. Comparable store sales for the six month period ended July 31, 2004 were up 9.3%, with Ann Taylor up 2.4% and Ann Taylor Loft up 21.2%;

 

  Ann Taylor Loft experienced its fourth consecutive quarter of double-digit comparable store sales growth;

 

  The Company achieved net income of $30,211,000 and diluted earnings per share of $0.41, both records for a second quarter period, and contributing to record net income of $61,979,000 and diluted earnings per share of $0.84 for the six month period;

 

  All holders of the Company’s Convertible Debentures exercised their option to convert to common stock of the Company rather than accept the cash redemption offer.

 

The retail environment remains very competitive. While these operating results may be difficult to maintain, the Company remains positive about the remainder of Fiscal 2004 and plans to continue its store opening schedule using cash flow from operations. Management’s plan for future growth builds on the strengths discussed above, and is based on offering clients brand-appropriate merchandise at convenient, accessible locations. The Company’s ability to achieve this objective will be dependent on factors such as those outlined in the “Statement Regarding Forward-Looking Disclosures”.

 

While selling, general and administrative expenses for the first six months increased 0.3% over last year as a percentage of net sales, the Company anticipates that its increasing sales levels will allow it to adequately leverage these costs.

 

10


Table of Contents

Results of Operations

 

The following table sets forth consolidated income statement data expressed as a percentage of net sales:

 

     Quarters Ended

    Six Months Ended

 
     July 31,
2004


    August 2,
2003


    July 31,
2004


    August 2,
2003


 

Net sales

   100.0 %   100.0 %   100.0 %   100.0 %

Cost of sales

   47.0     48.1     44.5     47.2  
    

 

 

 

Gross margin

   53.0     51.9     55.5     52.8  

Selling, general and administrative expenses

   42.4     42.7     44.1     43.8  
    

 

 

 

Operating income

   10.6     9.2     11.4     9.0  

Interest income

   0.3     0.2     0.3     0.2  

Interest expense

   0.2     0.4     0.3     0.5  
    

 

 

 

Income before income taxes

   10.7     9.0     11.4     8.7  

Income tax provision

   4.3     3.6     4.6     3.4  
    

 

 

 

Net income

   6.4 %   5.4 %   6.8 %   5.3 %
    

 

 

 

 

The following table sets forth consolidated income statement data expressed as a percentage increase from the comparable prior year period:

 

     Quarters Ended

    Six Months Ended

 
     July 31,
2004


    August 2,
2003


    July 31,
2004


    August 2,
2003


 

Net sales

   21.1 %   13.7 %   22.0 %   7.8 %

Operating income

   39.7 %   16.7 %   56.5 %   0.1 %

Net income

   42.7 %   16.3 %   58.5 %   0.0 %

 

11


Table of Contents

Sales

 

The following table sets forth certain sales and store data:

 

     Quarters Ended

    Six Months Ended

 
     July 31,
2004


    August 2,
2003


    July 31,
2004


    August 2,
2003


 

Net sales (in thousands)

                                

Total Company (a)

   $ 472,634     $ 390,207     $ 905,880     $ 742,224  

Ann Taylor

     221,661       216,038       435,085       417,364  

AnnTaylor Loft

     208,541       140,008       393,928       259,931  

Comparable stores sales percentage

                                

Increase (decrease) (b)

                                

Total Company

     7.0 %     5.3 %     9.3 %     (0.5 )%

AnnTaylor

     0.8 %     4.9 %     2.4 %     (1.8 )%

AnnTaylor Loft

     18.1 %     5.7 %     21.2 %     1.7 %

Number of Stores

                                

Open at beginning of period

     667       602       648       584  

New Stores

     21       3       40       21  

Expanded stores

     1       3       1       4  

Closed stores

     1       2       1       2  

Open at end of period

     687       603       687       603  

Total square footage at end of period (in thousands) (c)

     3,893       3,408                  

(a) Total Company sales includes sales at Ann Taylor, Ann Taylor Loft and Ann Taylor Factory stores, as well as internet sales.
(b) Comparable store sales are calculated by excluding the net sales of a store for any month of one period if the store was not also open during the same month of the prior period. A store that is expanded by more than 15% is treated as a new store for the first year following the opening of the expanded store.
(c) Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space.

 

Net sales increased $82,427,000 or 21.1% in the second quarter of Fiscal 2004 over the comparable 2003 period due to increased comparable store sales and the opening of additional stores. The Company believes client acceptance of its brands, especially at Ann Taylor Loft, continued to drive sales. The Company’s net sales increased $163,656,000 or 22.0% to $905,880,000 in the first six months of Fiscal 2004 over the comparable 2003 period.

 

Gross Margin

 

Gross margin as a percentage of net sales increased to 53.0% in the second quarter of Fiscal 2004 from 51.9% in the second quarter of Fiscal 2003. The increase in gross margin as a percentage of net sales was primarily due to increased profitability at Ann Taylor Loft. For the first six months ended July 31, 2004, gross margin as a percentage of net sales increased to 55.5% compared to 52.8% for the same period last year. This increase was primarily due to higher full price sales at Ann Taylor Loft and higher margins on full price and non-full price sales at both divisions.

 

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Selling, General and Administrative Expenses

 

Selling, general and administrative expenses as a percentage of net sales decreased in the second quarter of Fiscal 2004 to 42.4% from 42.7% in the comparable 2003 period. This decrease was primarily due to increased leverage on fixed expenses as a result of higher comparable store sales, partially offset by increased marketing costs. Selling, general and administrative expenses as a percentage of net sales increased to 44.1% for the first six months of Fiscal 2004 compared to 43.8% for the same period last year. The increase was primarily due to higher marketing costs and an increase in the provision for management performance bonus. These increases were partially offset by an overall leveraging of expenses due to the increase in comparable store sales.

 

Interest Income

 

Interest income increased 66.7% in the second quarter of Fiscal 2004 to $1,295,000 from $777,000 in the comparable 2003 period due to increased cash balances.

 

Interest Expense

 

Interest expense decreased $595,000 in the second quarter of Fiscal 2004 to $1,079,000 from the comparable 2003 period. This decrease was due to the conversion of the outstanding Convertible Debentures, as discussed more fully below. The Company expects interest savings of approximately $2,300,000 in the second half of Fiscal 2004 as a result of the conversion.

 

Liquidity and Capital Resources

 

The Company’s primary source of working capital is cash flow from operations. For the six months ended July 31, 2004, cash flow provided by operating activities totaled $85,954,000. The following table sets forth other primary measures of the Company’s liquidity:

 

     July 31, 2004

   January 31, 2004

     (dollars in thousands)

Working capital

   $ 446,715    $ 415,748

Current ratio

     3.41:1      3.57:1

 

For the first six months of Fiscal 2004, net cash provided by operating activities increased primarily as a result of income before depreciation and amortization and an increase in accounts payable, offset by an increase in merchandise inventories. Inventory on a square foot basis increased 12.8% at the end of the second quarter from the end of Fiscal 2003. The Company also expects inventory levels to increase an additional ten to twenty percent on a per square foot basis for the remainder of 2004, due primarily to an overall change in product mix and product upgrades at the Ann Taylor division, costs associated with the phase-out of quota and incremental costs associated with shipping merchandise by air.

 

Cash used by investing activities during the first six months of Fiscal 2004 amounted to $34,815,000, and primarily related to the opening of new stores.

 

Cash used by financing activities during the first six months of Fiscal 2004 primarily related to the repurchase of common stock partially offset by proceeds received in connection with stock based compensation programs.

 

In March 2004, the Company announced a $75,000,000 securities repurchase plan. Through August 9, 2004, the Company repurchased 2,590,000 shares of its common stock at a cost of approximately $69,000,000 ($59,000,000 through July 31, 2004 and $10,000,000 thereafter) under this plan. On August 11,

 

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2004, the Company announced a new $100,000,000 securities repurchase plan replacing the $75,000,000 plan. Under the August 11, 2004 plan, the Company has repurchased 1,100,000 shares of its common stock at an approximate cost of $27,000,000 through the date of this filing.

 

In April 2004, 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 26, 2004 to stockholders of record at the close of business on May 11, 2004. All share and per share data presented herein reflects this stock split.

 

The Company expects its total capital expenditure requirements in Fiscal 2004 will be approximately $120,000,000. An important aspect of the Company’s business strategy is its store expansion program designed to reach new customers through the opening of new stores. The actual amount of the Company’s capital expenditures will depend in part on the number of stores opened, expanded and refurbished and on the amount of construction allowances the Company receives from the landlords of its new or expanded stores. Currently, the Company expects to open 11 Ann Taylor, 75 Ann Taylor Loft, and eight Ann Taylor Factory stores in Fiscal 2004. The Company expects to use cash flow from operations to fund its capital expenditure requirements.

 

A portion of the Fiscal 2004 capital expenditures relates to costs associated with the anticipated Fiscal 2005 relocation of the Company’s corporate offices in New York City. As a result of this relocation, the Company is adjusting the remaining lives of certain fixed assets to correlate to the expected move, the impact of which is not significant to the results of operations. In addition, the Company is expecting a one-time write-off of lease costs associated with the remaining term of the lease for the existing offices (which expires in September 2006) upon cessation of their use, the impact of which has not been determined.

 

During Fiscal 1999, the Company issued an aggregate of $199,072,000 principal amount at maturity Convertible Subordinated Debentures due 2019 (“Convertible Debentures”). On May 20, 2004 the Company notified the holders that it would redeem these Convertible Debentures on June 18, 2004 at $635.42 per $1,000.00 of the principal amount. The holders had the option to convert their Convertible Debentures into common stock of the Company prior to redemption. On June 18, 2004, all the Convertible Debentures were converted for an aggregate total of 5,409,867 shares of common stock. The conversion of Convertible Debentures has no effect on diluted earnings per share. As the result of the conversion of the Convertible Debentures, the Company’s total contractual obligations decreased by the face value of these securities, $199,072,000.

 

Critical Accounting Policies

 

Management has determined that the Company’s most critical accounting policies are those related to merchandise inventory valuation, intangible asset impairment, and income taxes. The Company continues to monitor its accounting policies to ensure proper application. There have been no changes to these policies as discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

 

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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”, “may”, “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(s); a significant change in the regulatory environment applicable to the Company’s business; risks associated with the possible inability of the Company, particularly through its sourcing and logistics functions, to operate within production and delivery constraints; the impact of quotas, and the elimination thereof; 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; the inability of the Company to hire, retain and train key personnel, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table sets forth information concerning purchases made by the Company of its common stock for the periods indicated (on a post split basis):

 

     Total Number
of Shares
Purchased (a)


   Average
Price Paid
Per Share


   Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plan (b)


  

Approximate
Dollar Value

of Shares

that May Yet

Be Purchased
Under Publicly
Announced Plan


May 2, 2004 to May 29, 2004

   13,063    $ 27.02    —      $ 62,370,940

May 30, 2004 to July 3, 2004

   601,934      28.39    600,000      45,338,780

July 4, 2004 to July 31, 2004

   1,100,000      26.66    1,100,000      16,014,298
    
         
      
     1,714,997    $ 27.27    1,700,000       
    
         
      

(a) Includes 14,997 shares of restricted stock repurchased in connection with employee compensation plans.

 

(b) These shares were part of a $75,000,000 securities repurchase plan, announced by the Company on March 9, 2004. Subsequent to July 31, 2004, the Company has repurchased 440,000 shares of its common stock at a cost of approximately $10,000,000, bringing the total repurchased under the March 9, 2004 plan to 2,590,000 shares. On August 11, 2004, the Company announced a new $100,000,000 securities repurchase plan. This plan replaced the March 9, 2004 plan and will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by resolution of the Board of Directors. Under the August 11, 2004 plan, the Company has repurchased 1,100,000 shares of its common stock at an approximate cost of $27,000,000 through the date of this filing.

 

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Item 6. Exhibits

 

Exhibit
Number


 

Description


10.1   Second Restated Amendment to the AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan, effective as of March 9, 2004.
10.2   Second Restated Second Amendment to the AnnTaylor Stores Corporation 2000 Stock Option and Restricted Stock Award Plan, effective as of March 9, 2004.
10.3   Second Restated Second Amendment to the AnnTaylor Stores Corporation 2002 Stock Option and Restricted Stock and Unit Award Plan, effective as of March 9, 2004.
10.4   Second Restated First Amendment to the AnnTaylor Stores Corporation 2003 Equity Incentive Plan, effective as of March 9, 2004.
10.5   Agreement of Lease, dated as of August 3, 2004, between AnnTaylor Stores Corporation and No. 1 Times Square Development LLC.
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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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 8, 2004   By:  

/S/    J. PATRICK SPAINHOUR


        J. Patrick Spainhour
        Chairman, Chief Executive Officer
        (Principal Executive Officer)
Date: September 8, 2004   By:  

/S/    JAMES M. SMITH


        James M. Smith
        Executive Vice President,
        Chief Financial Officer and Treasurer
        (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number


 

Description


10.1   Second Restated Amendment to the AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan, effective as of March 9, 2004.
10.2   Second Restated Second Amendment to the AnnTaylor Stores Corporation 2000 Stock Option and Restricted Stock Award Plan, effective as of March 9, 2004.
10.3   Second Restated Second Amendment to the AnnTaylor Stores Corporation 2002 Stock Option and Restricted Stock and Unit Award Plan, effective as of March 9, 2004.
10.4   Second Restated First Amendment to the AnnTaylor Stores Corporation 2003 Equity Incentive Plan, effective as of March 9, 2004.
10.5   Agreement of Lease, dated as of August 3, 2004, between AnnTaylor Stores Corporation and No.1 Times Square Development LLC.
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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