<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to______________
COMMISSION FILE NUMBER: 0-23760
AMERICAN EAGLE OUTFITTERS, INC.
(Exact name of registrant as specified in its charter)
OHIO NO. 25-1724320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 THORN HILL DRIVE, WARRENDALE, PA 15086-7528
(Address of principal executive offices) (Zipcode)
(412) 776-4857
(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE, 9,929,150 SHARES OUTSTANDING AS OF NOVEMBER 1, 1997
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AMERICAN EAGLE OUTFITTERS, INC.
-------------------------------
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
November 1, 1997 (unaudited) and February 1, 1997 3
Consolidated Statements of Operations (unaudited)
Three months and nine months ended November 1, 1997 and
November 2, 1996 4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended November 1, 1997 and November 2, 1996 5
Notes to Consolidated Financial Statements 6-8
Review By Independent Accountants 9
Independent Accountants' Review Report 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-12
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 23 Acknowledgment of Independent Accountants 15
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except common stock share amounts) November 1, February 1,
ASSETS 1997 1997
---- ----
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents $ 12,627 $ 34,326
Merchandise inventory 58,913 27,117
Receivables 10,968 3,556
Prepaid expenses and other 5,254 4,381
Deferred income taxes 5,741 4,380
-------- --------
Total current assets 93,503 73,760
-------- --------
Fixed assets:
Fixtures and equipment 25,528 23,118
Leasehold improvements 35,628 32,671
-------- --------
61,156 55,789
Less: Accumulated depreciation and amortization 22,708 21,598
-------- --------
38,448 34,191
-------- --------
Other assets 2,619 2,487
-------- --------
Total assets $134,570 $110,438
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 41,223 $ 20,430
Accrued compensation and payroll taxes 6,705 4,926
Accrued rent 7,227 6,006
Accrued income and other taxes 3,210 5,478
Other liabilities and accrued expenses 2,779 2,542
-------- --------
Total current liabilities 61,144 39,382
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Stockholders' equity:
Common stock, 30,000,000 shares authorized, 10,063,150
shares issued (10,051,950 shares at February 1, 1997) 53,339 52,863
Contributed capital 5,365 5,535
Retained earnings 18,645 17,119
-------- --------
77,349 75,517
Less: Deferred compensation 2,298 2,836
Treasury stock, 134,000 shares 1,625 1,625
-------- --------
Total stockholders' equity 73,426 71,056
-------- --------
Total liabilities and stockholders' equity $134,570 $110,438
======== ========
</TABLE>
See notes to Consolidated Financial Statements
3
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $104,902 $78,846 $252,013 $203,499
Cost of sales, including certain buying, occupancy and
warehousing expenses 66,248 52,996 174,053 142,800
-------- ------- -------- --------
Gross profit 38,654 25,850 77,960 60,699
Selling, general and administrative expenses 26,726 21,075 67,109 57,780
Depreciation and amortization 1,859 1,451 5,299 4,544
-------- ------- -------- --------
Operating income (loss) 10,069 3,324 5,552 (1,625)
Interest income, net 270 211 669 800
-------- ------- -------- --------
Income (loss) before income taxes 10,339 3,535 6,221 (825)
Provision (benefit) for income taxes 4,063 1,390 2,444 (325)
-------- ------- -------- --------
Net income (loss) $ 6,276 $ 2,145 $ 3,777 $ (500)
======== ======= ======== ========
Net income (loss) per common and common share
equivalent $ 0.61 $ 0.21 $ 0.37 $ (0.05)
======== ======= ======== ========
Weighted average number of shares outstanding 10,318 10,259 10,313 10,247
======== ======= ======== ========
Retained earnings, beginning $ 12,369 $ 8,549 17,119 $ 11,194
Net income (loss) 6,276 2,145 3,777 (500)
Acquisition of Prophecy, Ltd. -- -- (2,251) --
-------- ------- -------- --------
Retained earnings, ending $ 18,645 $10,694 18,645 $ 10,694
======== ======= ======== ========
</TABLE>
See notes to Consolidated Financial Statements
4
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
November 1, November 2,
1997 1996
---- ----
<S> <C> <C>
Net income (loss) $ 3,777 $ (500)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
USED FOR OPERATING ACTIVITIES:
Depreciation and amortization 5,299 4,544
Loss on impairment and write-off of assets 1,135 1,459
Restricted stock compensation 715 723
Deferred income taxes (19) (2,094)
CHANGES IN ASSETS AND LIABILITIES:
Merchandise inventory (31,538) (34,833)
Receivables (6,007) 1,533
Prepaid and other (1,052) (209)
Accounts payable 15,685 21,836
Accrued liabilities 1,266 (2,201)
-------- --------
Total adjustments (14,516) (9,242)
-------- --------
Net cash used for operating activities (10,739) (9,742)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (10,168) (7,575)
Investment in Prophecy, Ltd. (900) --
Collection on notes from sale of outlet stores -- 3,568
Proceeds from sale of fixed assets 37 2,299
-------- --------
Net cash used for investing activities (11,031) (1,708)
-------- --------
FINANCING ACTIVITIES:
Stock options exercised 71 382
-------- --------
Net cash provided by financing activities 71 382
-------- --------
Net decrease in cash (21,699) (11,068)
Cash - beginning of period 34,326 19,986
-------- --------
Cash - end of period $ 12,627 $ 8,918
======== ========
</TABLE>
See notes to Consolidated Financial Statements
5
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AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of American Eagle Outfitters,
Inc. (the "Company") at November 1, 1997 and for the three and nine month
periods ended November 1, 1997 (the "current period") and November 2, 1996 (the
"prior period") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The Consolidated
Financial Statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The Consolidated Balance Sheet at February 1,
1997 was derived from the audited financial statements. The Company's business
is affected by the pattern of seasonality common to most retail apparel
businesses. The results for the current and prior periods are not necessarily
indicative of future financial results.
Certain notes and other information have been condensed or omitted from the
interim Consolidated Financial Statements presented in this Quarterly Report on
Form 10-Q. Therefore, these Consolidated Financial Statements should be read in
conjunction with the Company's Fiscal 1996 Annual Report.
2. BASIS OF PRESENTATION
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. On an ongoing basis,
management reviews its estimates based on currently available information.
Changes in facts and circumstances may result in revised estimates.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common shares
outstanding and common stock equivalents outstanding during the periods
presented.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted in the Company's 1997
annual report. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary (termed basic earnings per
share) earnings per share, the dilutive effect of stock options will be
excluded. The impact of Statement 128 on the calculation of primary and fully
diluted earnings per share for the three and nine month periods ended November
1, 1997 and November 2, 1996 is not expected to be material.
RECLASSIFICATION
Certain reclassifications have been made to the Consolidated Financial
Statements for the prior period in order to conform to the November 1, 1997
presentation.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Because no borrowings were required under the terms of the Company's line of
credit, there were no amounts paid for interest during the nine months ended
November 1, 1997 or November 2, 1996. Income tax payments were $4.6 million and
$2.6 million during the nine months ended November 1, 1997 and November 2, 1996,
respectively.
6
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4. RELATED PARTY TRANSACTIONS
As described in the information that follows, the Company has various
transactions with related parties. The nature of the relationship is primarily
through common ownership. The Company has an operating lease for its corporate
headquarters and distribution center with an affiliate of the Company. The
lease, which was entered into on January 1, 1996, and expires on December 31,
2010, provides for annual rental payments of approximately $1.2 million through
2001, $1.6 million through 2006, and $1.8 million through the end of the lease.
In addition, the Company and its subsidiaries purchase merchandise from and sell
merchandise to various related parties and use the services of a related
importing company.
During the current period, the Company provided a short-term loan in the amount
of $3.0 million to Azteca Production International, a related party. The terms
of the note include annual interest at 7% plus margin defined as the difference
between 8.5% and National City Bank's prime lending rate. Management expects the
loan to be paid in full by April 1998. The note receivable outstanding balance
of approximately $2.1 million is included in Accounts Receivable as of November
1, 1997. Subsequent to November 1, 1997, the loan was amended to increase the
outstanding amount to $3.0 million.
Transactions with these related parties and associated balance sheet amounts
were as follows:
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Merchandise purchases plus
import administrative charges $24,578 $15,865 $55,825 $34,665
Accounts payable $16,407 $16,235 $16,407 $16,235
Accounts receivable $ 5,226 $ 756 $ 5,226 $ 756
Rent expense $ 387 $ 388 $ 1,175 $ 1,171
Merchandise sales $ 3,389 $ 231 $ 7,661 $ 1,211
</TABLE>
The Company has provided one-year loans, which are renewed annually, to certain
officers and other individuals to pay the taxes on the restricted stock that
vested in April 1995 and April 1997. As of November 1, 1997, the outstanding
value of these loans, including interest at 6.8%, approximated $451,000 as
compared with $361,000 at November 2, 1996.
7
<PAGE> 8
5. ACCOUNTS RECEIVABLE
Accounts Receivable is comprised of the following:
<TABLE>
<CAPTION>
November 1, February 1,
1997 1997
---- ----
<S> <C> <C>
Accounts Receivable - Landlord $ 2,084 $1,336
Related Party Accounts and Notes Receivable 5,226 1,334
Accounts Receivable - Other 3,658 886
------- ------
Total $10,968 $3,556
======= ======
</TABLE>
6. INCOME TAXES
The provisions of FASB No. 109, "Accounting for Income Taxes", have been
reflected in the preparation of the accompanying Consolidated Financial
Statements. For the nine months ended November 1, 1997 and November 2, 1996, the
effective tax rate used to provide income tax amounts approximated 39%.
7. LEASE COMMITMENTS
The Company is contingently liable for the rental payments totaling
approximately $5.3 million for the outlet stores which were sold in October
1995.
8. ACQUISITION OF PROPHECY, LTD.
Effective May 4, 1997, the Company acquired Prophecy Ltd. (Prophecy), a New
York-based contract apparel manufacturer. The majority partner of Prophecy was
the Schottenstein family. The goals of the acquisition are to leverage the
talent and expense of the Company's New York design office and to use Prophecy's
production expertise and manufacturing relationships to shorten the product
delivery cycle and enable the Company to continually improve product quality and
value. The terms of the acquisition included a cash payment of $0.9 million at
closing as well as the assumption of net liabilities of approximately $2.7
million. The acquisition was accounted for as a purchase; however, the assets
acquired and the liabilities assumed have been recorded at historic carrying
value because Prophecy is under common control with the Company. The premium
paid in excess of Prophecy's book value was recorded as a reduction to equity.
The results of operations of Prophecy are included in the accompanying
Consolidated Financial Statements from the date of acquisition.
9. SUBSEQUENT EVENT
On December 8, 1997, the Board of Directors approved a three-for-two stock
split to shareholders of record on December 19, 1997. The additional shares will
be distributed on January 5, 1998. The per share information included in this
quarterly report has not been restated to give effect to this split, as the
action was authorized and approved subsequent to the release of third quarter
earnings to the public. All per share information will be retroactively restated
for this split during the fourth quarter of the current fiscal year in
conjunction with the Company's adoption of Financial Accounting Standards Board
Statement No. 128, "Earnings Per Share."
8
<PAGE> 9
REVIEW BY INDEPENDENT ACCOUNTANTS
Ernst & Young LLP, our independent accountants, have performed a limited review
of the Consolidated Financial Statements for the quarters ended November 1, 1997
and November 2,1996, as indicated in their report on the limited review included
below. Since they did not perform an audit, they express no opinion on the
Consolidated Financial Statements referred to above. Management has given effect
to any significant adjustments and disclosures proposed in the course of the
limited review.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
American Eagle Outfitters, Inc. and subsidiaries
We have reviewed the accompanying consolidated balance sheet of American Eagle
Outfitters, Inc. and subsidiaries as of November 1, 1997, and the related
consolidated statements of operations for the three-month and nine-month periods
ended November 1, 1997 and November 2, 1996 and the consolidated statements of
cash flows for the nine-month periods ended November 1, 1997 and November 2,
1996. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of American Eagle Outfitters, Inc. and
subsidiaries as of February 1, 1997, and the related consolidated statements of
operations and cash flows for the year then ended (not presented herein) and in
our report dated March 7, 1997 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of February 1, 1997, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
Pittsburgh, Pennsylvania
November 19, 1997
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of the listed items included in the Company's
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain buying,
occupancy and warehousing expenses 63.2 67.3 69.1 70.2
----- ----- ----- -----
Gross profit 36.8 32.7 30.9 29.8
Selling, general and administrative expenses 25.4 26.7 26.6 28.4
Depreciation and amortization 1.8 1.8 2.1 2.2
----- ----- ----- -----
Operating income (loss) 9.6 4.2 2.2 (0.8)
Interest income, net 0.3 0.3 0.3 0.4
----- ----- ----- -----
Income (loss) before income taxes 9.9 4.5 2.5 (0.4)
Provision (benefit) for income taxes 3.9 1.8 1.0 (0.2)
----- ----- ----- -----
Net income (loss) 6.0% 2.7% 1.5% (0.2)%
===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED NOVEMBER 1, 1997 TO THREE MONTHS ENDED NOVEMBER
2, 1996
Net sales for the three months ended November 1, 1997 (the "current period")
increased 33.0% to $104.9 million from $78.8 million for the three months ended
November 2, 1996 (the "prior period"). The increase of $26.1 million in net
sales resulted primarily from increases of $18.1 million or 23.8% from
comparable store sales, $5.4 million from new stores, and $4.2 million from
non-comparable store sales, offset by decreases of $0.9 million from closed
store sales and $0.7 from merchandise sales to Mycal Ltd. (formerly Nimius). The
total increase in net sales resulted from an increase in units sold rather than
from an increase in prices. The Company operated 332 stores at the end of the
current period compared to 298 stores operated at the end of the prior period.
Gross profit for the current period increased 49.5% to $38.7 million from $25.9
million for the prior period. Gross profit as a percent of net sales for the
current period increased to 36.8% from 32.7% for the prior period. The increase
in gross profit as a percent of sales was attributable to a 1.3% increase in
merchandise margins, as well as an improvement of 2.8% in buying, occupancy, and
warehousing costs reflecting improved leveraging of these expenses. The increase
in merchandise margins resulted primarily from reduced markdowns as a rate to
sales as compared to the prior period, as well as a reduction in cost of goods
sold in the current period related to merchandise purchases by Mycal Ltd.
Selling, general and administrative expenses for the current period increased to
$26.7 million from $21.1 million for the prior period. As a percent of net
sales, these expenses decreased to 25.4% from 26.7% for the prior period due to
better leveraging of these expenses. The increase of $5.6 million resulted from
an increase of in store operating expenses to support the new store growth and
increased compensation and benefit costs.
Depreciation and amortization expense for the current period increased to $1.9
million from $1.5 million for the prior period and represented 1.8% of sales for
both periods.
Interest income for the current period increased to $0.3 million from $0.2
million for the prior period because of higher cash balances
10
<PAGE> 11
available for investment. No borrowings were required under the terms of the
Company's line of credit during the current period.
The income before income taxes for the current period increased to $10.3 million
from $3.5 million income before income taxes for the prior period. As a percent
of net sales, the income before income taxes for the current period increased to
9.9% from 4.5% for the prior period. The increase in income before income taxes
as a percent of sales was attributable to a 4.2% improvement in leveraging of
store occupancy and warehousing expenses, and selling, general, and
administrative expenses as well as improved merchandise margins of 1.2%.
COMPARISON OF NINE MONTHS ENDED NOVEMBER 1, 1997 TO NINE MONTHS ENDED NOVEMBER
2, 1996
Net sales for the nine months ended November 1, 1997 (the "current period")
increased 23.8% to $252.0 million from $203.5 million for the nine months ended
November 2, 1996 (the "prior period"). The increase of $48.5 million in net
sales resulted primarily from increases of $27.8 million or 14.2% from
comparable store sales, $16.8 million from non-comparable stores sales and $9.0
million from new stores, offset by decreases of $3.9 million from closed store
sales and $1.2 million from merchandise sales to Mycal Ltd. (formerly Nimius).
The total increase in net sales resulted from an increase in units sold rather
than from an increase in prices. The Company operated 332 stores at the end of
the current period compared to 298 stores operated at the end of the prior
period.
Gross profit for the current period increased 28.4% to $78.0 million from $60.7
million for the prior period. Gross profit as a percent of net sales for the
current period increased to 30.9% from 29.8% for the prior period. This increase
in gross profit as a percent of net sales, was attributable to a 1.8%
improvement in buying, occupancy, and warehousing costs reflecting improved
leveraging of these expenses, offset by decreases of 0.7% in merchandise
margins. The decrease in merchandise margins resulted primarily from increased
markdowns and an increase in inventory shrinkage, offset by improved mark-ons as
compared to the prior period.
Selling, general and administrative expenses for the current period increased to
$67.1 million from $57.8 million for the prior period. As a percent of net
sales, these expenses decreased to 26.6% from 28.4% for the prior period due to
better leveraging of salaries and other administrative expenses. The increase of
$9.3 million resulted primarily from an increase in store operating expenses to
support the new store growth and increased compensation and benefit costs.
Depreciation and amortization expense for the current period increased to $5.3
million from $4.5 million for the prior period and represented 2.1% of sales in
the current period as compared to 2.2% of sales in the prior period.
Interest income for the current period decreased to $0.7 million from $0.8
million for the prior period because of lower cash balances available for
investment during the second quarter of the current period. No borrowings were
required under the terms of the Company's line of credit during the current
period.
The income before income taxes for the current period increased to $6.2 million
from a $0.8 million loss before income taxes for the prior period. As a percent
of net sales, the income before income taxes for the current period increased to
2.5% from (0.4)% for the prior period. The increase in income before income
taxes as a percent of sales was attributable to a 3.6% improvement in leveraging
of store occupancy and warehousing expenses, selling, general, and
administrative expenses, and depreciation costs. This improvement was offset by
reduced merchandise margins of 0.6% and lower interest income of 0.1%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of working capital in the current period were cash
flow used by operating activities, primarily to support inventory increases for
anticipated sales and new store growth. Additionally, the Company used working
capital to support capital expenditures and to acquire Prophecy, Ltd. The
Company had working capital of $32.4 million and $34.4 million at November 1,
1997 and February 1, 1997, respectively.
At November 1, 1997, the Company had an unsecured demand lending arrangement
with a bank to provide a $60.0 million line of credit at either the lender's
prime lending rate (8.5% at November 1, 1997) or a negotiated rate such as
LIBOR. The facility has a limit of $40.0 million that can be used for direct
borrowing. Cash generated from operations in prior periods was sufficient enough
to finance operations so that no borrowings were required against the line
during the current period. Letters of credit in the amount of $41.8 million were
outstanding at November 1, 1997. The remaining available balance on the line was
$18.2 million at November 1, 1997.
11
<PAGE> 12
Capital expenditures, net of construction allowances, totaled $10.2 million for
the nine months ended November 1, 1997. These expenditures included the addition
of 32 new store locations, 16 store remodels, leasehold improvements in existing
stores, and the purchase of CAD equipment, software and hardware.
The Company expects to open an additional 4 stores during the remainder of the
fiscal year. This forward-looking statement will be influenced by factors
including the Company's financial position, consumer spending, and the number of
advantageous mall store leases that may become available. The Company believes
that the cash flow from operations and its bank line of credit will be
sufficient to meet its presently anticipated cash requirements through Fiscal
1998.
SEASONALITY
Historically, the Company's operations have been seasonal, with a
disproportionate amount of the Company's net sales and a majority to its net
income occurring in the fourth fiscal quarter, reflecting increased demand
during the year-end holiday selling season and, to a lesser extent, the third
quarter, reflecting increased demand during the back-to-school selling season.
The Company has recognized net losses during the first fiscal quarter and weaker
net sales and income during the second fiscal quarter.
IMPACT OF INFLATION
The Company does not believe that the relatively modest levels of inflation
which have been experienced in the United States in recent years have had a
significant effect on its net sales or its profitability. Substantial increases
in cost, however, could have a significant impact on the Company and the
industry in the future.
SAFE HARBOR STATEMENT AND BUSINESS RISKS
This report contains various "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events, including the following: the
planned opening of 4 stores during the remainder of Fiscal 1997 and the
sufficiency of cash flows and line of credit facilities to meet Fiscal 1998 cash
requirements. The Company cautions that these statements are further qualified
by factors that could cause actual results to differ materially from those in
the forward-looking statements, including without limitation, the following: a
decline in demand for the merchandise offered by the Company; any events causing
the disruption of imports including the insolvency of a significant supplier;
the ability of the Company to locate and obtain favorable store sites and
negotiate acceptable lease terms; the ability of the Company to gauge the
fashion tastes of its customers and provide merchandise that satisfies customer
demand; the effect of the economic conditions; and the effect of competitive
pressures from other retailers. Results actually achieved thus may differ
materially from expected results in any forward-looking statements.
The Company's results of operations will also fluctuate from quarter to quarter
in the future as a result of numerous other factors. These include factors the
Company cannot control that impact mall-based retailers generally, such as
factors affecting the amount of traffic in enclosed shopping malls and regional
and national economic conditions affecting disposable consumer income. They also
include factors over which the Company has some control, such as distinguishing
itself from its competitors based on the quality and design of its private label
brand names; identifying and responding to fashion trends in a timely manner;
the ability to direct source merchandise closer to need and in appropriate
quantities; the ability to retain qualified personnel; and the number and timing
of the opening of new stores. Any one or a combination of these factors could
have a material adverse affect on the Company's results of operations and
financial condition.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
10.12 First Amendment to Loan with Azteca Production
International, Inc.
23. Acknowledgement of Independent Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K - None
13
<PAGE> 14
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.
Dated December 9, 1997
American Eagle Outfitters, Inc.
(Registrant)
/s/ Laura A. Weil
------------------------------------
Laura A. Weil
Executive Vice President and Chief
Financial Officer
/s/ Dale E. Clifton
------------------------------------
Dale E. Clifton
Vice President, Controller and Chief
Accounting Officer
14
<PAGE> 1
EXHIBIT 10.12
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT (this "Amendment") to the Loan and Security Agreement is
entered into as of the 21st day of November, 1997, by and between Azteca
Production International, Inc. (the "Borrower"), and American Eagle Outfitters,
Inc. (the "Lender").
RECITALS:
A. As of June 6, 1997, the Borrower and the Lender executed a certain
Loan and Security Agreement (the "Loan Agreement"), setting forth the terms of
certain extensions of credit to the Borrower; and
B. As of June 6, 1997, the Borrower executed and delivered to the
Lender, inter alia, a commercial loan note in the original principal sum of
Three Million Dollars ($3,000,000.00) (hereinafter the "Note"); and
C. In connection with the Loan Agreement and the Note, the Borrower
executed and delivered to the Lender certain other loan documents, consents,
assignments, security agreements, agreements, instruments and financing
statements in connection with the indebtedness referred to in the Loan Agreement
(all of the foregoing, together with the Note and the Loan Agreement, are
hereinafter collectively referred to as the "Loan Documents"); and
D. The Borrower has requested that the Lender amend and modify certain
terms and covenants in the Loan Agreement, and the Lender is willing to do so
upon the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants, agreements
and promises contained herein, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, the parties hereto for
themselves and their successors and assigns do hereby agree, represent and
warrant as follows:
1. Definitions. All capitalized terms not otherwise defined herein
shall have the meanings ascribed to such terms in the Loan Agreement.
2. Section 1, "The Loan," of the Loan Agreement is hereby amended to
recite in its entirety as follows:
1. The Loan. The Lender, subject to the terms and conditions
hereof, will extend credit to the Borrower up to the aggregate
principal sum of $3,000,000.00 (the "Loan"). The Loan shall be
comprised of a demand loan facility up to the sum of
$3,000,000.00.
<PAGE> 2
The proceeds of the Loan may be advanced in partial amounts
prior to November 25, 1997; provided, however, that the
Lender shall have no obligation to make any advance at any
time that there exists a Pending Default. The principal
balance of the Loan shall not exceed an amount equal to 100%
of Eligible Inventory (the "Borrowing Base"). The Lender, in
its sole discretion, reserves the right upon notice to the
Borrower to decrease the foregoing percentage.
3. Section 3.2, "Terms of Repayment," of the Loan Agreement is hereby
amended to recite in its entirety as follows:
3.2 Terms of Repayment. The Loan shall be evidenced by a
note, or by one or more notes subsequently executed in
substitution therefor, each in substantially the form set
forth in Exhibit A-1 attached to that certain First Amendment
to Loan and Security Agreement between the Borrower and the
Lender dated November 21, 1997. Repayment of the Loan shall
be made in accordance with the terms of the promissory notes
then outstanding pursuant to this Agreement.
4. Section 3.7, "Intercreditor Agreement," of the Loan Agreement is
hereby amended to recite in its entirety as follows:
3.7 Intercreditor Agreement. The Borrower shall cause
Congress Financial Corporation (Western) to enter into a
Subordination Agreement with the Lender that is satisfactory
to the Lender in its sole and absolute discretion.
5. Section 6.10, "No Offset," of the Loan Agreement is hereby amended
to recite in its entirety as follows:
6.10 No Offset. Except to the extent of thirty percent of the
face amount of invoices for goods sold to the Lender by the
Borrower, provided that such goods are accepted by the Lender
in its sole discretion (the "Permitted Offset"), the Borrower
shall not offset against amounts due under the Loan any
amounts due from the Lender to the Borrower for goods sold to
the Lender by the Borrower. Except for the Permitted Offset,
Lender shall not offset against amounts due and owing to the
Borrower for goods sold to the Lender any amounts due and
owing under the Loan.
-2-
<PAGE> 3
6. Conditions of Effectiveness. This Amendment shall become effective
as of November 21, 1997, upon satisfaction of all of the following conditions
precedent:
(a) The Lender shall have received two duly executed copies of the
Amendment, a duly executed promissory note in the form of Exhibit A-1 attached
hereto in substitution for, and replacement of, the Note, and such other
certificates, instruments, documents, agreements, and opinions of counsel as may
be required by the Lender, each of which shall be in form and substance
satisfactory to the Lender and its counsel; and
(b) The representations contained in paragraph 7 below shall be true
and accurate.
7. Representations. The Borrower represents and warrants that after
giving effect to this Amendment (a) each and every one of the representations
and warranties made by or on behalf of the Borrower in the Loan Agreement or the
Loan Documents is true and correct in all respects on and as of the date hereof,
except to the extent that any of such representations and warranties related, by
the expressed terms thereof, solely to a date prior hereto; (b) the Borrower has
duly and properly performed, complied with and observed each of its covenants,
agreements and obligations contained in the Loan Agreement and Loan Documents;
and (c) no event has occurred or is continuing, and no condition exists which
would constitute an Event of Default.
8. Amendment to Loan Agreement. (a) Upon the effectiveness of Section 2
through Section 5 hereof, each reference in the Loan Agreement to "Loan and
Security Agreement," "Loan Agreement," "Agreement," the prefix "herein,"
"hereof," or words of similar import, and each reference in the Loan Documents
to the Loan Agreement, shall mean and be a reference to the Loan Agreement as
amended hereby. (b) Except as modified herein, all of the representations,
warranties, terms, covenants and conditions of the Loan Agreement, the Loan
Documents and all other agreements executed in connection therewith shall remain
as written originally and in full force and effect in accordance with their
respective terms, and nothing herein shall affect, modify, limit or impair any
of the rights and powers which the Lender may have thereunder. The amendment set
forth herein shall be limited precisely as provided for herein, and shall not be
deemed to be a waiver of, amendment of, consent to or modification of any of the
Lender's rights under or of any other term or provisions of the Loan Agreement,
any Loan Document, or other agreement executed in connection therewith, or of
any term or provision of any other instrument referred to therein or herein or
of any transaction or future action on the part of the Borrower which would
require the consent of the Lender, including, without limitation, waivers of
Events of Default which may exist after giving effect hereto. The Borrower
ratifies and confirms each term, provision, condition and covenant set forth in
the Loan Agreement and the Loan Documents and acknowledges that the agreement
set forth therein continue to be legal, valid and binding agreements, and
enforceable in accordance with their respective terms.
9. No Waiver. Nothing in this Amendment shall be construed to waive,
modify, or cure any default or Event of Default that exists or may exist under
the Loan Agreement or the Loan Documents.
-3-
<PAGE> 4
10. Authority. The Borrower hereby represents and warrants to the
Lender that (a) the Borrower has legal power and authority to execute and
deliver the within Amendment; (b) the officer executing the within Amendment on
behalf of the Borrower has been duly authorized to execute and deliver the same
and bind the Borrower with respect to the provisions provided for herein; (c)
the execution and delivery hereof by the Borrower and the performance and
observance by the Borrower of the provisions hereof do not violate or conflict
with the articles of incorporation, regulations or by-laws of the Borrower or
any law applicable to the Borrower or result in the breach of any provision of
or constitute a default under any agreement, instrument or document binding upon
or enforceable against the Borrower; and (d) this Amendment constitutes a valid
and legally binding obligation upon the Borrower in every respect.
11. Counterparts. This Amendment may be executed in two or more
counterparts, each of which, when so executed and delivered, shall be an
original, but all of which together shall constitute one and the same document.
Separate counterparts may be executed with the same effect as if all parties had
executed the same counterparts.
12. Costs and Expenses. The Borrower agrees to pay on demand in
accordance with the terms of the Loan Agreement all costs and expenses of the
Lender in connection with the preparation, reproduction, execution and delivery
of this Amendment and all other loan documents entered into in connection
herewith, including the reasonable fees and out-of-pocket expenses of the
Lender's counsel with respect thereto.
13. Governing Law. This Amendment shall be governed by and construed in
accordance with the law of the State of Ohio.
IN WITNESS WHEREOF, the Borrower and the Lender have hereunto
set their hands as of the date first set forth above.
THE BORROWER:
AZTECA PRODUCTION INTERNATIONAL, INC.
By: /s/ Hubert Guez
----------------------------------
Its: President
---------------------------------
-4-
<PAGE> 5
THE LENDER:
AMERICAN EAGLE OUTFITTERS, INC.
By: /s/ George Kolber
-----------------------------------
Its: Vice Chairman - COO
-----------------------------------
CONSENT OF GUARANTORS
Each of the undersigned, being guarantors of the Borrower's
indebtedness to the Lender pursuant to certain guaranty agreements with the
Lender, hereby consents and agrees to be bound by the terms, conditions and
execution of the above Amendment and hereby further agrees that his obligations
shall be continuing as provided in said guaranty agreements and said guaranty
agreements shall remain as written originally and continue in full force and
effect in all respects.
/s/ Hubert Guez
--------------------------------------
Hubert Guez
/s/ Paul Guez
--------------------------------------
Paul Guez
-5-
<PAGE> 6
EXHIBIT A-1
AMERICAN EAGLE OUTFITTERS, INC.
COMMERCIAL LOAN NOTE
BUSINESS PURPOSE
$3,000,000.00 November 21, 1997
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
American Eagle Outfitters, Inc. (hereinafter called the "Lender," which term
shall include any holder hereof), at such place as the Lender may designate or,
in the absence of such designation, at any of the Lender's offices, the sum of
Three Million Dollars ($3,000,000.00) or so much as shall have been advanced by
the Lender and not repaid (hereinafter called the "Principal Sum"), together
with interest as hereinafter provided. The proceeds of the loan evidenced hereby
may be advanced in partial amounts during the term of this note (this "Note")
prior to the earlier of demand or November 25, 1997. Each such advance shall be
made to the undersigned upon receipt by the Lender of the undersigned's
application therefor and disbursement instructions, which shall be in such form
as the Lender shall from time to time prescribe. The Lender shall be entitled to
rely on any oral or telephonic communication requesting an advance and/or
providing disbursement instructions hereunder, which shall be received by it in
good faith from anyone reasonably believed by the Lender to be the undersigned,
or the undersigned's authorized agent. The undersigned agrees that all advances
made by the Lender will be evidenced by entries made by the Lender into its
electronic data processing system and/or internal memoranda maintained by the
Lender. The undersigned further agrees that the sum or sums shown on the most
recent printout from the Lender's electronic data processing system, the grid
attached hereto, or on such memoranda shall be rebuttably presumptive evidence
of the amount of the Principal Sum and of the amount of any accrued interest.
The undersigned promises to pay the Principal Sum and the interest thereon at
the time and in the manner hereinafter provided in this Note.
This Note is executed and the advances contemplated hereunder are to be
made pursuant to a Loan and Security Agreement by and between the undersigned
and the Lender dated as of June 6, 1997, and all amendments, modifications and
supplements thereto from time to time (hereinafter called the "Loan Agreement"),
and all the covenants, representations, agreements, terms and conditions
contained therein, including but not limited to additional conditions of
default, are incorporated herein as if fully rewritten. This Note is given in
substitution for, and replacement of, that certain Commercial Loan Note dated
June 6, 1997, executed and delivered to Lender by the undersigned.
INTEREST
Interest will accrue on the unpaid balance of the Principal Sum until
paid at a rate of interest equal to the Effective Rate. As used herein,
"Effective Rate" shall mean seven percent (7%) per annum plus the Margin. As
used herein, "Margin" shall mean, as of the last day of immediately
-6-
<PAGE> 7
preceding calendar month, the difference between (a) 8.50 percent and (b) the
rate of interest announced by National City Bank, Columbus as its prime rate as
of such date. The Effective Rate shall be adjusted as of the first day of each
calendar month.
At the election of the Lender, upon the occurrence of an "Event of
Default" pursuant to the Loan Agreement, interest will accrue on the unpaid
balance of the Principal Sum and unpaid interest, if any, until paid at the rate
of ten percent (10%) per annum.
All interest shall be calculated on the basis of a 360 day year for the
actual number of days the Principal Sum or any part thereof remains unpaid.
MANNER OF PAYMENT
The Principal Sum shall be payable ON DEMAND; provided, however, that
if the Principal Sum is not sooner demanded, the Principal Sum shall be due and
payable on April 1, 1998. Thirty percent of the face amount of each invoice for
goods that are sold to the Lender by the undersigned (provided that such goods
are accepted by the Lender in its sole discretion) shall by applied by the
Lender as a payment of the Principal Sum. In addition, installments of the
Principal Sum shall be due and payable on the first of each month, beginning
December 1, 1997, and continuing on the first day of each month thereafter.
Except for the final installment, which shall be for the unpaid balance of the
Principal Sum, each such installment shall be in the amount of the lesser of
(a) the difference between (i) $300,000.00, and (ii) thirty percent of
the face amount of all goods sold to the Lender by the undersigned
during the month preceding the date such installment is due, provided
that such goods are accepted by the Lender in its sole discretion, or
(b) the unpaid balance of the Principal Sum.
Accrued interest shall be due and payable monthly beginning on December 1, 1997,
and continuing on the first day of each month thereafter, and at maturity,
whether by demand, acceleration or otherwise.
LATE CHARGE
Any installment or other payment not made within 10 days of the date
such payment or installment is due shall be subject to a late charge equal to 5%
of the amount of the installment or payment.
SECURITY
-7-
<PAGE> 8
This Note is secured by the security interests granted by or referred
to in the Loan Agreement and by the assignments and the mortgages or other
security documents dated June 6, 1997, or given contemporaneously herewith.
DEFAULT
Without limiting the right of the Lender to demand payment of the
Principal Sum and all accrued interest thereon at any time, upon the occurrence
of any of the following events:
(a) the undersigned fails to make any payment of interest or of
the Principal Sum on or before the date such payment is due;
(b) an "Event of Default" under the Loan Agreement shall have
occurred;
the Lender may, at its option, without notice or demand, accelerate the maturity
of the obligations evidenced hereby, which obligations shall become immediately
due and payable. In the event the Lender shall institute any action for the
enforcement or collection of the obligations evidenced hereby, the undersigned
agrees to pay all costs and expenses of such action, including reasonable
attorneys' fees, to the extent permitted by law.
GENERAL PROVISIONS
The undersigned, and any indorser, surety, or guarantor, hereby
severally waive presentment, notice of dishonor, protest, notice of protest, and
diligence in bringing suit against any party hereto, and consent that, without
discharging any of them, the time of payment may be extended an unlimited number
of times before or after maturity without notice. The Lender shall not be
required to pursue any party hereto, including any guarantor, or to exercise any
rights against any collateral herefor before exercising any other such rights.
The obligations evidenced hereby may from time to time be evidenced by
another note or notes given in substitution, renewal or extension hereof. Any
security interest or mortgage which secures the obligations evidenced hereby
shall remain in full force and effect notwithstanding any such substitution,
renewal, or extension.
The captions used herein are for reference only and shall not be deemed
a part of this Note. If any of the terms or provisions of this Note shall be
deemed unenforceable, the enforceability of the remaining terms and provisions
shall not be affected. This Note shall be governed by and construed in
accordance with the law of the State of Ohio.
WAIVER OF RIGHT TO TRIAL BY JURY
THE UNDERSIGNED HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER
-8-
<PAGE> 9
THIS NOTE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED
IN CONNECTION HEREWITH, OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE UNDERSIGNED OR THE LENDER WITH RESPECT TO THIS
NOTE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE; AND THE UNDERSIGNED HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY, AND THAT THE UNDERSIGNED OR THE LENDER MAY FILE AN ORIGINAL COUNTERPART
OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF
THE UNDERSIGNED TO THE WAIVER OF THE RIGHT OF THE UNDERSIGNED TO TRIAL BY JURY.
Borrower:
AZTECA PRODUCTION INTERNATIONAL, INC.
By: /s/ Hubert Guez
----------------------------------
Its: President
----------------------------------
-9-
<PAGE> 1
Exhibit 23
Acknowledgment of Ernst & Young LLP
The Board of Directors and Stockholders
American Eagle Outfitters, Inc. and subsidiaries
We are aware of the incorporation by reference in the Registration
Statements (Forms S-8) of American Eagle Outfitters, Inc. and subsidiaries
pertaining to the American Eagle Outfitters, Inc. 1994 Stock Option Plan, the
Stock Fund of the American Eagle Outfitters, Inc. Profit Sharing and 401(k)
Plan, the American Eagle Outfitters, Inc. Employee Stock Purchase Plan, and the
American Eagle Outfitters, Inc. 1994 Restricted Stock Plan of our report dated
November 19, 1997 relating to the unaudited consolidated interim financial
statements of American Eagle Outfitters, Inc. and subsidiaries which are
included in its Form 10-Q for the quarter ended November 1, 1997.
Pursuant to Rule 436 (c) of the Securities Act of 1933, our reports are not a
part of the registration statement prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
Pittsburgh, Pennsylvania
December 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED NOVENBER 1, 1997 AND IS QUALIFIED IN IT'S ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000919012
<NAME> AMERICAN EAGLE OUTFITTERS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> AUG-03-1997
<PERIOD-END> NOV-01-1997
<CASH> 12,627
<SECURITIES> 0
<RECEIVABLES> 10,968
<ALLOWANCES> 0
<INVENTORY> 58,913
<CURRENT-ASSETS> 93,503
<PP&E> 61,156
<DEPRECIATION> 22,708
<TOTAL-ASSETS> 134,570
<CURRENT-LIABILITIES> 61,144
<BONDS> 0
0
0
<COMMON> 53,339
<OTHER-SE> 20,087
<TOTAL-LIABILITY-AND-EQUITY> 134,570
<SALES> 104,902
<TOTAL-REVENUES> 104,902
<CGS> 66,248
<TOTAL-COSTS> 66,248
<OTHER-EXPENSES> 28,585
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (270)
<INCOME-PRETAX> 10,339
<INCOME-TAX> 4,063
<INCOME-CONTINUING> 6,276
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 6,276
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
