<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0001
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 1999
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)
DELAWARE NO. 13-2721761
(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)
(724) 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, $.01 PAR VALUE, 46,614,462 OUTSTANDING AS OF AUGUST 19, 1999
<PAGE> 2
AMERICAN EAGLE OUTFITTERS, INC.
-------------------------------
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
July 31, 1999 (unaudited) and January 30, 1999 3
Consolidated Statements of Operations (unaudited)
Three and six months ended July 31, 1999 and August 1, 1998 4
Consolidated Statements of Cash Flows (unaudited)
Six months ended July 31, 1999 and August 1, 1998 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 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
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 14
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 15 Acknowledgment of Independent Accountants 16
Exhibit 27 Financial Data Schedule 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) July 31, January 30,
ASSETS 1999 1999
---- ----
Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 49,099 $ 71,940
Short-term investments 21,797 13,360
Merchandise inventory 74,363 49,688
Accounts and note receivable, including related party 13,276 8,560
Prepaid expenses and other 9,075 2,757
Deferred income taxes 19,525 8,199
-------- --------
Total current assets 187,135 154,504
-------- --------
Fixed assets:
Fixtures and equipment 42,602 36,307
Leasehold improvements 60,215 46,996
-------- --------
102,817 83,303
Less: Accumulated depreciation and amortization 34,576 29,933
-------- --------
68,241 53,370
-------- --------
Other assets 8,306 3,074
-------- --------
Total assets $263,682 $210,948
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,801 $ 18,551
Accrued compensation and payroll taxes 15,587 17,739
Accrued rent 14,745 13,042
Accrued income and other taxes 2,211 3,208
Other liabilities and accrued expenses 7,938 7,211
-------- --------
Total current liabilities 70,282 59,751
-------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 466 461
Contributed capital 80,103 64,561
Retained earnings 119,066 89,874
-------- --------
199,635 154,896
Less: Deferred compensation 1,930 2,419
Accumulated other comprehensive loss 4,305 --
Treasury stock -- 1,280
-------- --------
Total stockholders' equity 193,400 151,197
-------- --------
Total liabilities and stockholders' equity $263,682 $210,948
======== ========
</TABLE>
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 Six Months Ended
------------------ ----------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $178,582 $125,731 $323,986 $225,425
Cost of sales, including certain buying, occupancy
and warehousing expenses 105,993 76,668 192,370 139,145
-------- -------- -------- --------
Gross profit 72,589 49,063 131,616 86,280
Selling, general and administrative expenses 42,693 31,782 79,801 58,005
Depreciation and amortization 2,753 2,084 5,237 4,059
-------- -------- -------- --------
Operating income 27,143 15,197 46,578 24,216
Interest income, net 785 541 1,519 1,083
-------- -------- -------- --------
Income before income taxes 27,928 15,738 48,097 25,299
Provision for income taxes 10,979 6,185 18,905 9,941
-------- -------- -------- --------
Net income $ 16,949 $ 9,553 $ 29,192 $ 15,358
======== ======== ======== ========
Basic income per common share $ 0.36 $ 0.21 $ 0.63 $ 0.34
======== ======== ======== ========
Diluted income per common share $ 0.35 $ 0.20 $ 0.60 $ 0.32
======== ======== ======== ========
Weighted average common shares outstanding - basic 46,458 45,242 46,218 45,038
======== ======== ======== ========
Weighted average common shares outstanding - diluted 48,682 48,112 48,559 47,764
======== ======== ======== ========
Retained earnings, beginning $102,117 $ 41,561 $ 89,874 $ 35,756
Net income 16,949 9,553 29,192 15,358
-------- -------- -------- --------
Retained earnings, ending $119,066 $ 51,114 $119,066 $ 51,114
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
--------------------
July 31, August 1,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 29,192 $ 15,358
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
(USED FOR ) OPERATING ACTIVITIES:
Depreciation and amortization 5,237 4,059
Loss on impairment and write-off of fixed assets 583 1,118
Restricted stock compensation 490 618
Deferred income taxes 60 (2,361)
CHANGES IN ASSETS AND LIABILITIES:
Merchandise inventory (24,675) (18,044)
Accounts and note receivable (4,716) 2,238
Prepaid expenses and other (8,327) (1,364)
Accounts payable 11,253 (264)
Accrued liabilities 2,078 (2,634)
-------- --------
Total adjustments (18,017) (16,634)
-------- --------
Net cash provided by (used for) operating activities 11,175 (1,276)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (20,710) (12,215)
Net purchase of short-term investments (15,529) --
-------- --------
Net cash used for investing activities (36,239) (12,215)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from stock options exercised 2,223 1,398
-------- --------
Net cash provided by financing activities 2,223 1,398
-------- --------
Net decrease in cash and cash equivalents (22,841) (12,093)
Cash and cash equivalents - beginning of period 71,940 48,359
-------- --------
Cash and cash equivalents - end of period $ 49,099 $ 36,266
======== ========
</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 July 31, 1999 and for the three and six month periods
ended July 31, 1999 (the "current period") and August 1, 1998 (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. 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 January
30, 1999 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 1998 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.
CASH AND CASH EQUIVALENTS
Cash includes cash equivalents. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS AND OTHER COMPREHENSIVE LOSS
Cash in excess of operating requirements is invested in marketable equity or
government debt obligations. As of July 31, 1999, short-term investments include
investments with an original maturity of greater than three months (averaging
approximately 11 months) and consist primarily of tax-exempt municipal bonds
classified as available for sale and marketable equity securities. The primary
difference between net income and comprehensive income is related to the change
in the market value, net of tax, of the above described investments as follows:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
------------------ ----------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 16,949 $ 9,553 $ 29,192 $ 15,358
Other comprehensive loss, net of tax ($ 4,305) $ -- ($ 4,305) $ --
-------- -------- -------- --------
Total comprehensive income $ 12,644 $ 9,553 $ 24,887 $ 15,358
======== ======== ======== ========
</TABLE>
6
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CAPITAL STRUCTURE
The Company has 125,000,000 common shares authorized at $.01 par value, and
46,577,303 shares issued and outstanding as of July 31, 1999 and 46,110,984
shares outstanding as of January 30, 1999. There are 5,000,000 preferred shares
authorized at $.01 par value with none outstanding. During the period ending
July 31, 1999, the Company retired approximately $1,280,000 and 475,000 shares
of treasury stock.
EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share and
the effect on income per share and the weighted average number of shares of
dilutive potential common stock (stock options and restricted stock).
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
------------------ ----------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $16,949 $ 9,553 $29,192 $15,358
======= ======= ======= =======
Weighted average number of common shares used in
basic EPS 46,458 45,242 46,218 45,038
Effect of dilutive stock options and non-vested
restricted stock 2,224 2,870 2,341 2,726
------- ------- ------- -------
Weighted average number of common shares and dilutive
potential common stock used in diluted EPS 48,682 48,112 48,559 47,764
======= ======= ======= =======
</TABLE>
RECLASSIFICATION
Certain reclassifications have been made to the Consolidated Financial
Statements for the prior period in order to conform to the July 31, 1999
presentation.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Because there were no borrowings under the terms of the Company's line of
credit, there were no amounts paid for interest during the three or six months
ended July 31, 1999 or August 1, 1998. Income tax payments were $17.4 million
and $18.7 million during the six months ended July 31, 1999 and August 1, 1998,
respectively. During the six months ended July 31, 1999 and August 1, 1998,
$14.6 million and $1.6 million, respectively, were recognized as increases to
contributed capital, related to the tax benefits associated with the exercise
and vesting of stock options and restricted stock.
4. RELATED PARTY TRANSACTIONS
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.
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.
Related party amounts follow:
7
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<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Six Months Ended
------------------ ----------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Merchandise purchases through a
related party importer $14,914 $20,277 26,265 $35,326
Accounts payable $ 3,398 $ 9,616 3,398 $ 9,616
Accounts and notes receivable $ 4,501 $ 1,119 4,501 $ 1,119
Rent expense $ 387 $ 387 774 $ 774
Merchandise sales $ 1,715 $ -- 4,133 $ 2,534
</TABLE>
The Company provides short-term loans to certain officers to pay the taxes on
the restricted stock that vests each year. As of July 31, 1999 and August 1,
1998, the outstanding value of these loans approximated $2,207,000 and $843,000,
respectively.
5. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
(In thousands)
July 31, January 30,
1999 1999
---- ----
<S> <C> <C>
Accounts receivable - construction allowances $ 3,415 $ 4,008
Related party accounts and note receivable 4,501 2,829
Accounts receivable - other 5,360 1,723
------- -------
Total $13,276 $ 8,560
======= =======
</TABLE>
6. INCOME TAXES
For the three and six months ended July 31, 1999 and August 1, 1998, the
effective tax rate used for the provision of income tax approximated 39%.
7. LEGAL PROCEEDINGS
The Company is a party to ordinary routine litigation incidental to its
business. Management does not expect the results of the litigation to be
material to the financial statements individually or in the aggregate.
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 three and six month periods
ended July 31, 1999 and August 1, 1998, 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.
We have reviewed the accompanying consolidated balance sheet of American Eagle
Outfitters, Inc. as of July 31, 1999, and the related consolidated statements of
operations for the three and six month periods ended July 31, 1999 and August 1,
1998 and the consolidated statements of cash flows for the six month periods
ended July 31, 1999 and August 1, 1998.
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. as
of January 30, 1999, and the related consolidated statements of operations and
cash flows for the year then ended (not presented herein) and in our report
dated February 26, 1999 (except for Note 12, as to which the date is April 7,
1999) 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 January 30, 1999, is fairly stated, in all
material respects, in relation to the consolidated financial statements from
which it has been derived.
Pittsburgh, Pennsylvania
August 18, 1999
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
This table shows the percentage relationship to net sales of the listed items
included in the Company's Consolidated Statements of Operations.
<TABLE>
<CAPTION>
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain buying, occupancy 59.4 61.0 59.4 61.7
----- ----- ----- -----
and warehousing expenses
Gross profit 40.6 39.0 40.6 38.3
23.9 25.2 24.6 25.8
Selling, general and administrative expenses
1.5 1.7 1.6 1.8
----- ----- ----- -----
Depreciation and amortization
15.2 12.1 14.4 10.7
Operating income
0.4 0.4 0.4 0.5
----- ----- ----- -----
Interest income, net
15.6 12.5 14.8 11.2
Income before income taxes
6.1 4.9 5.8 4.4
----- ----- ----- -----
Provision for income taxes
9.5% 7.6% 9.0% 6.8%
===== ===== ===== =====
Net income
</TABLE>
COMPARISON OF THREE MONTHS ENDED JULY 31, 1999 TO THE THREE MONTHS ENDED
AUGUST 1, 1998
Net sales increased 42.0% to $178.6 million from $125.7 million. The increase
includes:
- -$24.5 million from comparable store sales, representing a 19.8% increase over
the prior year, and -$28.4 million from new and non-comparable store sales, and
non-store sales.
The increase resulted from an increase of 49.6% in units sold, offset by a 5.8%
decrease in prices. We operated 426 stores at the end of the current period,
compared to 347 stores at the end of the prior period.
Gross profit increased to $72.6 million from $49.1 million. Gross profit as a
percent of net sales increased to 40.6% from 39.0% . The increase in gross
profit as a percent of net sales, was attributable to a 1.2% increase in
merchandise margins as well as a 0.4% improvement in buying, occupancy, and
warehousing costs. The increase in merchandise margins resulted primarily from
improved mark-ons, offset by increased markdowns as a percent of sales. This
improvement in buying, occupancy, and warehousing costs reflect improved
leveraging achieved through comparable store sales growth.
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Selling, general and administrative expenses increased to $42.7 million from
$31.8 million. As a percent of net sales, these expenses decreased to 23.9% from
25.2%. The $10.9 million increase includes:
- -$5.9 million in store operating expenses to support new store growth,
- -$0.7 million for increased promotional advertising, direct mail, and non-store
advertising costs,
- -$1.9 million in compensation costs to support increased sales, and
- -$2.4 million for general services purchased, supplies, and other expenses.
Depreciation and amortization expense increased to $2.8 million from $2.1
million. As a percent of net sales, these expenses decreased to 1.5% from 1.7%.
Interest income increased to $0.8 million from $0.5 million because of higher
cash reserves available for investment. No borrowings were required under the
terms of our line of credit during the current or prior periods.
Income before income taxes increased to $27.9 million from $15.7 million. As a
percent of net sales, income before income taxes increased to 15.6% from 12.5% .
The increase in income before income taxes as a percent of sales was
attributable to the factors noted above.
COMPARISON OF SIX MONTHS ENDED JULY 31, 1999 TO THE SIX MONTHS ENDED AUGUST 1,
1998
Net sales increased 43.7% to $324.0 million from $225.4 million. The increase
includes:
- -$51.7 million from comparable store sales, representing a 23.2% increase over
the prior year, and
- -$46.9 million from new and non-comparable store sales, and non-store sales.
The increase resulted from an increase of 49.8% in units sold, offset by a 5.0%
decrease in prices. We operated 426 stores at the end of the current period,
compared to 347 stores at the end of the prior period.
Gross profit increased to $131.6 million from $86.3 million. Gross profit as a
percent of net sales increased to 40.6% from 38.3% . The increase in gross
profit as a percent of net sales, was attributable to a 0.9% increase in
merchandise margins as well as a 1.4% improvement in buying, occupancy, and
warehousing costs. The increase in merchandise margins resulted primarily from
improved mark-ons, offset by increased markdowns as a percent of sales. This
improvement in buying, occupancy, and warehousing costs reflect improved
leveraging achieved through comparable store sales growth.
Selling, general and administrative expenses increased to $79.8 million from
$58.0 million. As a percent of net sales, these expenses decreased to 24.6% from
25.8%. The $21.8 million increase includes:
- -$10.0 million in store operating expenses to support new store growth,
- -$2.7 million for increased promotional advertising, direct mail, and non-store
advertising costs,
- -$4.1 million in compensation costs to support increased
sales, and
- -$5.0 million for general services purchased, supplies, and other
expenses.
Depreciation and amortization expense increased to $5.2 million from $4.1
million. As a percent of net sales, these expenses decreased to 1.6% from 1.8%.
Interest income increased to $1.5 million from $1.1 million because of higher
cash reserves available for investment. No borrowings were required under the
terms of our line of credit during the current or prior periods.
Income before income taxes increased to $48.1 million from $25.3 million. As a
percent of net sales, income before income taxes increased to 14.8% from 11.2% .
The increase in income before income taxes as a percent of sales was
attributable to the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash in the current period was from net income. Our
primary uses of cash included $24.7 million to support inventory
11
<PAGE> 12
increases for anticipated sales and new store growth, $20.7 million in capital
expenditures and $15.5 million to purchase short-term investments. Working
capital at July 31, 1999 was $116.9 million compared to $59.5 million at August
1, 1998. The increase in working capital resulted primarily from the increase in
cash provided by operating activities.
Capital expenditures, net of construction allowances, totaled $20.7 million for
the six months ended July 31, 1999. These expenditures included:
- -new stores totaling $10.3 million including future new store openings,
- -remodeling of store locations totaling $5.2 million including future remodels,
- -improvements to our distribution center of $3.2 million, and
- -other capital expenditures of $2.0 million.
At July 31, 1999, the Company had an unsecured demand lending arrangement with a
bank to provide a $100 million line of credit (reflecting a $25 million increase
in line availability which occurred in June 1999) at either the lender's prime
lending rate (8.0% at July 31, 1999) or a negotiated rate such as LIBOR. The
facility has a limit of $40.0 million that can be used for direct borrowing. No
borrowings were required against the line for the current or prior period. At
July 31, 1999, letters of credit in the amount of $53.9 million were outstanding
leaving a remaining available balance on the line of $46.1 million.
We are currently planning to open approximately 40 stores during the remainder
of the fiscal year. This forward-looking statement will be influenced by factors
including our financial position, consumer spending, and the number of
acceptable mall store leases that may become available. We believe that cash
flow from operations and our bank line of credit will be sufficient to meet our
anticipated cash requirements through Fiscal 1999.
IMPACT OF INFLATION
We do not believe that the relatively modest levels of inflation occurring in
the United States in recent years have significantly effected our net sales or
our profitability. Substantial increases in cost, however, could have a
significant impact on us and the industry in the future.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000.
State of Readiness: As of June 30, 1999, the Company is Year 2000 ready. Our
plan to resolve the internal Year 2000 issue involved two major phases:
detection and correction. The detection phase included planning, inventory,
triage, and detailed assessment. We took an inventory of all our information
technology and non-information technology systems to determine which of our
systems were not Year 2000 compliant. We also implemented procedures to review
the Year 2000 readiness in all recently acquired equipment. Next, the Company
prioritized actions related to the Year 2000 problems based upon their potential
impact on the Company. This detailed assessment of the problems and a correction
plan were completed in October 1998.
The correction phase included repair and resolution and testing and
implementation. We had four mission critical systems: distribution center
systems, point of sale systems, merchandising software, and financial software.
All systems are now Year 2000 ready.
With respect to suppliers and business partners, we have sent letters to
approximately 1,800 parties in an attempt to determine the possible impact of
failure of third parties to be Year 2000 compliant. Approximately 75% of the
parties contacted have returned our questionnaire. We have had discussions with
our major suppliers and continue to follow up with third parties to ensure that
they remain on schedule with their Year 2000 compliance. We are in the process
of visiting our major suppliers to review their Year 2000 readiness. We have
determined that approximately 10% of our vendors will not be Year 2000
compliant. However, none of these third parties are critical to our continuing
operations. We believe that all of our major suppliers and business partners
will be Year 2000 compliant.
Costs to Address Our Year 2000 Issues: The total cost of the Year 2000 project
was $1.9 million of which $0.5 million relates to hardware and software which
was capitalized. The remaining costs were expensed as incurred and include
salaries, incentive compensation and third party consulting services. These
costs were funded through cash flows from operations.
Risks of Our Year 2000 Issues: We are dependent on our suppliers and business
partners. If efforts on our part, our customers' part, our suppliers' and
business partners' part, or the part of public utilities or the government fail
to adequately address the relevant Year
12
<PAGE> 13
2000 issues, the most likely worst case scenario would be possible delays in the
delivery of merchandise to our stores. We do not currently believe that any such
delay will have a materially adverse effect on us.
Our Contingency Plans: While we anticipate that all of our major suppliers and
business partners will be Year 2000 compliant, we have developed comprehensive
contingency plans which will allow the continuation of business operations in
the event that we or any of our significant suppliers or business partners do
not properly address Year 2000 issues. Testing of these contingency plans will
continue through the end of the year. We will obtain early delivery of some
merchandise from suppliers in an attempt to mitigate any Year 2000 issues that
may arise. We are also looking for alternative vendors to supply products and
services in the event that some of our current non-mission critical vendors are
unable to perform because of Year 2000 problems. Further, we are searching for
ways that we can support our current vendors who may have Year 2000 problems. We
cannot assure you that our efforts will prevent all consequences and there may
be undetermined future costs due to business disruption that may be caused by
suppliers, transportation disruptions, or unforeseen circumstances.
SAFE HARBOR STATEMENT, SEASONALITY, 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 our expectations or
beliefs concerning future events, including the following:
- -the planned opening of approximately 40 stores during the remainder of Fiscal
1999,
- -the sufficiency of cash flows and line of credit facilities to meet Fiscal
1999 requirements, and
- -the completion of modifications to computer systems to enable the processing
of transactions in the year 2000 and beyond.
We caution 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:
- -decline in demand for our merchandise,
- -the ability to obtain suitable sites for new stores at acceptable costs,
- -the hiring and training of qualified personnel,
- -the integration of new stores into existing operations,
- -the expansion of buying and inventory capabilities,
- -the availability of capital,
- -our ability to anticipate and respond to changing consumer preferences and
fashion trends in a timely manner,
- -any disaster or casualty resulting in the interruption of service for our
distribution center,
- -the effect of economic conditions, and
- -the effect of competitive pressures from other retailers.
Results actually achieved may differ materially from expected results in these
statements.
Historically, our operations have been seasonal, with a disproportionate amount
of net sales and a majority of 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. During Fiscal 1998, these periods accounted
for approximately 62% of our sales. As a result of this seasonality, any factors
negatively affecting us during the third and fourth fiscal quarters of any year,
including adverse weather or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results of operations for
the entire year. Our quarterly results of operations also may fluctuate based
upon such factors as the timing of certain holiday seasons, the number and
timing of new store openings, the amount of net sales contributed by new and
existing stores, the timing and level of markdowns, store closings,
refurbishments and relocations, competitive factors, weather and general
economic conditions.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In a complaint filed on June 2, 1998 in the action styled, Abercrombie & Fitch
Stores, Inc. v. American Eagle Outfitters, Inc., Civil Action No. C2-98-569, in
the United States District Court, Southern District of Ohio, Eastern Division,
Abercrombie & Fitch alleged that we infringed their trade dress. Our motion for
summary judgement was granted by the Court on July 14, 1999 dismissing the
lawsuit with prejudice. Abercrombie & Fitch has filed a motion with the Court to
reconsider its position.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 1999 Annual Meeting of Shareholders on June 8,
1999. Holders of 21,089,624 common shares of the Company were
present representing approximately 91% of the Company's 23,173,466
common shares issued and outstanding.
(b) and (c) The following persons were elected as members of the Company's
Board of Directors to serve until the annual meeting following
their election or until their successors are duly elected and
qualified. Each person received the number of votes for or the
number of votes with authority withheld indicated below.
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
- ---- --------- --------------
<S> <C> <C>
Ari Deshe 21,037,753 51,871
Michael G. Jesselson 21,045,804 43,820
George Kolber 21,076,087 13,537
Roger S. Markfield 21,045,799 43,825
Jay L. Schottenstein 20,995,814 93,810
</TABLE>
The proposal to approve the Company's 1999 Stock Incentive Plan
described in the Proxy Statement passed with 14,210,005 votes For;
4,826,966 votes Against; and 30,408 votes Abstain.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 15 Acknowledgement of Ernst & Young LLP
Exhibit 27 Financial Data Schedule
(b) None.
14
<PAGE> 15
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.
<TABLE>
<S> <C>
Dated September 2, 1999
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
</TABLE>
15
<PAGE> 1
Exhibit 15
Acknowledgment of Ernst & Young LLP
The Board of Directors and Stockholders
American Eagle Outfitters, Inc.
We are aware of the incorporation by reference in the Registration Statements
(Forms S-8) pertaining to the American Eagle Outfitters, Inc. Employee Stock
Purchase Plan (Registration No. 333-3278), the American Eagle Outfitters, Inc.
1994 Restricted Stock Plan (Registration No. 33-79350), the American Eagle
Outfitters, Inc. 1994 Stock Option Plan (Registration Nos. 333-44759, 33-79358,
and 333-12661), and the American Eagle Outfitters, Inc. Stock Fund of American
Eagle Outfitters, Inc. Profit Sharing and 401(k) Plan (Registration No.
33-84796), and the American Eagle Outfitters, Inc. Registration Statement (Form
S-3) (Registration No. 333-68875) of our report dated August 18 , 1999 relating
to the unaudited consolidated interim financial statements of American Eagle
Outfitters, Inc. which is included in its Form 10-Q for the quarter ended July
31, 1999.
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
August 30, 1999
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 49,099
<SECURITIES> 21,797
<RECEIVABLES> 13,276
<ALLOWANCES> 0
<INVENTORY> 74,363
<CURRENT-ASSETS> 187,135
<PP&E> 102,817
<DEPRECIATION> 34,576
<TOTAL-ASSETS> 263,682
<CURRENT-LIABILITIES> 70,282
<BONDS> 0
0
0
<COMMON> 466
<OTHER-SE> 192,934
<TOTAL-LIABILITY-AND-EQUITY> 263,682
<SALES> 178,582
<TOTAL-REVENUES> 178,582
<CGS> 105,993
<TOTAL-COSTS> 105,993
<OTHER-EXPENSES> 45,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (785)
<INCOME-PRETAX> 27,928
<INCOME-TAX> 10,979
<INCOME-CONTINUING> 16,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,949
<EPS-BASIC> .36
<EPS-DILUTED> .35
</TABLE>
