- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 MAY 3, 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 -------------- (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. Outstanding as of Class May 30, 2003 ----- ------------ Common Stock, $.0068 par value 44,290,384 ------------------------------ ---------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ================================================================================ 2 INDEX TO FORM 10-Q ------------------ PAGE NO. -------- PART I. FINANCIAL INFORMATION ------- --------------------- Item 1. Financial Statements Condensed Consolidated Statements of Income for the Quarters Ended May 3, 2003 and May 4, 2002........................................ 3 Condensed Consolidated Balance Sheets at May 3, 2003 and February 1, 2003................... 4 Condensed Consolidated Statements of Cash Flows for the Quarters Ended May 3, 2003 and May 4, 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..............................16 PART II. OTHER INFORMATION -------- ----------------- Item 4. Submission of Matters to a Vote of Security Holders..17 Item 6. Exhibits and Reports on Form 8-K.....................18 SIGNATURES........................................................19 ---------- CERTIFICATIONS ...................................................20 -------------- EXHIBIT INDEX.....................................................24 ------------- ================================================================================ 3 PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS ANNTAYLOR STORES CORPORATION ---------------------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- FOR THE QUARTERS ENDED MAY 3, 2003 AND MAY 4, 2002 (UNAUDITED) QUARTERS ENDED ------------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- ` (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales ........................................ $352,017 $345,392 Cost of sales .................................... 163,002 158,829 ------- ------- Gross margin ..................................... 189,015 186,563 Selling, general and administrative expenses ..... 158,618 151,081 ------- ------- Operating income ................................. 30,397 35,482 Interest income .................................. 688 516 Interest expense ................................. 1,694 1,699 ------- ------- Income before income taxes ....................... 29,391 34,299 Income tax provision ............................. 11,463 13,377 ------- ------- Net income .................................... $ 17,928 $ 20,922 ======= ======= Basic earnings per share of common stock ......... $ 0.41 $ 0.48 ======= ======= Diluted earnings per share of common stock ....... $ 0.39 $ 0.45 ======= ======= See accompanying notes to condensed consolidated financial statements. 3 ================================================================================ 4 ANNTAYLOR STORES CORPORATION ---------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- MAY 3, 2003 AND FEBRUARY 1, 2003 (UNAUDITED) MAY 3, FEBRUARY 1, 2003 2003 ----------- ----------- ASSETS (IN THOUSANDS) Current assets Cash and cash equivalents ...................... $ 188,274 $ 212,821 Accounts receivable, net ....................... 20,436 10,367 Merchandise inventories ........................ 196,401 185,484 Prepaid expenses and other current assets ...... 53,975 46,599 ----------- ----------- Total current assets ....................... 459,086 455,271 Property and equipment, net ...................... 242,948 247,115 Goodwill, net .................................... 286,579 286,579 Deferred financing costs, net .................... 3,949 4,170 Other assets ..................................... 16,996 17,691 ----------- ----------- Total assets ............................... $ 1,009,558 $ 1,010,826 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ............................... $ 62,003 $ 57,058 Accrued expenses ............................... 79,170 94,137 ----------- ----------- Total current liabilities .................. 141,173 151,195 Long-term debt, net .............................. 122,515 121,652 Deferred lease costs and other liabilities ....... 26,075 23,561 Stockholders' equity Common stock, $.0068 par value; 120,000,000 shares authorized; 48,953,485 and 48,932,860 shares issued, respectively ................ 332 332 Additional paid-in capital ..................... 500,420 500,061 Retained earnings .............................. 313,401 296,113 Deferred compensation on restricted stock ...... (5,584) (3,968) ----------- ----------- 808,569 792,538 Treasury stock, at cost 4,660,851 and 4,050,972 shares, respectively .................. (88,774) (78,120) ----------- ----------- Total stockholders' equity ................. 719,795 714,418 ----------- ----------- Total liabilities and stockholders' equity . $ 1,009,558 $ 1,010,826 =========== =========== See accompanying notes to condensed consolidated financial statements. 4 ================================================================================ 5 ANNTAYLOR STORES CORPORATION ---------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- FOR THE QUARTERS ENDED MAY 3, 2003 AND MAY 4, 2002 (UNAUDITED) QUARTERS ENDED MAY 3, 2003 MAY 4, 2002 --------- --------- (IN THOUSANDS) Operating activities: Net income ....................................... $ 17,928 $ 20,922 Adjustments to reconcile net income to net cash provided (used) by operating activities: Amortization of deferred compensation .......... 780 1,391 Deferred income taxes .......................... 231 --- Depreciation and amortization .................. 12,649 11,730 Gain on sale of proprietary credit card accounts receivable ..................... --- (2,095) Loss on disposal of property and equipment ..... 552 306 Non-cash interest .............................. 1,084 1,056 Tax benefit from exercise of stock options ..... 53 2,794 Changes in assets and liabilities: Receivables .................................. (10,069) (5,277) Merchandise inventories ...................... (10,917) 7,842 Prepaid expenses and other current assets .... (6,808) 396 Accounts payable and accrued expenses ........ (10,022) (1,237) Other non-current assets and liabilities, net 2,411 1,703 --------- --------- Net cash provided (used) by operating activities . (2,128) 39,531 --------- --------- Investing activities: Purchases of property and equipment .............. (9,035) (11,045) Net proceeds from sale of proprietary credit card accounts receivable ................ --- 57,800 --------- --------- Net cash provided (used) by investing activities . (9,035) 46,755 --------- --------- Financing activities: Payments on mortgage ............................. --- (1,250) Payment of financing costs ....................... --- (14) Common stock activity related to stock based compensation programs, net ............... (603) 9,449 Repurchase of common stock ....................... (12,781) --- --------- --------- Net cash provided (used) by financing activities . (13,384) 8,185 --------- --------- Net increase (decrease) in cash .................... (24,547) 94,471 Cash and cash equivalents, beginning of period ..... 212,821 30,037 --------- --------- Cash and cash equivalents, end of period ........... $ 188,274 $ 124,508 ========= ========= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest......... $ 301 $ 354 ========= ========= Cash paid during the period for income taxes..... $ 1,022 $ 2,581 ========= ========= See accompanying notes to condensed consolidated financial statements. 5 ================================================================================ 6 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 2003 interim period 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 May 3, 2003 and May 4, 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. All share and per share amounts for the period ended May 4, 2002 have been restated to reflect the effect of the stock split: [Tables next page] 6 ================================================================================ 7 ANNTAYLOR STORES CORPORATION ---------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (UNAUDITED) 2. EARNINGS PER SHARE (CONTINUED) - -- ------------------------------ QUARTERS ENDED -------------------------------------------------------------- MAY 3, 2003 MAY 4, 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 $17,928 44,043 $0.41 $20,922 43,978 $0.48 EFFECT OF DILUTIVE SECURITIES - ----------------------------- Stock options and restricted stock --- 266 --- 721 Convertible Debentures 724 3,606 706 3,606 ------- ------ ------- ------ DILUTED EARNINGS PER SHARE - -------------------------- Income available to common stockholders $18,652 47,915 $0.39 $21,628 48,305 $0.45 ======= ====== ===== ======= ====== ===== Options to purchase 2,768,893 and 875,625 shares of common stock during the quarters ended May 3, 2003 and May 4, 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 shares of common stock during those periods. 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 7 ================================================================================ 8 ANNTAYLOR STORES CORPORATION ---------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (UNAUDITED) ----------- 3. STOCK-BASED AWARDS (CONTINUED) - -- ------------------------------ 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 --------------------- MAY 3, MAY 4, 2003 2002 ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income: As reported........................................... $17,928 $20,922 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects... (974) (898) ------- ------- Pro forma............................................. $16,954 $20,024 ======= ======= Basic earnings per share: As reported........................................... $ 0.41 $ 0.48 ======= ======= Pro forma............................................. $ 0.38 $ 0.46 ======= ======= Diluted earnings per share: As reported........................................... $ 0.39 $ 0.45 ======= ======= Pro forma ............................................ $ 0.37 $ 0.43 ======= ======= 4. LONG-TERM DEBT - -- -------------- Long-term debt outstanding at May 3, 2003 was $122,515,000, which represents the net carrying value of the Company's convertible debentures on that date. 8 ================================================================================ 9 ANNTAYLOR STORES CORPORATION ---------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (UNAUDITED) 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. Management is currently evaluating the provisions of SFAS No. 150, and does not believe that it will have an impact on the Company's consolidated financial statements. 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 is currently evaluating the provisions of SFAS No. 149, and does not believe that it will have a significant impact on the Company's consolidated financial statements. In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities - an Interpretation of Accounting Research Bulletin No. 51". FIN No. 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risks and rewards of ownership among their owners and other parties involved. The provisions of FIN No. 46 are applicable immediately to all variable interest entities created after January 31, 2003 and variable interest entities in which a company obtains an interest after that date. For variable interest entities created before January 31, 2003, the provisions of this interpretation are effective July 1, 2003. Management has determined FIN No. 46 will have no impact on the Company's consolidated financial statements. 9 ================================================================================ 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS QUARTERS ENDED ------------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- Number of Stores: Open at beginning of period............... 584 538 Opened during period...................... 18 13 Expanded or remodeled during period*...... 1 --- Closed during period...................... --- --- Open at end of period..................... 602 551 Type of Stores Open at End of Period: Ann Taylor stores......................... 351 343 Ann Taylor Loft stores.................... 224 188 Ann Taylor Factory stores................. 27 20 -------------------- * Expanded stores are excluded from comparable store sales for the first year following expansion. QUARTER ENDED MAY 3, 2003 COMPARED TO QUARTER ENDED MAY 4, 2002 The Company's net sales in the first quarter of fiscal 2003 increased to $352,017,000 from $345,392,000 in the first quarter of fiscal 2002, an increase of $6,625,000, or 1.9 percent. By division, net sales for the first quarter of fiscal 2003, were $201,326,000 for Ann Taylor and $119,923,000 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. Comparable store sales for the first quarter of fiscal 2003 decreased 6.5 percent, compared to an increase of 0.1 percent in the first quarter of fiscal 2002. Comparable store sales by division were down 8.1 percent for Ann Taylor and down 2.8 percent for Ann Taylor Loft. Management believes that the decrease in comparable store sales was, in part, the result of client dissatisfaction with certain of the Company's product offerings and merchandise assortment available in Ann Taylor stores. Gross margin as a percentage of net sales decreased slightly to 53.7 percent in the first quarter of fiscal 2003, compared to 54.0 percent in the first quarter of fiscal 2002. 10 ================================================================================ 11 Selling, general and administrative expenses were $158,618,000, or 45.1 percent of net sales, in the first quarter of fiscal 2003, compared to $151,081,000, or 43.7 percent of net sales, in the first quarter of fiscal 2002. The increase in selling, general and administrative expenses as a percentage of sales was primarily the result of an overall deleveraging of expenses due to negative comparable store sales, and higher tenancy and new store operations expenses. These increases were partially offset by a decrease in the provision for management performance bonus. Additionally, 2002 was favorably impacted by the $2,095,000 gain on the sale of the Ann Taylor proprietary credit card. As a result of the foregoing factors, the Company had operating income of $30,397,000, or 8.6 percent of net sales, in the first quarter of fiscal 2003, compared to $35,482,000, or 10.3 percent of net sales, in the first quarter of fiscal 2002. Interest income was $688,000 in the first quarter of fiscal 2003, compared to $516,000 in the first quarter of fiscal 2002. The increase is attributable to higher cash on hand, partially offset by lower interest rates. Interest expense was $1,694,000 in the first quarter of fiscal 2003, compared to $1,699,000 in the first quarter of fiscal 2002. The income tax provision was $11,463,000, or 39 percent of income before income taxes, in the first quarter of fiscal 2003, compared to $13,377,000, or 39 percent of income before income taxes, in the first quarter of fiscal 2002. As a result of the foregoing factors, the Company had net income of $17,928,000, or 5.1 percent of net sales, for the first quarter of fiscal 2003, compared to $20,922,000, or 6.1 percent of net sales, for the first quarter of fiscal 2002. AnnTaylor Stores Corporation conducts no business other than the management of Ann Taylor. FINANCIAL CONDITION For the first quarter of fiscal 2003, net cash used by operating activities totaled $2,128,000, primarily as a result of an increase in working capital. Cash used by investing activities during the first quarter of fiscal 2003 amounted to $9,035,000, for the purchase of property and equipment. Cash used by financing activities during the first quarter of fiscal 2003 amounted to $13,384,000 due primarily the Company's repurchase of common stock. 11 ================================================================================ 12 Merchandise inventories were $196,401,000 at May 3, 2003, compared to inventories of $185,484,000 at February 1, 2003. Merchandise inventories at May 3, 2003 and February 1, 2003 included approximately $31,589,000 and $41,771,000, respectively, of inventory associated with the Company's sourcing division, which is primarily finished goods in transit from factories. On a per square foot basis, inventories at the end of the first quarter of fiscal 2003, including inventories attributable to the Company's sourcing division, were up approximately 3 percent compared to inventories at the end of fiscal 2002. 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 $85,000,000. For the three months ended May 3, 2003, capital expenditures totaled $9,035,000, net of landlord construction allowances. During the first three months of fiscal 2003, the Company opened one new Ann Taylor store and 17 new Ann Taylor Loft stores. For the remainder of fiscal 2003, the Company expects to open 10 additional Ann Taylor stores, 49 additional Ann Taylor Loft stores and one Ann Taylor Factory store. In order to finance its operations and capital requirements, the Company expects to use internally generated funds, trade credit and funds available to it under its credit facility. The Company believes that cash flow from operations and funds available under 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. All share and per share amounts for the period ended May 4, 2002 have been restated to reflect the effect of the stock split. In August 2002, the Company's Board of Directors authorized a $50 million securities repurchase program. The repurchase program is subject to compliance with the Company's revolving credit agreement. Pursuant to this program, purchases of shares of the Company's Common Stock and/or its Convertible Debentures due 2019 may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of Common Stock will become treasury shares available 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 quarter of 2003 in connection with this securities repurchase program, at a total cost of approximately $12,800,000. 12 ================================================================================ 13 RECENT ACCOUNTING PRONOUNCEMENTS On May 15, 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement 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. Management is currently evaluating the provisions of this statement, and does not believe that it will have an impact on the Company's consolidated financial statements. On April 30, 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003. Management is currently evaluating the provisions of this statement, and does not believe that it will have a significant impact on the Company's consolidated financial statements. In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities - an Interpretation of Accounting Research Bulletin No. 51". FIN No. 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risks and rewards of ownership among their owners and other parties involved. The provisions of FIN No. 46 are applicable immediately to all variable interest entities created after January 31, 2003 and variable interest entities in which a company obtains an interest after that date. For variable interest entities created before January 31, 2003, the provisions of this interpretation are effective July 1, 2003. Management has determined FIN No. 46 will have no impact on the Company's consolidated financial statements. CRITICAL ACCOUNTING POLICIES Management has determined that the Company's most critical accounting policies are those related to merchandise inventory valuation, intangible asset impairment, income taxes and pension accounting. 13 ================================================================================ 14 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 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 has also been involved in both foreign and domestic tax audits. At any given time, many tax years are subject to audit by various taxing authorities. 14 ================================================================================ 15 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. 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. 15 ================================================================================ 16 ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days of the filing of this quarterly report (the "Evaluation Date"). 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 were no significant changes in the Company's internal controls or in other factors that could significantly affect such controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses. 16 ================================================================================ 17 PART II. OTHER INFORMATION -------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AnnTaylor Stores Corporation's 2003 Annual Meeting of Stockholders was held on May 1, 2003. The following matters were voted upon and approved by the Company's stockholders at the meeting: 1. Messrs. Gerald S. Armstrong and Wesley E. Cantrell, and Ms. Hanne M. Merriman, were re-elected as Class III Directors of the Company for terms expiring in 2006, or until their respective successors are elected and qualified. 38,241,680, 39,720,356 and 38,239,321 shares were voted in favor of, no shares were voted against, and 2,943,517, 1,464,841, and 2,945,876 shares abstained from voting on, the re-election of Messrs. Armstrong and Cantrell, and Ms. Merriman, respectively. 2. The material terms of the performance goals under the Company's Long Term Cash Incentive Compensation Plan, as amended, were re-approved. 39,923,212 shares were voted in favor of, 1,241,264 shares were voted against and 20,721 shares abstained from voting on, this proposal. 3. The Company's 2003 Equity Incentive Plan, adopted by the Board of Directors, was approved. 33,334,806 shares were voted in favor of, 7,831,165 shares were voted against and 19,226 shares abstained from voting on, this proposal. 4. The engagement of Deloitte & Touche LLP as the Company's independent auditors for the 2003 fiscal year was ratified. 35,785,987 shares were voted in favor of, 5,386,739 shares were voted against and 12,471 shares abstained from voting on, this proposal. 17 ================================================================================ 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Number Description ------- -------------------------------------------------------- 10.1 First Amendment to the AnnTaylor Stores Corporation 2002 Stock Option and Restricted Stock and Unit Award Plan, effective as of March 11, 2003. 10.2 Employment Agreement, dated as of March 28, 2003, between the Company and Jerome Jessup. 10.3 AnnTaylor Stores Corporation 2003 Equity Incentive Plan. 99.1 Certification of chief executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: The following reports on Form 8-K were filed during the quarter covered by this report: DATE OF REPORT ITEM(S) REPORTED -------------- ---------------- 2/6/2003 Item 5 and Item 7 3/11/2003 Item 5 and Item 7 4/10/2003 Item 7 and Item 9 The report on Form 8-K dated March 11, 2003 included the Company's Condensed Consolidated Statements of Operations for the quarters and fiscal years ended February 1, 2003 and February 2, 2002 and Condensed Consolidated Balance Sheets at February 1, 2003 and February 2, 2002. 18 ================================================================================ 19 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: June 13, 2003 By: /s/J. Patrick Spainhour ---------------- --------------------------- J. Patrick Spainhour Chairman and Chief Executive Officer Date: June 13, 2003 By: /s/James M. Smith ---------------- --------------------------- James M. Smith Senior Vice President, Chief Financial Officer and Treasurer 19 ================================================================================ 20 CERTIFICATION ------------- I, J. Patrick Spainhour, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AnnTaylor Stores Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 20 ================================================================================ 21 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 13, 2003 /s/J. Patrick Spainhour ----------------------- --------------------------------- J. Patrick Spainhour Chairman and Chief Executive Officer 21 ================================================================================ 22 CERTIFICATION ------------- I, James M. Smith, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AnnTaylor Stores Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 22 ================================================================================ 23 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 13, 2003 /s/James M. Smith ------------------------- ------------------------------ James M. Smith Senior Vice President, Chief Financial Officer and Treasurer 23 ================================================================================ 24 Exhibit Index - -------------- Exhibit Number Description 10.1 First Amendment to the AnnTaylor Stores Corporation 2002 Stock Option and Restricted Stock and Unit Award Plan, effective as of March 11, 2003. 10.2 Employment Agreement, dated as of March 28, 2003, between the Company and Jerome Jessup. 10.3 AnnTaylor Stores Corporation 2003 Equity Incentive Plan. 99.1 Certification of chief executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 24