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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0001
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
150 THORN HILL DRIVE, WARRENDALE, PA 15086-7528
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (724) 776-4857
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares,
without par value
(Title of class)
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, and (2) has been subject to the filing requirements for
at least the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant,
11,777,011 Common Shares, based on the $83.125 closing sale price on April 15,
1999 was $978,964,039.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 23,162,456 Common Shares were
outstanding at April 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for 1999 Annual Meeting of
Stockholders, in part, as indicated.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
We are a specialty retailer of all-American casual apparel, accessories, and
footwear for men and women between the ages of 16 and 34. We source, design, and
market a versatile line of timeless and relaxed clothing classics like jeans,
khakis, and T-shirts under our American Eagle Outfitters(R) and AE(R) brand
names for exclusive sale in our American Eagle Outfitters stores. As of April 1,
1999, we operated 394 stores in 41 states.
We opened our first American Eagle Outfitters store in 1977. We are currently
one of the largest retailers targeting the highly favorable teenage demographic.
According to U.S. census data, the teen demographic is growing at a faster rate
than the total U.S. population. We appeal to our growing consumer base by
selling attractively priced fashionable items that reflect our lifestyle-based
retail branding strategy. Our lifestyle brand concept is incorporated in every
aspect of our retail operations. Our designers interpret fashion trends and
develop merchandise that has fresh, collegiate appeal for our target customer.
Our store layout and design are uniform and convey a natural and youthful brand
image. We utilize strong visual representations of active youth in our in-store
print advertising. Other marketing, advertising and promotional programs further
reinforce our classic American Eagle brand image. We believe the combination of
these efforts has created a strong brand identity for American Eagle
Outfitters(R).
We plan to continue to promote and expand our brand. We believe strong brand
awareness will provide the foundation for future growth. In Fiscal 1998, we
began to leverage the power of our brand by selling merchandise through our
internet site, ae.com, launching our quarterly catalog, AE Magazine, and
expanding our direct mail program. In Fiscal 1999, we will increase our
offerings through these alternative distribution channels and seek higher
conversion rates from our direct mail marketing base. We plan to open 80 stores
in Fiscal 1999. Our new stores will be larger and include both new geographic
expansion and entries into more high performance malls that typically generate
higher average sales per square foot. We also intend to extend our brand to new
product categories including personal care items.
ORGANIZATION AND HISTORY
Until January 2, 1994, our business was operated by Retail Ventures, Inc. and
Natco Industries, Inc., two corporations owned principally by members of the
Jerome Schottenstein family. Effective on that date, we obtained all of the
operating assets and liabilities of the American Eagle Outfitters(R) operations
in exchange for the issuance of shares of our common stock. We lease our office
and distribution center from a partnership owned by the Schottenstein Family and
Schottenstein Stores Corporation. Shottenstein Stores Corporation also continues
to provide us with certain importing and other services. See Note 3 of Notes to
Consolidated Financial Statements. On November 2, 1998, we changed our state of
incorporation from Ohio to Delaware. Effective on April 7, 1999, we completed a
plan of reorganization to achieve certain corporate objectives and to implement
a holding company structure. As part of this reorganization, we changed our name
from Natco Industries, Inc. to American Eagle Outfitters, Inc. and our
predecessor, formerly known as American Eagle Outfitters, Inc. changed its' name
to AE Stores Company and became our wholly owned subsidiary. The transaction did
not have a significant impact on our financial statements.
Our financial year is a 52/53 week year that ends on the Saturday nearest to
January 31. For tax purposes, we report on a July year-end. As used herein,
"Fiscal 1998", "Fiscal 1997" and "Fiscal 1996" refer to the respective twelve
month periods ended January 30, 1999, January 31, 1998 and February 1, 1997.
"Transition 1996" refers to the twenty-seven week period from July 30, 1995 to
February 3, 1996. Similarly, "Fiscal 1995" and "Fiscal 1994" refer to the fiscal
years ended July 29, 1995 and July 30, 1994, respectively. "Fiscal 1999" refers
to the twelve month period ending February 1, 2000.
Our principal offices are located at 150 Thorn Hill Drive, Warrendale,
Pennsylvania 15086-7528 and our telephone number is (724) 776-4857.
OPERATING STRATEGY
Over the past three years, we have focused on six core operating strategies to
differentiate ourselves from our competition, improve our profitability and
increase sales. These strategies include:
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Build the American Eagle Outfitters Brand.
We have created a focused brand image based on a youthful active lifestyle,
classic American styles and affordability. Our brand image is communicated
through all aspects of our operations, from merchandising to marketing to our
store environment. We are still in the early stages of developing our brand, and
we believe the opportunities for continued growth of our brand are excellent. We
plan to extend the reach of our brand through new store openings in both new and
existing markets and through alternate distribution channels. In Fiscal 1998, we
began selling merchandise on our internet site, ae.com, and launched our
quarterly catalog, AE Magazine. Increased marketing initiatives further
strengthen our brand image. In Fiscal 1998, we increased direct mail promotions
and introduced new promotional media including movie theater advertising, aerial
advertising on beaches during Spring break, and closed circuit television in
high schools. We have developed marketing and promotional alliances with
corporate partners whose customer demographics are similar to those of our
customers. Examples of co-marketing efforts include music compact disc
promotions and contests for mountain bikes, four wheel drive vehicles and trips.
We utilize print advertising in magazines such as Mademoiselle, Seventeen, Spin,
Teen People, and ESPN to further reinforce our youthful active image.
Focus on Rapidly Growing Customer Base
Our target customer is a 20 year old man or woman, but we believe our brand
appeals to customers between the ages of 16 and 34. The demographic outlook is
favorable for the population segment that includes our target customer base and
should support the growth of our brand. It is estimated that the teenage
population will grow at a rate nearly double that of the overall U.S. population
through 2005.
Control Merchandise Design, Production, and Retail Operations
An integral part of our strategy is to offer merchandise that reinforces our
brand image and serves our target customer. We are able to achieve this because
essentially all of our merchandise assortment is private label. We control the
production of merchandise from the design stage through final sale. Our internal
design group develops seasonal merchandise themes and collaborates with our
buyers to create a coordinated merchandise presentation for each season, which
is augmented by periodic, in-season merchandise updates. Through our sourcing
affiliate, we deal directly with manufacturers to facilitate lower product costs
and reduce order lead times. As a result, we are able to quickly respond to
fashion changes and provide merchandise closer to the season in which the
merchandise is intended to be worn. We are also able to tailor our merchandise
assortment by region in response to differing seasonal climates and trends. We
control the visual presentation and pricing of our goods, test new items and
ensure consistent customer service levels.
Offer Great Value to Customers
We seek to provide great quality apparel, footwear, and accessories at
affordable prices that are competitive with or lower than those of comparable
mall-based retailers. We have established relationships with key manufacturers
and we have our own sourcing company to ensure the quality of our goods. As a
result of our sourcing and merchandise strategies, we are able to support our
pricing strategy while maintaining our quality standards.
Maintain Consistent Store Level Operations
A critical element of our brand development is conveying a consistent message to
our customers. The first step is creating a store environment that conveys the
image of our brand. Our store design, furniture, fixtures, and music are
carefully coordinated to create a store environment that is consistent with the
casual, fashionable image of our brand. Large in-store photographs depict young
people enjoying an active, casual lifestyle with friends. These same pictures
are used throughout our advertising campaigns, catalog and internet site. We
maintain a uniform appearance throughout our store base, in terms of merchandise
display and location on the selling floor. Store managers receive detailed store
plans that outline fixture and merchandise placement. Regional visual directors
ensure that the visual presentation of the merchandise and marketing materials
are executed consistently throughout the stores. We believe that an important
aspect of our brand and marketing strategy is personalized customer service. Our
sales associates are the central element in creating a comfortable atmosphere.
Sales associates are trained to provide superior customer service through AE
University, our in-store training curriculum. Sales associates are encouraged to
wear American Eagle merchandise and must follow personal appearance guidelines
which reflect our image.
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Continue to Invest in Infrastructure
To support our store expansion strategy, we plan to increase our distribution
capacity and upgrade our technology systems over the next few years. In 1998, we
invested $6 million in our distribution center, primarily upgrading our existing
sorting systems to improve our processing efficiencies. This helped to reduce
our unit processing costs by 8% in 1998 compared to the prior year and will
improve our processing times for new orders and replenishment. We plan to add
120,000 square feet to our distribution and office facilities during Spring
1999. We are also researching additional locations for distribution as we expand
our store base. As part of this strategy, we have opened a 42,000 square foot
distribution facility in Mexico from which we expect to ship basic items, such
as T-shirts. Additionally, we are investing in upgrading our information
technology systems over the next several years. Planned projects will involve
store systems, warehouse distribution, merchandise planning and allocation, and
supply chain technology.
GROWTH STRATEGY
Our growth strategy is focused on developing a strong brand. The principal
elements of our growth strategy include:
New Store Growth
Our store expansion strategy is to continue our geographic expansion throughout
the United States and to fill-in existing markets. We expect to open 80 stores
in Fiscal 1999, and to increase our store base by 15-20% annually thereafter. We
are focusing our expansion efforts on the West and plan to enter California in
Fiscal 1999, which we believe offers tremendous opportunity to reach our target
customer and expand our brand. While substantially all stores to be opened in
Fiscal 1999 will be in regional shopping malls, we believe that selected street
locations in high traffic urban settings and university towns, as well as
airports and strip centers, provide attractive expansion opportunities. We
believe that there are at least 500 additional enclosed mall locations in the
United States suitable for an American Eagle Outfitters store. Because we offer
our customers fashionable merchandise at value-oriented prices, we appeal to a
broad income segment. Consequently, we can operate profitability in a wide range
of mall types. Historically, we focused our expansion on malls offering the most
attractive lease terms. Our store expansion strategy will increasingly focus on
expanding into higher performance malls that typically generate higher sales per
square foot.
The table below shows certain information relating to our historic store growth:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL TRANSITION FISCAL
1998 1997 1996 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
MALL BASED STORES
Stores at beginning of period 332 303 272 266 192
Stores opened during the period 56 36 38 11 81
Stores closed during the period (2) (7) (7) (5) (7)
--- --- --- --- ---
Subtotal 386 332 303 272 266
--- --- --- --- ---
OUTLET STORES
Subtotal -- -- -- 1 31
--- --- --- --- ---
TOTAL STORES AT END OF PERIOD 386 332 303 273 297
=== === === === ===
</TABLE>
Non-Store Opportunities
In Fiscal 1998, we began selling merchandise through our internet site, ae.com,
and launched our quarterly catalog, AE Magazine, to further promote merchandise.
Our catalog currently reaches a circulation of 500,000 per issue. Our internet
site is an extension of the AE lifestyle that we convey in our stores and our
catalog. We offer approximately 80% of our product through ae.com and we also
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provide movie clips, horoscopes, and book selections, all carefully selected and
edited for our target customer. These new distribution channels further promote
the AE brand and permit us to capture meaningful data on our customers and their
shopping patterns that can be used to enhance the productivity of our overall
operations.
Increased Sales Productivity
We believe significant opportunities exist to improve our sales productivity
because we are in the early stages of the development of our brand. Our brand
provides opportunities for expansion of existing product categories. For
example, womens' apparel has increased as a percentage of total sales from 24%
in Fiscal 1995 to 52% in Fiscal 1998. We believe the AE brand can also be
extended to new product categories, such as personal care and accessories. In
order to maintain a balanced presentation in each category and to accommodate
any future product categories, we are seeking larger new store locations and
increasing selling square footage in store remodels. We remodeled 16 stores in
Fiscal 1998 and have targeted 22 stores for remodeling in Fiscal 1999. We are in
the final stages of a re-design of our store format, which we will be testing in
June 1999. We believe this new format will improve the overall shopping
experience through innovative design features and the incorporation of the
latest store technologies. Database marketing is another component of our sales
growth strategy. We believe that integrating the customer data obtained through
our stores, catalog, internet site and our credit card will facilitate more
effective target marketing and the development of greater customer loyalty. We
believe the combination of these growth initiatives will help to continue the
growth of the AE brand and improve sales productivity.
Growth Through Acquisitions
Our growth strategy includes the possibility of growth through acquisitions. We
periodically consider and evaluate acquisitions and opportunities to support
future growth, and may undertake acquisitions in 1999. At this time we have not
committed to any material future acquisitions. In the event we did pursue
material future acquisitions, any such acquisitions could require additional
equity or debt financing, which we would seek to obtain as required.
MERCHANDISE CATEGORIES
We design and sell virtually all of our merchandise under our own brands. Our
merchandising strategy focuses on providing a carefully selected, in-season,
merchandise assortment within our principal merchandise groups: mens and womens
apparel, footwear and accessories. Merchandise is regularly updated with new
styles, colors and fabrics. We offer quality fashionable interpretations of
fundamental wardrobe items such as jeans, sweaters, khakis, T-shirts, flannel
shirts, and fleece. The following table shows the approximate percentage of net
sales attributable to each merchandise group:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Transition Fiscal
1998 1997 1996 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Mens apparel 40% 41% 36% 52% 57%
Womens apparel 52% 50% 47% 30% 24%
Footwear and accessories 8% 9% 17% 18% 19%
---- ---- ---- ---- ----
100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
Recognizing the sales and margin opportunities of building a larger customer
base in womens apparel, we significantly increased the percentage of womens
merchandise in our stores beginning in Spring 1995. We seasonally adjust the mix
between mens and womens apparel to maximize the opportunity within each
merchandise category.
STORE OPERATIONS
Our store operations are managed by an Executive Vice President and Director of
Store Operations, seven regional managers and forty-four district managers, each
of whom supervises an average of nine stores. A typical store has a store
manager, two assistant store managers, four full-time and six to twelve
part-time sales associates, depending on the season. The hiring and training of
new
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employees are the responsibility of the store manager and district manager, and
we have established training and operations procedures to assist them.
Our continued success is dependent in part on our ability to attract, retain,
and motivate qualified employees. Our incentive compensation and training
programs are intended to attract and retain qualified store employees. Sales
associates are trained to provide superior customer service in order to maximize
sales, and to ensure that store merchandising plans are executed properly and to
minimize inventory shrinkage. We utilize AE University, an in-store training
curriculum that was developed to provide on-site training and skills development
to sales associates and managers. During Fiscal 1998, we established the
position of national recruiter to coordinate our efforts in recruiting qualified
candidates. Also during Fiscal 1998, we implemented staff scheduling software to
improve productivity and customer service by better aligning store staffing with
expected customer traffic.
Regional, district, and store managers receive performance bonuses based on
sales, payroll, and shrinkage goals for their stores. Sales associates and
assistant managers are eligible for a number of incentives, including cash
awards and prizes for achieving certain sales goals. In Fiscal 1997, we
introduced AE Rewards, an incentive program that enables hourly sales associates
to earn points for achieving sales goals. These points are used to select
merchandise awards from an AE Rewards catalog.
STORE ENVIRONMENT
We consider our stores and in-store marketing as principal elements that signify
and convey the image of our brand. Our store design, furniture, fixtures and
music are carefully coordinated to create a store environment that is consistent
with the casual, fashionable image of the brand. To promote consistency and name
recognition, our stores are designed to be substantially identical, with a warm
and casual ambiance created by the use of worn hardwood floors, light colored
wooden fixtures and off white walls. Large in-store photographs depict young
people enjoying an active, casual lifestyle with friends and family and reflect
our casual, "live your life" attitude. We believe that our store ambiance is
welcoming and comfortable and promotes a pleasant shopping experience. We
believe that our current store design in the majority of our stores is
effective, meeting the needs of our target customer. However, we understand that
we must evolve and react quickly to the rapidly changing retail environment.
Accordingly, we are in the final stages of an AE store format re-design, which
we will be testing in June 1999. We feel that this enhanced format will improve
the overall shopping experience of our customers through improved design and the
incorporation of the latest store technologies.
We regularly refurbish and renovate our stores to provide better customer
service and upgrade to our newest store design, particularly in connection with
lease renewals. In Fiscal 1998, we renovated 16 higher volume, older stores to
the newest store design at a total cost of $3.5 million. Also, we spent $1.9
million in fixture and leasehold retrofits to existing stores.
STORE LOCATIONS
Our stores average approximately 4,200 gross square feet and approximately 3,300
on a selling square foot basis. At January 30, 1999, we operated 386 stores in
41 states shown below:
<TABLE>
<S> <C> <C> <C>
Alabama Kansas New Hampshire Tennessee
------- ------ ------------- ---------
10 stores 5 stores 4 stores 14 stores
Arkansas Kentucky New Jersey Texas
-------- -------- ---------- -----
3 stores 6 stores 13 stores 17 stores
Colorado Louisiana New Mexico Utah
-------- --------- ---------- ----
3 stores 6 stores 2 stores 1 store
Connecticut Maine New York Vermont
----------- ----- -------- -------
8 stores 1 store 26 stores 2 stores
Delaware Maryland North Carolina Virginia
-------- -------- -------------- --------
1 store 10 stores 16 stores 19 stores
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Florida Massachusetts North Dakota Washington
------- ------------- ------------ ----------
18 stores 12 stores 2 stores 3 stores
Georgia Michigan Ohio West Virginia
------- -------- ---- -------------
14 stores 19 stores 24 stores 6 stores
Idaho Minnesota Oklahoma Wisconsin
----- --------- -------- ---------
1 store 9 stores 4 stores 9 stores
Illinois Mississippi Pennsylvania
-------- ----------- ------------
20 stores 5 stores 29 stores
Indiana Missouri South Carolina
------- -------- --------------
11 stores 11 stores 7 stores
Iowa Nebraska South Dakota
---- -------- ------------
10 stores 3 stores 2 stores
</TABLE>
PURCHASING
We purchase merchandise from approximately 75 domestic and foreign suppliers who
either manufacture their own merchandise or supply merchandise manufactured by
others, or both. During Fiscal 1998, approximately 19% of our merchandise was
purchased from domestic suppliers and the remaining 81% from foreign suppliers.
Since we rely on a small number of overseas sources for a significant portion of
our purchases, any event causing the disruption of imports including the
insolvency of a significant supplier, the imposition of additional import
restrictions, or political or economic disruptions in a country where our vendor
factories are located, could have a material adverse affect on our operations.
We do not maintain any long-term or exclusive commitments or arrangements to
purchase from any single supplier.
All of our suppliers receive a vendor compliance manual that describes our
quality standards and shipping instructions. We maintain a quality control
department at our distribution center to inspect incoming merchandise shipments
for uniformity of sizes and colors, and for overall quality of manufacturing.
Periodic quality inspections are also made by our employees at manufacturing
facilities in the United States and internationally to identify potential
problems prior to shipment of merchandise. Additionally, our merchant group
works directly with many factories to address quality control issues before
merchandise is shipped.
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MERCHANDISE DESIGN
A key element of our business strategy is to design products geared to a
well-defined customer group and which embody the image of a casual, youthful
lifestyle. Our internal design group is divided primarily into separate mens and
womens design teams. The product development process begins with senior
management in the merchandising and design areas, who develop seasonal
merchandise themes and concepts. These design themes and concepts are developed
through domestic and foreign travel, retail shopping and an awareness of
fashions and activities currently favored by the young, active segment of the
population. These themes and concepts are then used to create items for the
merchandise line that are then developed by the designers. The designers
collaborate with our buyers to create a coordinated merchandise presentation for
each season, which is augmented by periodic, in-season merchandise updates.
MERCHANDISE INVENTORY, REPLENISHMENT AND DISTRIBUTION
Purchase orders, executed by our buyers, are entered into the computerized
merchandise data system at the time of order. Merchandise is normally shipped
directly from vendors to our central distribution center near Pittsburgh, PA.
Upon receipt, merchandise is entered into the merchandise data system, then
processed and prepared for shipment to the stores or forwarded to a warehouse
holding area to be used as store replenishment goods. The allocation of
merchandise among stores varies based upon a number of factors relating to the
specific characteristics of each store such as geographic location, customer
demographics or store size. Merchandise is shipped to the stores two to three
times per week depending upon the season and store requirements.
The specialty retail apparel business fluctuates according to changes in the
economy and customer preferences, dictated by fashion and season. These
fluctuations especially affect the inventory owned by apparel retailers, since
merchandise usually must be ordered well in advance of its selling season. While
we endeavor to test many merchandise items before ordering large quantities, we
are still vulnerable to changing fashion trends and fluctuations in customer
demands. In addition, the cyclical nature of the retail business requires that
we carry a significant amount of inventory, especially prior to peak selling
seasons, when we build up our inventory levels. We enter into agreements for the
manufacture and purchase of private label apparel well in advance of the
applicable selling season. As a result, we are vulnerable to changes in consumer
demand, pricing shifts, and the timing and selection of merchandise purchases.
We continually review our inventory levels in order to identify slow-moving
merchandise and generally use markdowns to clear this merchandise. Markdowns may
occur when inventory exceeds customer demand for reasons of style, seasonal
adaptation, changes in customer preference, lack of consumer acceptance of
fashion items, competition, or we determine that the inventory in stock will not
sell at its currently ticketed price. Such markdowns may have an adverse impact
on our earnings, depending on the extent and amount of inventory affected.
CUSTOMER CREDIT
We offer our customers an American Eagle Outfitters private label credit card.
We have no liability to the card issuer for bad debt expense, provided that
purchases are made in accordance with the issuing banks' procedures. We believe
that providing in-store credit through use of our proprietary credit card
promotes incremental sales and encourages customer loyalty. Our credit card
holders receive special promotional offers and advance notice of all in-store
sales events. The names and addresses of these preferred customers are added to
our customer database which is used primarily for direct mail purposes.
Customers may also pay for their purchases with American Express(R),
Discover(R), MasterCard(R), Visa(R), cash or check. During Fiscal 1998,
approximately 46% of all purchases were paid for with credit cards.
In November 1998, we replaced our gift certificate program with stored value
gift cards. Gift cards with values from $10 to $200 can be purchased. When the
recipient uses the gift card, the value of the purchase is electronically
deducted and any remaining value can be used for future purchases. During Fiscal
1998, we sold $8.0 million in gift cards versus $4.4 million in gift
certificates in the prior year.
MARKETING AND ADVERTISING
Our marketing and advertising strategies are designed to increase consumer
recognition of our merchandise and establish American Eagle Outfitters as a
differentiated lifestyle brand. We focus our advertising efforts on in-store
displays and promotional events, direct mail and print media but we are also
expanding into other means of advertising. In Fiscal 1998, our advertising
expenses were 2.8% of net sales.
In-store advertising is primarily communicated through large graphics that
portray men and women engaged in activities associated with an active lifestyle.
Promotions, contests and gifts with purchase are also offered to customers,
often in conjunction with
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corporate partners whose target customer demographics are similar to ours.
Examples of co-marketing efforts include music compact discs produced in
conjunction with a national music magazine and contests for prizes including
mountain bikes, four-wheel drive vehicles and vacation trips.
We utilize direct mail to announce upcoming sales and the arrival of new
merchandise and to promote our image. Promotional materials are also included in
the monthly statement for our private label credit card. We use our own list of
customers and database mining techniques to target direct mail materials to
existing and potential customers.
We also utilize print advertising to build recognition of our brand. Our print
ads appear in nationwide publications with reader demographic profiles that
reflect our targeted youthful customer.
During Fiscal 1998, we expanded our advertising vehicles through development of
a catalog that was mailed to target customers. Also during Fiscal 1998, we
endeavored into other means of promotional advertising, including aerial
advertising during spring break, movie theater advertising, and closed-circuit
television advertising in schools.
INFORMATION SYSTEMS
Our computer information systems consist of a full range of retail financial and
merchandising systems which include merchandise planning, distribution center
processing, inventory allocation, shipment processing, in-store systems, sales
reporting, and financial processing and reporting.
In Fiscal 1998, a disaster recovery plan to allow for continued mainframe
computer operations in the event of a major service disruption was tested and
implemented, a relational database was created to support our internet sales
process, a new sales audit application was implemented that added new levels of
control to the audit function, and upgrades and modifications were made to our
existing hardware and software to ensure that they are Year 2000 compliant. We
plan to complete all modifications, upgrades, and testing of our systems
affected by Year 2000 issues by June 1999. During 1999, we also plan to install
in-store computers which will allow direct, efficient communication with our
home office.
COMPETITION
The retail apparel industry is very competitive. We compete primarily on the
basis of quality, fashion, service, selection and price. We compete with various
divisions of The Limited and The Gap, as well as with retail chains such as
Abercrombie & Fitch, The Buckle, Pacific Sunwear, and other national, regional
and local retailers catering to a youthful customer. We also compete with the
casual apparel and footwear departments of department stores, often in the same
mall as our stores. Many of our competitors are considerably larger and have
substantially greater financing, marketing, and other resources. There can be no
assurance that we will be able to successfully compete in the future.
TRADEMARKS AND SERVICE MARKS
We have registered American Eagle Outfitters(R) in the U.S. Patent and Trademark
Office ("PTO")as a trademark for clothing products and for a variety of
non-clothing products, and as a service mark for retail clothing store service.
We have also registered AE(R) as a trademark for clothing products, and AEO(R)
as a trademark for clothing products and a variety of non-clothing products.
American Eagle has applied to the PTO for the registration of AE(TM) as a
trademark for footwear which will be registered in the near future, and AE
Performance(TM), AE Khaki(TM), and AE Supply(TM) as trademarks for clothing
products.
EMPLOYEES
As of March 1, 1999, we had 7,576 employees, of whom 1,401 were full-time
salaried employees, 451 were full-time hourly employees and 5,724 were part-time
and seasonal hourly employees. We consider our relationship with our employees
to be satisfactory.
ITEM 2. PROPERTIES.
We rent our headquarters and distribution facilities near Pittsburgh, PA from
Linmar Realty Company ("Linmar"), a related party. In Fiscal 1998, we spent
approximately $6.0 million to upgrade its distribution center facilities to
enhance operating efficiencies and
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accommodate store growth. Our headquarters and distribution center occupy
approximately 308,000 square feet, 49,000 square feet of which is used for
executive, administrative and buying offices. As a result of a 1995 expansion, a
new lease was entered into which expires on December 31, 2010. In Fiscal 1999,
we will contract with our landlord to expand our distribution center facility to
add 120,000 square feet which will increase our capacity to handle the
distribution needs for 700 stores. We also lease approximately 15,000 square
feet for our design and production offices in New York, NY. This lease expires
in October 2008.
All of our stores are leased. The store leases generally have terms of
approximately 10 years. Most of these leases provide for base rental and require
the payment of a percentage of sales as additional rent when sales reach
specified levels. Under our store leases, we are typically responsible for
maintenance and common area charges, real estate taxes and certain other
expenses. We have generally been successful in negotiating renewals as leases
near expiration.
ITEM 3. 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 alleges that we infringe their trade dress. We have filed a
motion for summary judgement. We believe the allegations in the complaint are
without merit and we will continue to vigorously defend our rights.
We are subject to various claims and legal actions that arise in the ordinary
course of our business. We believe that such claims and legal actions,
individually and in the aggregate, will not have a material adverse effect on
our business or our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Effective April 7, 1999, we effected a corporate reorganization. This
reorganization was approved by the holders of a majority of our outstanding
shares of common stock at a special meeting of the stockholders on March 29,
1999, with 18,683,329 shares voted in favor of the reorganization, 68,401 shares
voted against the reorganization, and 11,477 shares abstained.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our stock is traded on the Nasdaq National Market under the symbol "AEOS". The
following table sets forth the range of high and low sales prices of the common
stock as reported on The Nasdaq National Market during the periods indicated. As
of March 1, 1999, there were 110 stockholders of record. The following
information reflects the January 1998, May 1998, and May 1999 stock splits.
<TABLE>
<CAPTION>
For the Quarters Ended Market Price
- ---------------------- ------------
High Low
---- ---
<S> <C> <C>
April 1997 $ 2.78 $ 1.81
July 1997 $ 3.72 $ 2.24
October 1997 $ 6.45 $ 3.45
January 1998 $ 8.98 $ 6.56
April 1998 $20.79 $ 7.75
July 1998 $26.75 $16.57
October 1998 $27.31 $14.13
January 1999 $34.19 $21.88
</TABLE>
We have never paid cash dividends and presently anticipate that all of our
future earnings will be retained for the development of our business and do not
anticipate paying cash dividends in the foreseeable future. The payment of any
future dividends will be at the discretion of our Board of Directors and will be
based on future earnings, financial condition, capital requirements and other
relevant factors.
11
<PAGE> 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Selected Consolidated Financial Data
(dollars in thousands, except per share amounts and square foot data)
<TABLE>
<CAPTION>
For the Years Ended
January 30, January 31, February 1, February 3, July 29,
1999 1998 1997 1996 (2) 1995
---- ---- ---- -------- ----
(Unaudited))
<S> <C> <C> <C> <C> <C>
Net sales (1) $ 587,600 $ 405,713 $ 326,404 $ 340,323 $ 296,563
Operating income (loss) (1) $ 87,053 $ 31,120 $ 8,859 ($ 1,073) $ 12,043
Net income (loss) $ 54,118 $ 19,537 $ 5,925 ($ 1,334) $ 6,765
Basic earnings (loss) per share (3) $ 1.20 $ 0.44 $ 0.13 ($ 0.03) $ 0.15
Diluted earnings (loss) per share (3) $ 1.13 $ 0.43 $ 0.13 ($ 0.03) $ 0.15
Total assets $ 210,948 $ 144,795 $ 110,438 $ 95,363 $ 134,484
Working capital $ 94,753 $ 48,486 $ 34,378 $ 24,775 $ 19,264
Stockholders' equity $ 151,197 $ 90,808 $ 71,056 $ 63,796 $ 57,932
Average return on stockholders' equity 44.7% 24.1% 8.8% (2.3%) 12.5%
Current ratio 2.59 1.90 1.87 1.78 1.25
Long term debt -- -- -- -- --
Total stores at year-end 386 332 303 273 297
Comparable store sales increase (decrease) 32.1% 15.1% -1.8% 6.6% 2.9%
Net sales per average selling square foot (4) $ 497 $ 391 $ 340 $ 381 $ 351
Total selling square feet at end of period 1,276,889 1,080,657 990,980 916,796 1,001,262
Net sales per average gross square foot (4) $ 388 $ 303 $ 261 $ 288 $ 264
Total gross square feet at end of period 1,624,933 1,393,361 1,285,598 1,200,816 1,317,857
</TABLE>
(1) The prior year amounts have been reclassified to conform to the January 30,
1999 classifications.
(2) The 53-weeks ended February 3, 1996 includes 9 months of sales, or $21.5
million, from outlet stores sold in October 1995. It also includes 6 months of
operations from the year ended July 29, 1995, representing $113.7 million of net
sales, $13.7 million of operating loss, and $8.4 million of net loss.
(3) Earnings (loss) per share has been restated for the January 1998 and May
1998 three-for-two stock splits, the May 1999 two-for-one stock split, and for
the effect of Financial Accounting Standards Board Statement No. 128, Earnings
per Share. See Notes 2 and 12 to the Consolidated Financial Statements.
(4) Average net sales per square foot is calculated using retail sales for the
period divided by the straight average of the beginning and ending square
footage for the period.
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
We achieved record sales and earnings for the year ended January 30, 1999
('Fiscal 1998"). The improved sales and profitability resulted from our focus on
several operating goals and merchandise strategies developed to improve
operating performance, enhance brand image, and differentiate us from our
competition. We emphasized these merchandising strategies:
- -focus our merchandise assortment to support the American Eagle Outfitters(R)
brand and to appeal to our target customer,
- -commit to key merchandise items, and
- -execute an in-season, regionally-based merchandise strategy.
Our strategic marketing initiatives focused on efforts to expand the non-store
distribution of our merchandise by providing commerce opportunities on our
Internet web site, ae.com, and through catalog promotions. Our operating
initiatives included the addition of 54 new stores, net of closings, the upgrade
of 16 locations to our newest store design, and continued focus on inventory
productivity to improve merchandise flow and increase inventory turns. We also
improved our distribution center facility productivity through a $6.0 million
upgrade of the facility during Fiscal 1998. We believe this upgrade, together
with a planned expansion in Fiscal 1999, will continue to improve replenishment
and processing of new orders and increase the capacity of our facility to 700
stores.
As a result of these initiatives, our sales for Fiscal 1998 increased to $587.6
million compared to $405.7 million for the year ended January 31, 1998 ("the
prior year" or "Fiscal 1997"), an increase of 44.8%. Comparable store sales
achieved record levels for Fiscal 1998, increasing 32.1% compared to the prior
year. We achieved this increase primarily through an 18.1% increase over last
year in the number of merchandise units sold in comparable stores. Our net sales
per average selling square foot increased to $497 for Fiscal 1998 from $391 for
Fiscal 1997, a 27.1% increase. Additionally, gross profit increased to $234.5
million, or 39.9% of sales, for Fiscal 1998, compared to $137.0 million, or
33.8% of sales for the prior year. The increased gross profit reflected
implementation of our strategic initiatives, resulting in improved merchandise
mark-ons, decreased markdowns as a percent of sales, and improved leveraging of
buying, occupancy and warehousing costs.
We continued our focus on improving inventory productivity, which is reflected
in inventory turnover of 4.1 times in Fiscal 1998 versus 3.6 times in the prior
year. Our liquidity, as measured by the current ratio, improved to 2.59 as of
January 30, 1999 compared to 1.90 at the end of the prior year.
Fiscal 1998's higher gross profit translated into significantly improved
operating profit and net income. Operating profit for Fiscal 1998 increased 180%
to $87.1 million compared to $31.1 million in the prior year. Net income for
Fiscal 1998 was $54.1 million, or $1.13 per share on a diluted basis, compared
to $19.5 million, or $0.43 per share on a diluted basis, in the prior year. Our
strong operating performance for the year as well as continued inventory
productivity allowed us to fund working capital requirements entirely through
cash flow. No borrowings were required under our $75.0 million credit facility.
Our balance sheet improved as a result of the operating performance achieved in
Fiscal 1998. As of January 30, 1999, cash and cash equivalents, including
short-term investments, increased by approximately 76% to $85.3 million from
$48.4 million in the prior year as a result of cash provided by operating
activities. Inventory was $49.7 million compared with $36.3 million in the prior
year, and increased 18.2% on a per store basis reflecting earlier receipt of
Spring 1999 merchandise. Stockholders' equity increased almost 67% to $151.2
million, or $3.28 per share, in Fiscal 1998 compared to $90.8 million, or $2.02
per share, at the end of the prior period. Average return on stockholders'
equity was 44.7% for Fiscal 1998, compared with 24.1% for Fiscal 1997.
13
<PAGE> 14
RESULTS OF OPERATIONS
This table shows, 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>
FOR THE FISCAL YEARS ENDED
--------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales, including certain buying,
occupancy and warehousing expenses 60.1 66.2 69.7
---- ---- ----
Gross profit 39.9 33.8 30.3
Selling, general and administrative expenses 23.6 24.3 25.7
Depreciation and amortization 1.5 1.8 1.9
--- --- ---
Operating income 14.8 7.7 2.7
Interest income, net 0.4 0.3 0.3
--- --- ---
Income before income taxes 15.2 8.0 3.0
Provision for income taxes 6.0 3.2 1.2
--- --- ---
Net income 9.2 % 4.8% 1.8 %
=== === ===
</TABLE>
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Net sales increased 44.8% to $587.6 million from $405.7 million. The increase
includes:
- -$127.3 million from comparable store sales, representing a 32.1% increase over
the prior year, and
- -$54.6 million from new and non-comparable store sales, and non-store sales.
The increase resulted from an increase of 31.6% in units sold, as well as an
8.8% increase in prices. We operated 386 stores at the end of Fiscal 1998,
compared to 332 stores at the end of Fiscal 1997.
Gross profit increased to $234.5 million from $137.0 million. Gross profit as a
percent of net sales increased to 39.9% from 33.8%. The increase in gross profit
as a percent of net sales, was attributable to a 3.6% increase in merchandise
margins as well as a 2.5% improvement in buying, occupancy, and warehousing
costs. The increase in merchandise margins resulted from a decrease in markdowns
as a percent of sales, and improved mark-ons. This improvement in buying,
occupancy, and warehousing costs reflect improved leveraging achieved through
comparable store sales growth.
Selling, general and administrative expenses increased to $138.8 million from
$98.5 million. As a percent of net sales, these expenses decreased to 23.6% from
24.3%. The $40.3 million increase includes:
- -$16.9 million in compensation costs to support increased sales and new
incentive programs,
- -$9.0 million for general services purchased, supplies, and other expenses,
14
<PAGE> 15
- -$7.8 million in store operating expenses to support new store growth,
- -$5.4 million for increased promotional advertising, direct mail, catalog and
Internet development costs, and
- -$1.2 million related to costs in connection with the Natco merger (See Note 3
of the Consolidated Financial Statements).
Depreciation and amortization expense increased to $8.6 million from $7.3
million. As a percent of net sales, these expenses decreased to 1.5% from 1.8%.
Interest income increased to $2.4 million from $1.2 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 period.
Income before income taxes increased to $89.5 million from $32.3 million. As a
percent of net sales, income before income taxes increased to 15.2% from 8.0%.
The increase in income before income taxes as a percent of sales was
attributable to the factors noted above.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Net sales increased 24.3% to $405.7 million from $326.4 million. The increase
includes:
- -$47.5 million from comparable store sales, representing a 15.1% increase over
the prior year, and
- -$31.8 million from new and non-comparable stores, offset by closed store sales.
The total increase in net sales resulted primarily from an increase of 28.2% in
units sold. We operated 332 stores at the end of Fiscal 1997, compared to 303
stores at the end of Fiscal 1996.
Gross profit increased to $137.0 million from $98.8 million. Gross profit as a
percent of net sales increased to 33.8% from 30.3%. The increase was
attributable to a 2.0% increase in merchandise margins and a 1.5% improvement in
buying, occupancy, and warehousing costs. The increase in merchandise margins
resulted primarily from improved mark-ons and decreased markdowns as a percent
of sales. This improvement in buying, occupancy, and warehousing costs reflect
improved leveraging of these expenses.
Selling, general and administrative expenses increased to $98.5 million from
$83.8 million. As a percent of net sales, these expenses decreased to 24.3%
from 25.7%. The $14.7 million increase includes:
- -$6.9 million in compensation costs to support increased sales, new incentive
programs, and the increase in minimum wage effective September 1, 1997,
- -$4.3 million in store operating expenses to support new store growth, and
- -$3.5 million for increased promotional advertising and general services
purchased.
Depreciation and amortization expense increased to $7.3 million from $6.1
million. As a percent of net sales, these expenses decreased to 1.8% from 1.9%.
Interest income increased to $1.2 million from $1.0 million primarily due to
interest earned on the short-term note receivable from Azteca Production
International. No borrowings were required under the terms of our line of credit
during the current or prior period.
Income before income taxes increased to $32.3 million from $9.8 million. As a
percent of net sales, income before income taxes increased to 8.0% from 3.0%.
The increase was attributable to the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash in Fiscal 1998 was from operations. Our primary use
of cash of $24.9 million was invested in capital expenditures. Additionally,
$13.4 million was used to support inventory increases for anticipated sales
growth and new stores. Working capital at year-end was $94.8 million for Fiscal
1998, $48.5 million for Fiscal 1997, and $34.4 million for Fiscal 1996. Fiscal
1998's increase resulted primarily from the increase in cash provided by
operating activities.
For Fiscal 1998, the source of the $59.8 million of cash provided by operating
activities was net income adjusted for non-cash charges for depreciation and
amortization. A portion of the cash flow provided by operating activities was
used to
15
<PAGE> 16
fund new store expansion, remodel existing stores, and other capital
expenditures discussed below. Also, we used $13.4 million to purchase short-term
investments with original maturities of six months to one year. These
investments can be sold at any time. The remainder of the cash flow provided by
operating activities is being retained to fund new store growth, remodelings,
future system enhancements, and other capital expenditures. We fund merchandise
purchases through operating cash flow.
At January 30, 1999, we had an unsecured demand lending arrangement with a bank
to provide a $75.0 million line of credit at either the lender's prime lending
rate (7.75% at January 30, 1999) or a negotiated rate such as LIBOR. The
facility has a limit of $40.0 million to be used for direct borrowing. No
borrowings were required against the line during Fiscal 1998. At January 30,
1999, letters of credit in the amount of $39.2 million were outstanding leaving
a remaining available balance on the line of $35.8 million.
Capital expenditures, net of construction allowances, totaled $24.9 million for
Fiscal 1998. These expenditures included:
- -the addition of 56 new stores totaling $9.5 million
- -16 remodeled locations totaling $3.5 million
- -$6.0 million in improvements to our distribution center
- -$1.9 million in fixture and leasehold retrofits to existing stores and
- -$4.0 million in other capital expenditures.
We expect capital expenditures for Fiscal 1999 to total approximately $40.0
million. We plan to open approximately 80 stores during Fiscal 1999 at an
estimated cost of $19.0 million. This forward-looking statement will be
influenced by our financial position, consumer spending, and the number of
acceptable mall store leases that may become available. Additionally, we have
selected approximately 22 locations to upgrade to our newest store design in
Fiscal 1999 for an estimated cost of $6.6 million. These locations were selected
based upon sales performance and lease terms. Additionally, we plan to spend
approximately $3.0 million to review and upgrade existing systems. We plan to
spend approximately $5.0 million for fixtures and equipment upgrades in our
distribution center facility to improve operating efficiencies and accommodate
new store growth.
Our growth strategy includes the possibility of growth through acquisitions. We
periodically consider and evaluate acquisitions and opportunities to support
future growth, and may undertake acquisitions in 1999. At this time we have not
committed to any material future acquisitions. In the event we did pursue
material future acquisitions, any acquisitions could require additional equity
or debt financing, which we would seek to obtain as required. There can be no
assurance that we will be successful in closing any potential acquisition
transaction, or that any acquisition we undertake will increase our
profitability.
INCOME TAXES
At year-end, we had deferred tax assets of $10.4 million for Fiscal 1998 and
$7.6 million for Fiscal 1997, which result from financial and tax accounting
differences. We have had taxable income during each of the past three tax years
and anticipate that future taxable income will be able to recover the full
amount of the deferred tax asset. Assuming a 40% effective tax rate, we will
need to recognize pre-tax net income of $26 million to recover existing deferred
tax amounts. See Note 8 "Income Taxes" in the Notes to Consolidated Financial
Statements.
IMPACT OF INFLATION
We do 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 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: Our plan to resolve the internal Year 2000 issue involves
two major phases: detection and correction.
16
<PAGE> 17
The detection phase includes 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 new equipment acquired by us. Next, the Company prioritized its
Year 2000 problems based upon their potential impact on the Company. This
detailed assessment of the problems and a plan to correct these problems were
completed in October 1998.
The correction phase includes repair and resolution and testing and
implementation. We have four mission critical systems: distribution center
systems, point of sale systems, merchandising software, and financial software.
A portion of the packing systems in our distribution center are not Year 2000
compliant. We are implementing a software upgrade to make the packing system
Year 2000 compliant. The point of sale register systems need to have a BIOS
upgrade and a minor software upgrade. We are working with our outside vendors to
complete these repairs in each store location. Additionally, our point of sale
store polling system is not Year 2000 compliant and is being replaced with a
Year 2000 compliant system. Our merchandise software needs a version upgrade in
order to make it Year 2000 compliant. We are working to make the necessary
upgrades by May 1999. Our financial software is Year 2000 compliant. We are
internally reviewing and testing all mission critical systems and major systems
components for Year 2000 compliance and plan to complete such tests by June
1999. We believe that all mission critical systems will be Year 2000 compliant.
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 plan to visit 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
is estimated at $2.1 million and is being funded through cash flows from
operations. To date, we have incurred approximately $1.2 million of which $0.3
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. Of the total remaining project costs,
approximately $0.3 million is attributable to the purchase of new software and
hardware, which will be capitalized. We cannot guarantee that these estimates
will be achieved and actual results could differ materially from these plans.
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 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 cause a material 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 are developing a contingency
plan 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. 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 possibility of growth through acquisitions,
- -the planned opening of approximately 80 stores in Fiscal 1999,
- -the selection of approximately 22 stores for remodeling,
17
<PAGE> 18
- -the planned upgrade and expansion of our distribution center facilities,
- -the planned review and upgrade of existing systems, 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:
- -our ability to successfully acquire and integrate other businesses,
- -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,
- -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. 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.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
January 30, January 31, February 1,
ASSETS 1999 1998 1997
---- ---- ----
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 71,940 $ 48,359 $ 34,326
Short-term investments 13,360 -- --
Merchandise inventory 49,688 36,278 27,117
Accounts and note receivable, including related party 8,560 7,647 3,556
Prepaid expenses and other 2,757 5,388 4,381
Deferred income taxes 8,199 4,801 4,380
-------- -------- --------
Total current assets 154,504 102,473 73,760
-------- -------- --------
Fixed assets:
Fixtures and equipment 36,307 25,842 23,118
Leasehold improvements 46,996 35,978 32,671
-------- -------- --------
83,303 61,820 55,789
Less: Accumulated depreciation and amortization 29,933 23,273 21,598
-------- -------- --------
53,370 38,547 34,191
-------- -------- --------
Other assets 3,074 3,775 2,487
-------- -------- --------
Total assets $210,948 $144,795 $110,438
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,551 $ 24,606 $ 20,430
Accrued compensation and payroll taxes 17,739 9,227 4,926
Accrued rent 13,042 7,909 6,006
Accrued income and other taxes 3,208 8,738 5,478
Other liabilities and accrued expenses 7,211 3,507 2,542
-------- -------- --------
Total current liabilities 59,751 53,987 39,382
Stockholders' equity 151,197 90,808 71,056
-------- -------- --------
Total liabilities and stockholders' equity $210,948 $144,795 $110,438
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE> 20
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $587,600 $405,713 $326,404
Cost of sales, including certain buying,
occupancy and warehousing expenses 353,089 268,746 227,648
-------- -------- --------
Gross profit 234,511 136,967 98,756
Selling, general and administrative expenses 138,847 98,529 83,810
Depreciation and amortization 8,611 7,318 6,087
-------- -------- --------
Operating income 87,053 31,120 8,859
Interest income, net 2,436 1,158 973
-------- -------- --------
Income before income taxes 89,489 32,278 9,832
Provision for income taxes 35,371 12,741 3,907
-------- -------- --------
Net income $ 54,118 $ 19,537 $ 5,925
======== ======== ========
Basic earnings per common share $ 1.20 $ 0.44 $ 0.13
======== ======== ========
Diluted earnings per common share $ 1.13 $ 0.43 $ 0.13
======== ======== ========
Weighted average common shares outstanding - basic 45,281 44,181 43,899
======== ======== ========
Weighted average common shares outstanding - diluted 47,952 45,633 45,388
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE> 21
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
<TABLE>
<CAPTION>
(In thousands) Deferred
(1) Common Contributed Retained Treasury Compensation Stockholders'
Shares Stock Capital Earnings Stock Expense Equity
----- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 3, 1996 9,875 $ 99 $ 56,670 $ 11,194 ($ 1,516) ($ 2,651) $ 63,796
Net income -- -- -- 5,925 -- -- 5,925
Exercise and cancellation of stock
options and restricted stock 43 -- 356 -- (109) 53 300
Tax benefit realized on exercised
stock options and vested
restricted stock -- -- 44 -- -- -- 44
Restricted stock and stock option
compensation -- -- -- -- -- 991 991
Restricted stock grant -- -- 1,229 -- -- (1,229) --
------- --------- --------- --------- --------- --------- ---------
Balance at February 1, 1997 9,918 99 58,299 17,119 (1,625) (2,836) 71,056
Net income -- -- -- 19,537 -- -- 19,537
Exercise of stock options 115 1 973 -- -- -- 974
Tax benefit realized on exercised
stock options and vested restricted
stock -- -- 277 -- -- -- 277
Investment in Prophecy, Ltd. -- -- (1,350) (900) -- -- (2,250)
Restricted stock and stock option
compensation -- -- 370 -- -- 844 1,214
Three-for-two stock split -
January 5, 1998 4,978 50 (50) -- -- -- --
------- --------- --------- --------- --------- --------- ---------
Balance at January 31, 1998 15,011 150 58,519 35,756 (1,625) (1,992) 90,808
Net income -- -- -- 54,118 -- -- 54,118
Exercise of stock options 426 4 1,776 -- -- -- 1,780
Tax benefit realized on exercised
stock options and vested restricted
stock -- -- 2,255 -- -- -- 2,255
Restricted stock and stock option
compensation -- -- -- -- -- 1,336 1,336
Restricted stock grant 64 1 1,417 345 (1,763) --
Merger costs incurred by Natco -- -- 900 -- -- -- 900
Three-for-two stock split - May 8,
1998 7,554 76 (76) -- -- -- --
Two-for-one stock split - May 3,
1999 23,055 230 (230) -- -- -- --
------- --------- --------- --------- --------- --------- ---------
BALANCE AT JANUARY 30, 1999 46,110 $ 461 $ 64,561 $ 89,874 ($ 1,280) ($ 2,419) $ 151,197
======= ========= ========= ========= ========= ========= =========
</TABLE>
(1)125 MILLION AUTHORIZED, 46 MILLION ISSUED (ADJUSTED FOR THE JANUARY 1998, MAY
1998, AND MAY 1999 STOCK SPLITS) $.01 PAR VALUE COMMON STOCK AT JANUARY 30,
1999, JANUARY 31, 1998, AND FEBRUARY 1, 1997.
21
<PAGE> 22
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) FOR THE YEARS ENDED
-------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 54,118 $ 19,537 $ 5,925
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,611 7,318 6,087
Loss on impairment and write-off of
fixed assets 1,467 2,292 2,067
Restricted stock compensation 1,336 1,214 991
Deferred income taxes (2,753) (496) (1,898)
Merger costs incurred by Natco 900 -- --
Changes in assets and liabilities:
Merchandise inventory (13,410) (8,903) (3,723)
Receivables (913) (2,611) 2,055
Prepaid and other 2,445 (1,578) (400)
Receivables from officers -- 376 (30)
Accounts payable (5,400) (1,657) 4,018
Accrued liabilities 13,420 10,676 3,489
-------- -------- --------
Total adjustments 5,703 6,631 12,656
-------- -------- --------
Net cash provided by operating activities 59,821 26,168 18,581
-------- -------- --------
Investing activities:
Capital expenditures (24,919) (12,646) (10,540)
Net purchase of short-term investments (13,360) -- --
Investment in Prophecy, Ltd. -- (900) --
Proceeds from sale of assets 6 54 5,874
-------- -------- --------
Net cash used for investing activities (38,273) (13,492) (4,666)
-------- -------- --------
Financing activities:
Net proceeds from stock options exercised 2,033 1,357 425
-------- -------- --------
Net cash provided by financing activities 2,033 1,357 425
-------- -------- --------
Net increase in cash and cash equivalents 23,581 14,033 14,340
Cash and cash equivalents - beginning of period 48,359 34,326 19,986
-------- -------- --------
Cash and cash equivalents - end of period $ 71,940 $ 48,359 $ 34,326
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE> 23
AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 30, 1999
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION
American Eagle Outfitters, Inc. (the "Company") is a specialty retailer of
all-American casual apparel, accessories, and footwear for men and women between
the ages of 16 and 34. The Company designs, markets, and sells its own brand of
versatile, relaxed, and timeless classics like AE dungarees, khakis, and
T-shirts, providing high quality merchandise at affordable prices. The Company
operates retail stores located primarily in regional enclosed shopping malls
principally in the Midwest, Northeast, and Southeast. The Consolidated Financial
Statements include the accounts of the Company and its wholly-owned royalty,
investment and sourcing subsidiaries. All inter-company transactions have been
eliminated.
The following table sets forth the approximate percentage of net sales
attributable to each merchandise group for each of the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Mens apparel 40% 41% 36%
Womens apparel 52% 50% 47%
Footwear and accessories 8% 9% 17%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Effective May 4, 1997, the Company acquired the operations of Prophecy, Ltd.
partnership ('Prophecy'), a New York-based production and sourcing company. The
majority partner of Prophecy was a related party. The goals of the acquisition
were to leverage the talent and expense of the Company's New York design office
and to use Prophecy's production and sourcing expertise and manufacturing
relationships to shorten product delivery cycles and enable the Company to
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 was under common control with the
Company. The premium 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.
Prior to the consummation of the Company's initial offering, the existing
stockholders contributed 1,171,124 shares of common stock to the Company which
in turn, issued the common stock to officers, directors and other individuals
performing services for the Company. Pursuant to the April 13, 1994 restricted
stock agreements, this common stock was issued without cash consideration and
vests over five years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's financial year is a 52/53 week year that ends on the Saturday
nearest to January 31. For tax purposes, the Company reports on a July year-end.
As used herein, 'Fiscal 1998", 'Fiscal 1997" and 'Fiscal 1996" refer to the
twelve month periods ended January 30, 1999, January 31, 1998 and February 1,
1997, respectively. 'Fiscal 1999" refers to the twelve month period ending
January 29, 2000.
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
23
<PAGE> 24
circumstances may result in revised estimates.
Recent Financial Accounting Standards Board Pronouncements
FASB 130 Reporting Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 130, 'Reporting Comprehensive Income,' which
establishes standards for the reporting and display of comprehensive income and
its components in financial statements. This standard is effective for Fiscal
1998, however, it does not have any impact on the financial statement
disclosures because the Company does not currently have any elements of
comprehensive income
FASB 131 Disclosures about Segments of an Enterprise
In 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
'Disclosures about Segments of an Enterprise,' which establishes standards for
the disclosure of selected information about reportable segments, disclosures
about product and services, geographic areas, and major customers in financial
statements. This standard is effective for Fiscal 1998, however, it does not
currently have a significant impact on financial statement disclosures of the
Company.
FASB 132 Disclosures about Pensions and Other Post-retirement Benefits
In 1998, the FASB issued Statement of Financial Accounting Standards No. 132,
'Disclosures about Pensions and Other Post-retirement Benefits,' which modifies
established standards for disclosures related to pensions and other
post-retirement benefits. This standard is effective for Fiscal 1998. The
Company does not maintain any post-retirement or defined benefit plans.
Therefore, this statement does not have any impact on financial statement
disclosures.
FASB 133 Accounting for Derivative Instruments and Hedging Activities
In 1998, the FASB issued Statement of Financial Accounting Standards No. 133,
'Accounting for Derivative Instruments and Hedging Activities' which establishes
standards for the recognition and measurement of derivatives and hedging
activities. This standard is effective for Fiscal 2000. The Company does not
currently engage in these types of risk management or investment activities.,
This statement is not anticipated to have any impact on the Company's financial
statements
Cash
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
Cash in excess of operating requirements is invested in marketable equity or
government debt obligations. As of January 30, 1999, short-term investments
include investments with an original maturity of greater than three months
(averaging approximately 10 months) and consist of tax-exempt municipal bonds
classified as available for sale. These investments are recorded at cost and
approximate market value.
Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or market,
utilizing the retail method. Average cost includes merchandise design and
sourcing costs and related expenses.
The Company reviews its inventory levels in order to identify slow-moving
merchandise and generally uses markdowns to clear merchandise. Markdowns may
occur when inventory exceeds customer demand for reasons of style, seasonal
adaptation, changes in customer preference, lack of consumer acceptance of
fashion items, competition, or if it is determined that the inventory in stock
will not sell at its currently ticketed price. Such markdowns may have an
adverse impact on earnings, depending on their extent and amount of inventory
affected.
24
<PAGE> 25
Fixed Assets
Fixed assets are recorded on the basis of cost with depreciation and
amortization computed utilizing the straight-line method over the estimated
useful lives. Estimated useful lives range from three to ten years. Depreciation
and amortization expense is summarized as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Years Ended
-------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Depreciation expense $8,215 $6,943 $5,933
Amortization expense 396 375 154
------ ------ ------
Total $8,611 $7,318 $6,087
====== ====== ======
</TABLE>
In accordance with FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",impairment losses
are recorded on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets.
Stock Option Plan
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting standards
for stock-based employee compensation plans. The Company continues to account
for its stock-based employee compensation plan using the intrinsic value method
under Accounting Principles Board Opionion No. 25. See pro forma disclosures
required under FASB Statement No. 123 in Note 10.
Income Taxes
Income taxes are accounted for using the liability method. Under this method,
the deferred taxes are determined based on the differences between the financial
statement and tax basis of assets and liabilities at enacted tax rates in effect
for the years in which the differences are expected to reverse.
Preopening Expenses and Closing Costs
Expenditures of a noncapital nature incurred prior to the opening of a new store
are charged to operations as incurred. Costs of closing a store are recognized
when, in management's judgment, it is probable that the store will be closed.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense is summarized as
follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Years Ended
-------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Advertising expense $16,431 $10,067 $ 8,501
</TABLE>
25
<PAGE> 26
Supplemental Disclosures of Cash Flow Information
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Years Ended
-------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid during the periods for:
Income taxes $41,706 $ 9,675 $ 4,420
Interest $ -- $ -- $ --
</TABLE>
Earnings Per Share
The Company adopted Financial Accounting Standards Board issued Statement No.
128, 'Earnings per Share', (FASB 128) in Fiscal 1997. Earnings per share amounts
for all periods have been restated to give effect to the application of FASB No.
128. The effect of the restatement on earnings per share for the restated
periods is immaterial.
The following table shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
(In thousands) January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income used in basic EPS $54,118 $19,537 $ 5,925
======= ======= =======
Weighted average number of common shares used
in basic EPS 45,281 44,181 43,899
Effect of dilutive stock options and
non-vested restricted stock 2,671 1,452 1,489
------- ------- -------
Weighted average number of common shares and
dilutive potential common stock used in
diluted EPS 47,952 45,633 45,388
======= ======= =======
</TABLE>
RECLASSIFICATION
Certain reclassifications have been made to the Consolidated Financial
Statements for prior periods in order to conform to the Fiscal 1998
presentation.
3. 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. During 1998, the Company advanced funds to the importing
company for estimated expenses incurred on behalf of the Company, but not
billed. As of January 30, 1999, these advances exceeded the billings for
goods-in-transit in the amount of $1.9 million and are included in accounts and
note receivable on the Consolidated Balance Sheet.
During Fiscal 1997, the Company provided a short-term loan in the amount of $3.0
million to Azteca Production International, a related party vendor. The terms of
the note include annual interest at 7% plus a margin defined as the difference
between 8.5% and National City Bank's
26
<PAGE> 27
prime lending rate. The note receivable outstanding balance at January 31, 1998
was approximately $1.3 million. The loan was paid off in April 1998.
The Company has entered into a Plan of Reorganization and Agreement and Plan of
Merger with Natco Industries, Inc. ('Natco') and Thorn Hill Acquisition Corp.
('Newco'), a wholly owned subsidiary of Natco, with the Company surviving the
merger and becoming a wholly owned subsidiary of Natco. Natco is related to the
Company through common controlling stockholders. This merger was completed by
the Company to (i) eliminate Natco's potential conflicts of interest as to the
financial objectives of the Company, (ii) obtain the benefits of the holding
company structure arising from the reorganization and merger, and (iii) reduce
the concentration of ownership of the Company providing the opportunity to
increase liquidity in the market and enhance the Company's long-term ability to
raise capital. During Fiscal 1998, $0.9 million in costs were incurred by Natco
in connection with the merger which are reflected in selling, general and
administrative expenses in the Consolidated Statements of Operations. In
addition, during Fiscal 1998, the Company incurred approximately $0.3 million in
costs in connection with the merger which are also included in selling, general,
and administrative expenses. The net assets of Natco primarily consist of
approximately 30% ownership of the Company's common stock. The transaction does
not have a significant impact on the Company's existing financial statements.
Related party amounts follow:
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Merchandise purchases through
a related party importer $79,852 $65,192 $42,629
Accounts payable $1,237 $7,826 $7,068
Accounts and note receivable $2,829 $3,755 $1,334
Rent expense $1,548 $1,549 $1,407
Merchandise sales $3,289 $8,669 $2,812
</TABLE>
The Company provided loans to certain officers and other individuals to pay the
taxes on the restricted stock that vests each year. These loans have been paid
off and there was no receivable balance outstanding as of January 30, 1999 or
January 31, 1998. As of February 1, 1997, the outstanding value of these loans,
including interest at 6.8%, approximated $376,000.
4. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Accounts receivable - construction allowances $4,008 $1,518 $1,336
Related party accounts and note receivable 2,829 3,755 1,334
Accounts receivable - other 1,723 2,374 886
------ ------ ------
Total $8,560 $7,647 $3,556
====== ====== ======
</TABLE>
5. NOTES PAYABLE
The Company has an unsecured demand lending arrangement with a bank to provide a
$75 million line of credit at either the lender's prime lending rate (7.75% at
January 30, 1999) or a negotiated rate such as LIBOR. This reflects a $15
million increase in line availability for letters of credit which occurred in
July 1998. Because there were no borrowings in Fiscal 1998, there were no
amounts paid for interest. The
27
<PAGE> 28
facility has a limit of $40 million to be used for direct borrowing. No
borrowings were outstanding as of January 30, 1999, January 31, 1998, and
February 1, 1997. The Company had letters of credit of approximately $39.2
million outstanding at January 30, 1999 which were primarily related to the
purchase of inventory. The remaining balance which could be borrowed under this
lending arrangement was $35.8 million at January 30, 1999.
6. IMPAIRMENT OF ASSETS
In accordance with FASB No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," management evaluates the
ongoing value of leasehold improvements and store fixtures associated with
retail stores which have been open longer than one year. Based on these
evaluations, the Company determined that assets with a net carrying amount of
approximately $2.2 million at January 30, 1999 compared with $2.3 million at
January 31, 1998 were impaired. The expense included in selling, general and
administrative expenses for Fiscal 1998 and Fiscal 1997 was $0.2 million and
$1.7 million, respectively. Fair value was based on management's estimate of the
potential future benefits of such assets.
7. LEASE COMMITMENTS
All store operations are conducted from leased premises. These leases generally
provide for base rentals and the payment of a percentage of sales as additional
rent when sales exceed specified levels. Minimum rentals relating to these
leases are recorded on a straight-line basis. In addition, the Company is
typically responsible under its leases for common area maintenance charges, real
estate taxes and certain other expenses. These leases are classified as
operating leases.
Rent expense charged to operations, including amounts paid under short-term
cancelable leases, was as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
Jan. 30, Jan. 31, Feb. 1,
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Minimum rentals $53,482 $47,421 $42,738
Contingent rentals 6,177 1,725 674
------- ------- -------
Total $59,659 $49,146 $43,412
======= ======= =======
</TABLE>
The table below summarizes future minimum lease obligations under operating
leases in effect at January 30, 1999:
(In thousands)
<TABLE>
<CAPTION>
Fiscal years: Future Minimum
Lease Obligations
-----------------
<S> <C>
1999 $38,523
2000 36,857
2001 34,669
2002 32,646
2003 32,573
Thereafter 82,921
--------
Total $258,189
========
</TABLE>
28
<PAGE> 29
The Company is contingently liable for the rental payments totaling
approximately $3.2 million for the outlet stores which were sold in October
1995.
8. INCOME TAXES
The significant components of the Company's deferred tax assets (there are no
deferred tax liabilities) were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CURRENT:
Inventories $ 2,826 $ 1,297 $ 1,326
Accrued rent 3,375 2,545 2,015
Salaries and compensation 1,274 743 773
Other 724 216 266
------- ------- -------
8,199 4,801 4,380
------- ------- -------
LONG TERM:
Basis differences in fixed assets 2,200 2,790 1,391
Other -- 55 --
------- ------- -------
2,200 2,845 1,391
------- ------- -------
Total $10,399 $ 7,646 $ 5,771
======= ======= =======
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
(Dollars in thousands) January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
CURRENT:
<S> <C> <C> <C>
Federal $ 31,819 $ 12,366 $ 4,709
State 6,305 2,250 1,096
-------- -------- --------
Total current 38,124 14,616 5,805
-------- -------- --------
DEFERRED:
Federal (2,298) (1,733) (1,584)
State (455) (142) (314)
-------- -------- --------
Total deferred (2,753) (1,875) (1,898)
-------- -------- --------
Provision for income taxes $ 35,371 $ 12,741 $ 3,907
======== ======== ========
</TABLE>
A tax benefit has been recognized as contributed capital, in the amount of
$2,255,000 for the year ended January 30, 1999, $277,000 for the year ended
January 31, 1998 and $44,000 for the year ended February 1, 1997, resulting from
additional tax deductions related to vested restricted stock grants and stock
options exercised.
29
<PAGE> 30
A reconciliation between the statutory federal income tax and the effective tax
rate follows:
<TABLE>
<CAPTION>
PROVISION
---------
FOR THE YEARS ENDED
-------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 35 35 35
State income taxes, net of federal income
tax effect 4 4 4
Other items, net 1 1 1
- - -
40 40 40
== == ==
</TABLE>
9. PROFIT SHARING PLAN AND EMPLOYEE STOCK PURCHASE PLAN
The Company maintains a 401(k) retirement plan and contributory profit sharing
plan. Full-time employees who have attained twenty-one years of age and have
completed one year of service can contribute up to 15% of their salaries to the
401(k) plan on a pre-tax basis, subject to IRS limitations. The Company will
match up to 3% of the participants' eligible compensation. Contributions to the
profit sharing plan, as determined by the Board of Directors, are discretionary,
but generally may not exceed 15% of defined annual compensation paid to all
participating employees. The Company recognized $2,885,000, $1,242,000 and
$669,000 in expense during Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively, in connection with these plans.
The Employee Stock Purchase Plan (ESPP), effective on April 1, 1996, covers
employees who are at least 20 ' years old, have one year of service, and work at
least 1,000 hours. Contributions are determined by the employee with a maximum
of $1,248 annually with the Company matching 15% of the investment. These
contributions are used to purchase shares of Company stock in the open market.
10. STOCK OPTION PLAN AND RESTRICTED STOCK AGREEMENTS
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), 'Accounting for Stock Issued to Employees' and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123
(FASB 123), 'Accounting for Stock-Based Compensation,' requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
On February 10, 1994, the Company's Board of Directors adopted the American
Eagle Outfitters, Inc. 1994 Stock Option Plan (the "Plan"). The Plan provides
for the grant of 2,700,000 incentive or non-qualified options to purchase common
stock. On June 3, 1996, the Plan was amended to provide for the grant of an
additional 1,350,000 shares for which options may be granted under the Plan. On
May 7, 1997, the Plan was further amended to provide for the grant of an
additional 1,350,000 shares for which options may be granted under the Plan.
Additionally, the amendment provided that the maximum number of options which
may be granted to one individual may not exceed 1,800,000 shares. All full-time
employees and selected related party consultants to the Company are eligible to
receive options which are approved by a committee of the Board of Directors.
These options primarily vest over five years and are exercisable for a ten-year
period from the date of grant. Directors who are not officers or employees of
the Company were previously granted options for 11,250 shares of stock annually
at fair value, which vest one year after the date of grant. On September 11,
1996, the Plan was amended to grant 4,500 shares of stock at fair value to the
members of the Board of Directors who are not officers or employees of the
Company on the first trading day of each fiscal quarter of the Company which
vest one year after the date of grant and are exercisable for a ten-year period
from the date of grant. This provision became effective for the third quarter of
Fiscal 1996.
Pro forma information regarding net income and earnings per share is required by
FASB 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted beginning in the
fiscal year subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for Fiscal 1998: risk-free interest rates of 5%; no
30
<PAGE> 31
dividend yield; volatility factors of the expected market price of the Company's
common stock of.678; weighted-average expected life of the option of 6 years;
and an expected forfeiture rate of approximately 12%. The assumptions for Fiscal
1997 included risk-free interest rates of 6%; no dividend yield; volatility
factors of the expected market price of the Company's common stock of.644;
weighted-average expected life of the option of 6 years; and an expected
forfeiture rate of approximately 13%. The assumptions for Fiscal 1996 included
risk-free interest rates of 5%; no dividend yield; volatility factors of the
expected market price of the Company's common stock of.7384; weighted-average
expected life of the option of 5 years; and an expected forfeiture rate of
approximately 15%.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income $ 52,467 $ 19,060 $ 5,354
Pro forma net income per share
Basic $ 1.16 $ 0.43 $ 0.12
Diluted $ 1.09 $ 0.42 $ 0.12
</TABLE>
31
<PAGE> 32
A summary of the Company's stock option activity follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
JANUARY 30, 1999 (2) JANUARY 31, 1998 (2) FEBRUARY 1, 1997 (2)
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 3,356,238 $2.11 2,843,552 $1.98 1,601,774 $2.94
Granted
(Exercise Price equal to
Fair Value) 1,236,152 $11.16 1,035,000 $2.63 2,132,776 $2.12
Granted
(Exercise Price less than
Fair Value) - - - - 526,500 $1.50
Exercised (1) (950,606) $1.88 (442,214) $2.21 (193,274) $1.58
Cancelled (115,354) $6.19 (80,100) $2.27 (1,224,224) $3.33
--------- --------- ---------
Outstanding - end of year (3) 3,526,430 $5.21 3,356,238 $2.11 2,843,552 $1.98
========= ===== ========= ===== ========= =====
Exercisable - end of year (4) 553,224 $2.37 664,424 $1.63 474,434 $1.72
Weighted average fair value of
options granted during the year $6.91 $1.46 $1.66
</TABLE>
(1) Options exercised during Fiscal 1998 ranged in price from $1.39 - $6.45 with
an average of $1.88.
(2) As of January 30, 1999, January 31, 1998 and February 1, 1997, the Company
had 287,472 shares, 1,408,276 shares and 1,013,174 shares available for grant,
respectively.
(3) As of January 30, 1999, the exercise price of 1,996,178 options outstanding
ranged between $1.39 and $2.78 with weighted average remaining contractual lives
between approximately 7 and 8 years. The exercise price of 1,232,252 options
outstanding ranged between $3.84 and $8.92 with weighted average remaining
contractual lives between approximately 7 and 9 years.
(4) As of January 30, 1999, the exercise price of 517,954 options exercisable
ranged between $1.39 and $3.88.
32
<PAGE> 33
The Company maintains a restricted stock plan for compensating certain employees
and selected related party consultants. At January 30, 1999, 1,256,938 shares of
restricted stock were outstanding at grant prices ranging from $3.56 to $24.92,
with 906,150 shares vested. During Fiscal 1998, 128,000 shares of restricted
stock were granted ranging in price from $8.92 to $24.92.
For Fiscal 1998, Fiscal 1997, and Fiscal 1996, the Company recorded $1,336,156,
$1,214,167, and $990,050 in compensation expense, respectively, on restricted
stock and certain stock options granted during Fiscal 1996 where the exercise
price is less than fair value of the underlying stock, and certain options
granted to non-employees. Assuming no acceleration of vesting, the Company will
record $1,401,172 per year in compensation expense during the remaining vesting
periods.
11. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
<TABLE>
<CAPTION>
(In thousands, except earnings per share ) Quarters Ended
May 2, August 1, October 31, January 30,
1998 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 99,694 $125,731 $ 149,068 $ 213,107
Gross profit 37,217 49,063 60,420 87,811
Income before provision for income taxes 9,561 15,738 22,685 41,505
Net income 5,805 9,553 13,871 24,889
Basic earnings per common share (1) $0.13 $0.21 $0.31 $0.55
Diluted earnings per common share (1) $0.12 $0.20 $0.29 $0.52
</TABLE>
<TABLE>
<CAPTION>
May 3, August 2, November 1, January 31,
1997 1997 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 60,952 $ 86,159 $ 104,902 $ 153,700
Gross profit 14,253 25,053 38,654 59,007
Income (loss) before provision for income taxes (5,996) 1,878 10,339 26,057
Net income (loss) (3,619) 1,120 6,276 15,760
Basic earnings (loss) per common share (1) ($0.08) $0.03 $0.14 $0.35
Diluted earnings (loss) per common share (1) ($0.08) $0.02 $0.14 $0.34
</TABLE>
(1) Per share amounts have been restated to reflect the adoption of FASB 128,
the three-for-two stock splits, and the two-for-one stock split.
12. SUBSEQUENT EVENTS
On March 17, 1999, the Company's Board of Directors approved a two-for-one stock
split to be distributed on May 3, 1999, to stockholders of record on April 23,
1999. All share amounts and per share data have been restated to reflect this
stock split.
The Natco merger discussed in Note 3 was approved by the stockholders on March
29, 1999, and became effective on April 7, 1999. In connection with the merger,
the Company increased its authorized shares of common stock to 125,000,000 and
authorized 5,000,000 shares of preferred stock. These shares have $.01 par
value.
33
<PAGE> 34
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
American Eagle Outfitters, Inc.
We have audited the accompanying consolidated balance sheets of American Eagle
Outfitters, Inc. as of January 30, 1999, January 31, 1998, and February 1, 1997
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. The financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Eagle Outfitters, Inc. at January 30, 1999, January 31, 1998, and
February 1, 1997 and the consolidated results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Pittsburgh, Pennsylvania
February 26, 1999
Except for Note 12, as to which the date is
April 7, 1999
34
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the captions "Nominees For Election As
Directors", "Information Concerning Board of Directors" and "Executive Officers"
in our Proxy Statement relating to the Annual Meeting of Stockholders to be held
on June 8, 1999, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing in our Proxy Statement relating to the Annual Meeting
of Stockholders to be held on June 8, 1999 under the captions "Executive Officer
Compensation", "Option/SAR Grants in Last Fiscal Year", and "Aggregated Option
Exercises and Fiscal Year-End Option Value" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Security Ownership of Principal
Stockholders and Management" in our Proxy Statement relating to the Annual
Meeting of Stockholders to be held on June 8, 1999, is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement relating to the Company's Annual
Meeting of Stockholders to be held on June 8, 1999, is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements are included in
Item 8:
Consolidated Balance Sheets as of January 30, 1999, January 31,
1998, and February 1, 1997
Consolidated Statements of Operations for the years ended January
30, 1999, January 31, 1998, and February 1, 1997
Consolidated Statements of Stockholders' Equity for the years
ended January 30, 1999, January 31, 1998 and February 1, 1997
Consolidated Statements of Cash Flows for the years ended January
30, 1999, January 31, 1998, and February 1, 1997
Notes to the Consolidated Financial Statements
(a)(2) No financial statement schedules are supplied because of the absence of
the conditions under which they are required.
35
<PAGE> 36
(a)(3) Exhibits:
<TABLE>
<CAPTION>
------------- -------------------------------------------------- ---------------------------------------------------
Exhibit No. Exhibit Index
Page No.
------------- -------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
2.1 Plan of Reorganization and Merger Agreement, Previously filed as Appendix A to the Prospect US
dated as of November 30, 1998, among Natco included in the Registration Statement on Form S-4
Industries, Inc., Thorn Hill Acquisition Corp., (file no. 333-68609) filed December 9, 1998, as
Natco Limited Liability Company and American amended, and incorporated herein by reference.
Eagle Outfitters, Inc.
------------- -------------------------------------------------- ---------------------------------------------------
3.1 Second Amended and Restated Certificate of
Incorporation, as amended.
------------- -------------------------------------------------- ---------------------------------------------------
3.2 Amended and Restated Bylaws. Previously filed as Exhibit 3.2 to Registration
Statement on Form S-4 (file no. 333-68609) filed
December 9, 1999, as amended, and incorporated
herein by reference.
------------- -------------------------------------------------- ---------------------------------------------------
4.1 See Second Amended and Restated
Articles of Incorporation as Exhibit 3.1
------------- -------------------------------------------------- ---------------------------------------------------
4.2 See Amended and Restated Bylaws as Exhibit 3.2
------------- -------------------------------------------------- ---------------------------------------------------
10.1 Office/Distribution Center Lease dated January Previously filed as Exhibit 10.1 to the
1, 1996 between the Registrant and Linmar Realty Transition Report to Stockholders for the
Company. transition period ended February 3, 1996.
------------- -------------------------------------------------- ---------------------------------------------------
10.2 Form of Import Services Agreement. Previously filed as Exhibit 10.2 to Registration
Statement on Form S-1 (file no. 33-75294) filed
February 14, 1994, as amended, and incorporated
herein by reference.
------------- -------------------------------------------------- ---------------------------------------------------
10.3 Form of the Registrant's 1994 Stock Option Plan. Previously filed as Exhibit 4(a) to Registration
Statement on Form S-8 (file no. 33-79358) filed
May 25, 1994, as amended on Form S-8 (file no.
33-12643) filed September 25, 1996 and
incorporated herein by reference and Form S-8
(file no. 33-44759) filed January 22, 1998 and
incorporated herein by reference.
------------- -------------------------------------------------- ---------------------------------------------------
10.4 Form of Restricted Stock Agreement Previously filed as Exhibit 4(a) to Registration
Statement on Form S-8 (file no. 33-79358) filed
May 25, 1994 and incorporated herein by reference.
------------- -------------------------------------------------- ---------------------------------------------------
10.5 Form of Indemnification Agreement Previously filed as Exhibit 10.7 to Registration
Statement on Form S-1 (file no. 33-75294) filed
February 14, 1994, as amended, and incorporated
herein by reference.
------------- -------------------------------------------------- ---------------------------------------------------
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
------------- -------------------------------------------------- ---------------------------------------------------
Exhibit No. Exhibit Index
Page No.
------------- -------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
10.6 Merchandise Royalty Agreement Previously filed as Exhibit 10.8 to Form 10-K for
the year ended July 29, 1995.
------------- -------------------------------------------------- ---------------------------------------------------
10.7 Employee Stock Purchase Plan Previously filed as Exhibit 4(a) to Registration
Statement on Form S-8 (file no. 33-33278), filed
on April 5, 1996 and incorporated herein by
reference.
------------- -------------------------------------------------- ---------------------------------------------------
10.8 Purchase Agreement re: Prophecy Acquisition. Previously filed as Exhibit 10.10 to Form 10-Q
for the quarterly period ended May 3, 1997.
------------- -------------------------------------------------- ---------------------------------------------------
10.9 Loan and Security Agreement with Azteca Previously filed as Exhibit 10.11 to Form 10-Q
Production International, Inc. for the quarterly period ended August 2, 1997.
------------- -------------------------------------------------- ---------------------------------------------------
10.10 First Amendment to Loan with Azteca Production Previously filed as Exhibit 10.12 to Form 10-Q for
International, Inc. the quarterly period ended November 1, 1997.
------------- -------------------------------------------------- ---------------------------------------------------
21 Subsidiaries.
------------- -------------------------------------------------- ---------------------------------------------------
23.1 Consent of Ernst & Young LLP.
------------- -------------------------------------------------- ---------------------------------------------------
24 Power of Attorney.
------------- -------------------------------------------------- ---------------------------------------------------
27 Financial Data Schedule.
------------- -------------------------------------------------- ---------------------------------------------------
</TABLE>
(b) Reports on Form 8-K
We have the following Current Reports on Form 8-K since October 31, 1998:
(i) Current Report on Form 8-K, dated November 2, 1998, filed with
the Securities and Exchange Commission on November 9, 1998,
Item 5. Other Events, Re: Reincorporation.
(ii) Current Report on Form 8-K/A, dated November 2, 1998, filed
with the Securities and Exchange Commission on January 12,
1999, Item 5. Other Events, Re: Reincorporation.
(iii) Current Report on Form 8-K, dated April 7, 1999, filed with
the Securities and Exchange Commission on April 8, 1999, Item
5. Other Events, Re: Natco Reorganization and stock split.
(c) Exhibits
The exhibits to this report begin on page 39.
(d) Financial Statement Schedules
None
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AMERICAN EAGLE OUTFITTERS, INC.
By: *
-------------------------------
Jay L. Schottenstein, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on April 21,
1999.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
*
- -------------------------------------
Jay L. Schottenstein Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
*
- -------------------------------------
George Kolber Vice Chairman and Chief Operating Officer
*
- -------------------------------------
Roger S. Markfield President, Chief Merchandising Officer and Director
*
- -------------------------------------
Laura A. Weil Executive Vice President and Chief Financial Officer
*
- -------------------------------------
Dale E. Clifton Vice President, Controller, and Chief Accounting Officer
*
- -------------------------------------
Saul Schottenstein Vice Chairman
*
- -------------------------------------
Ari Deshe Director
*
- -------------------------------------
Jon P. Diamond Director
*
- -------------------------------------
Martin P. Doolan Director
*
- -------------------------------------
Gilbert W. Harrison Director
*
- -------------------------------------
Michael G. Jesselson Director
*
- -------------------------------------
Thomas R. Ketteler Director
*
- -------------------------------------
John L. Marakas Director
*
- -------------------------------------
David W. Thompson Director
*
- -------------------------------------
Gerald E. Wedren Director
</TABLE>
*By: /s/ Laura A. Weil
---------------------------------------
Laura A. Weil, Attorney-in-Fact
38
<PAGE> 1
Exhibit 3.1
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
AMERICAN EAGLE OUTFITTERS, INC., AS AMENDED
* * * * * * * * * * * * * * * * * * * * * * * * *
The above corporation, American Eagle Outfitters, Inc. (the
"Corporation"), existing pursuant to the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST. The name of the Corporation is: American Eagle Outfitters, Inc.
SECOND. The address of its registered office in the State of Delaware
is 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. The
name of its registered agent at such address is The Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. (a) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is One Hundred Thirty Million
(130,000,000) shares, consisting of 125,000,000 shares of common stock, $0.01
par value per share (the "Common Stock"), and 5,000,000 shares of Preferred
Stock, $.01 par value per share (the "Preferred Stock").
(b) Each holder of Common Stock shall be entitled to one vote for each
share of Common Stock held of record on all matters presented for vote of the
stockholders. Subject to the provisions of the General Corporation Law of the
State of Delaware, dividends may be paid on the Common Stock at such times and
in such amounts as the Board of Directors shall determine. Upon the dissolution,
liquidation, or winding up of the Corporation, after any preferential amounts to
be distributed to the holders of the Preferred Stock then outstanding have been
paid or declared set apart for payment, the holders of Common Stock shall be
entitled to receive all remaining assets of the Corporation available for
distribution to its stockholders ratably and proportioned to the number of
shares held by them.
(c) The Board of Directors is hereby authorized, by resolution or
resolutions, to establish, out of the unissued shares of Preferred Stock not
then allocated to any series of Preferred Stock, additional series of Preferred
Stock. Before any shares of any such additional series are issued, the Board of
Directors shall fix and determine, and is hereby expressly empowered to fix and
determine, by resolution or resolutions, the number of shares constituting such
series and the distinguishing characteristics and the relative rights,
preferences, privileges and immunities, if any, and any qualifications,
limitations or restrictions thereof, of the shares thereof, so far as not
inconsistent with the provisions of this Article FOURTH. Without limiting the
generality of the foregoing, the Board of Directors may fix and determine: (i)
the designation of such series and the number of shares which shall constitute
such series of such shares; (ii) the rate of dividend, if any, payable on the
shares of such series; (iii) whether the shares of such series shall be
cumulative, non-cumulative or partially cumulative as to dividends, and the
dates from which any cumulative dividends are to accumulate; (iv) whether the
shares of such series may be redeemed, and, if so, the price or prices at which
and the terms and conditions on which shares of such series may be redeemed; (v)
the amount payable upon shares of such series in the event of the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Corporation; (vi) the sinking fund provisions, if any, for the redemption of the
shares of such series; (vii) the voting rights, if any, of the shares of such
series; (viii) the terms and conditions, if any on which shares of such series
may be converted into shares of the Common Stock of the Corporation or any other
class or series; (ix) whether the shares of such series are to be preferred over
shares of Common Stock of the Corporation or any other class or series as to
dividends, or upon voluntary or involuntary dissolution, liquidation or winding
up of the affairs of the Corporation, or otherwise; and (x)
<PAGE> 2
any other characteristics, preferences, limitations, rights, privileges,
immunities or terms not inconsistent with the
provisions of this Article FOURTH.
Any shares of Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and cancelled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock, without designation as
to series, and may be reissued as part of any series of Preferred Stock created
by resolution or resolutions of the Board of Directors, subject to the
conditions and restrictions on issuance set forth herein.
FIFTH. In addition to all of the powers conferred by statute, the Board
of Directors is expressly authorized to make, alter or repeal the Bylaws of the
Corporation.
SIXTH. No contract or transaction between the Corporation and one or
more of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if:
(a) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board of Directors or committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or
(b) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee thereof, or the stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
SEVENTH. (a) The Corporation shall indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director, officer or
employee of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment) or any other applicable laws as presently or hereinafter in
effect against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
therewith. Without limiting the generality of the foregoing, the Corporation may
enter into one or more agreements with any person that provide for
indemnification greater or different than that provided in this Article Seventh.
(b) Expenses incurred by a director, officer or employee in defending a
civil or criminal action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director, officer or employee to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation.
2
<PAGE> 3
(c) The indemnification and advancement of expenses provided by this
Article shall not be deemed exclusive of any other rights to which a person
seeking indemnification and advancement of expenses may be entitled under any
statute, by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefits of the
heirs, executors and administrators of such a person.
(d) For the purposes of this Article Seventh, references to "the
Corporation" include, in addition to the resulting or surviving corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article Seventh
with respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had continued.
(e) Neither the Corporation nor its directors or officers nor any
person acting on its behalf shall be liable to any person for any determination
as to the existence or absence of conduct that would provide a basis for making
or refusing to make any payment under this Article Seventh, in reliance upon the
advice of counsel.
(f) A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholder, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
any improper personal benefit. If the General Corporation Law of the State of
Delaware is hereafter amended to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
(g) Neither the amendment nor repeal of this Article Seventh, nor the
adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this Article Seventh, shall eliminate or reduce
the effect of this Article Seventh in respect of any matter occurring, or any
cause of action, suit or claim that would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
EIGHTH. The Corporation shall have perpetual existence.
NINTH. Amendments.
(a) The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by the laws of
Delaware, and all rights conferred herein upon stockholders, directors and
others are granted subject to this reservation and subject to paragraph (b)
below.
(b) The provisions set forth in this Article NINTH and in Articles
TENTH and ELEVENTH of this Amended and Restated Certificate of Incorporation may
not be altered, amended or repealed in any respect, and new provisions
inconsistent therewith may not be adopted unless such action is approved by the
affirmative vote of the holders of at least eighty (80%) of all of the
outstanding shares of capital stock of the Corporation entitled to vote on
3
<PAGE> 4
such matter at a meeting of stockholders called for that purpose, except that if
the Board of Directors, by an affirmative vote of at least three-fourths (75%)
of the entire Board of Directors, recommends approval of such amendment to this
Amended and Restated Certificate of Incorporation to the stockholders, such
approval may be effected by the affirmative vote of the holders of a majority of
the outstanding shares of capital stock of the Corporation present in person or
represented by proxy and entitled to vote on such matter at a meeting of
stockholders called for that purpose.
TENTH. Board of Directors.
(a) Number, Election and Terms of Directors. The business and affairs
of the Corporation shall be managed by or under the direction of a Board of
Directors. The number of the directors of the Corporation shall be fixed from
time to time by resolution adopted by the affirmative vote of a majority of the
entire Board of Directors of the Corporation, except that the minimum number of
directors shall be fixed at no less than three (3) and the maximum number of
directors shall be fixed at no more than fifteen (15). The directors shall be
divided into three classes, Class I, Class II, and Class III. Each such class
shall consist, as nearly as possible, of one-third of the total number of
directors and remaining directors shall be included within each such class or
classes as the Board of Directors shall designate. Class I directors shall hold
office initially for a term expiring at the 1999 annual meeting of stockholders;
Class II directors shall hold office initially for a term expiring at the 2000
annual meeting of stockholders; and Class III directors shall hold office
initially for a term expiring at the 2001 annual meeting of stockholders. At
each annual meeting of stockholders, successors to the class of directors whose
term expires at that annual meeting shall be elected to hold office for a
three-year term. If the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain the number of directors
in each class as nearly equal as possible. A director shall hold office, subject
to any removal, death, resignation, or retirement, until the annual meeting for
the year in which his term expires and until his successor shall be elected and
qualified. Election of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
(b) Stockholder Nomination of Director Candidates. Nominations for
election to the Board of Directors of the Corporation at a meeting of
stockholders may be made by the Board of Directors, on behalf of the Board of
Directors by any nominating committee appointed by the Board of Directors, or by
any stockholder of the Corporation entitled to vote for the election of
directors at the meeting. Nominations, other than those made by or on behalf of
the Board of Directors, shall be made by notice in writing delivered to or
mailed, postage prepaid, and received by the Secretary of the Corporation at
least 60 days but no more than 90 days prior to the anniversary date of the
immediately preceding Annual Meeting of Stockholders. The notice shall set
forth: (i) the name and address of the stockholder who intends to make the
nomination; (ii) the name, age, business address and, if known, residence
address of each nominee; (iii) the principal occupation or employment of each
nominee; (iv) the number of shares of stock of the Corporation which are
beneficially owned by each nominee and by the nominating stockholder; (v) any
other information concerning the nominee that must be disclosed of nominees in
proxy solicitation pursuant to Regulation 14A of the Securities Exchange Act of
1934 (or any subsequent provisions replacing such Regulation); and (vi) the
executed consent of each nominee to serve as a director of the Corporation, if
elected. The chairman of the meeting of stockholders may, if the facts warrant,
determine that a nomination was not made in accordance with the foregoing
procedures, and if the chairman should so determine, the chairman shall so
declare to the meeting and the defective nomination shall be disregarded.
(c) Newly Created Directorships and Vacancies. Newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum, or by a sole remaining director. A director, including any director
chosen to fill a newly created directorship or any vacancy, shall hold office
until the next annual meeting following his election or appointment to the Board
of Directors for the class of director to which he is appointed, as applicable,
and until such director's successor shall have been elected and qualified. In no
case will a decrease in the number of directors shorten the term of any
incumbent director.
4
<PAGE> 5
(d) Removal. Notwithstanding any other provision of this Amended and
Restated Certificate of Incorporation or the Bylaws of the Corporation (and
notwithstanding the fact that some lesser percentage may be specified by the
General Corporation Law of the State of Delaware, this Amended and Restated
Certificate of Incorporation or the Bylaws of the Corporation), any director or
the entire board of directors of the Corporation may be removed from office at
any time, but only for cause and only by the affirmative vote of the holders of
at least eighty percent (80%) of all of the outstanding shares of capital stock
of the Corporation entitled to vote on the election of directors at a meeting of
stockholders called for that purpose, except that if the Board of Directors, by
an affirmative vote of at least three-fourths (75%) of the entire Board of
Directors, recommends removal of a director to the stockholders, such removal
may be effected by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the Corporation present in person or
represented by proxy and entitled to vote on the election of directors at a
meeting of stockholders called for that purpose.
(e) Directors Elected by Holders of Preferred Stock. Notwithstanding
the classification provisions set forth in paragraph (a) above, whenever the
holders of any one or more classes or series of Preferred Stock issued by this
Corporation shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies, terms of removal, and other features of such
directorships shall be governed by the terms of Article FOURTH and the
resolution or resolutions establishing such class or series adopted pursuant
thereto and such directors so elected shall not be divided into classes pursuant
to this Article TENTH unless expressly provided by such terms.
(f) Committees. Wherever the term "Board of Directors" is used in this
Amended and Restated Certificate of Incorporation, such term shall mean the
Board of Directors of the Corporation; provided, however, that, to the extent
any committee of directors of the Corporation is lawfully entitled to exercise
the powers of the Board of Directors, such committee may exercise any right or
authority of the Board of Directors under this Amended and Restated Certificate
of Incorporation.
ELEVENTH. Stockholder Action. Any action required or permitted to be
taken by any stockholders of the Corporation must be effected at a duly called
annual or special meeting of such stockholders and may not be effected by any
consent in writing by such stockholders, unless such consent is the unanimous
consent of all stockholders. Except as may be otherwise required by law, special
meetings of stockholders of the Corporation may be called only by the Board of
Directors pursuant to a resolution approved by a majority of the Board of
Directors.
5
<PAGE> 1
Exhibit 21
Subsidiaries
American Eagle Outfitters, Inc. has the following wholly owned subsidiaries:
AE Stores Company, a Delaware corporation
AEO International Corp., a Delaware corporation*
Retail Commerce Company, a Nevada corporation*
Retail Royalty Company, a Nevada corporation*
Prophecy Co., an Ohio corporation*
Eagle Trading Company, a Mexican corporation
*denotes second and third tier subsidiary owned by AE Stores Company
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to 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. 33-79358), the American Eagle
Outfitters, Inc. 1994 Stock Option Plan (Registration Nos. 333-44759, 333-79358,
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 February 26, 1999 (except
for Note 12, as to which the date is April 7, 1999), with respect to the
consolidated financial statements of American Eagle Outfitters, Inc. included in
the Annual Report (Form 10-K) for the year ended January 30, 1999.
Pittsburgh, Pennsylvania
April 15, 1999
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
Each director and/or officer of American Eagle Outfitters, Inc. (The
"Corporation") whose signature appears below hereby appoints Laura Weil or Dale
E. Clifton as his or her attorneys or any of them individually as his or her
attorney, to sign, in his or her name and behalf and in any and all capacities
stated below, and to cause to be filed with the Securities and Exchange
Commission (the"Commission"), the Corporation's Annual Report on Form 10-K (the
"Form 10-K") for the year ended January 30, 1999, and likewise to sign and file
with the Commission any and all amendments to the Form 10-K, and the Corporation
hereby appoints such persons as its attorneys-in-fact and each of them as its
attorney-in-fact with like authority to sign and file the Form 10-K and any
amendments thereto granting to each such attorney-in-fact full power of
substitution and revocation, and hereby ratifying all that any such
attorney-in-fact or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands as of April 21,
1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Jay L. Schottenstein Chairman and Chief Executive Officer
- --------------------------------- (Principal Executive Officer)
Jay L. Schottenstein
/s/ Saul Schottenstein Vice Chairman and Director
- ---------------------------------
Saul Schottenstein
/s/ George Kolber Vice Chairman, Chief Operating Officer and Director
- ---------------------------------
George Kolber
/s/ Roger S. Markfield President, Chief Merchandising Officer and Director
- ---------------------------------
Roger S. Markfield
/s/ Laura Weil Executive Vice President and Chief Financial Officer
- --------------------------------- (Principal Financial Officer)
Laura Weil
/s/ Dale E. Clifton Vice President, Controller, and Chief Accounting Officer
- --------------------------------- (Principal Accounting Officer)
Dale E. Clifton
/s/ Ari Deshe Director
- ---------------------------------
Ari Deshe
/s/ Jon P. Diamond Director
- ---------------------------------
Jon P. Diamond
/s/ Martin P. Doolan Director
- ---------------------------------
Martin P. Doolan
/s/ Gilbert W. Harrison Director
- ----------------------------------
Gilbert W. Harrison
/s/ Michael G. Jesselson Director
- ----------------------------------
Michael G. Jesselson
/s/ Thomas R. Ketteler Director
- ----------------------------------
Thomas R. Ketteler
/s/ John L. Marakas Director
- -------------------------------------
John L. Marakas
/s/ David W. Thompson Director
- ---------------------
David W. Thompson
/s/ Gerald E. Wedren Director
- --------------------------
Gerald E. Wedren
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 71,940
<SECURITIES> 13,360
<RECEIVABLES> 8,560
<ALLOWANCES> 0
<INVENTORY> 49,688
<CURRENT-ASSETS> 154,504
<PP&E> 83,303
<DEPRECIATION> 29,933
<TOTAL-ASSETS> 210,948
<CURRENT-LIABILITIES> 59,751
<BONDS> 0
0
0
<COMMON> 461
<OTHER-SE> 150,736
<TOTAL-LIABILITY-AND-EQUITY> 210,948
<SALES> 587,600
<TOTAL-REVENUES> 587,600
<CGS> 353,089
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<OTHER-EXPENSES> 147,458
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<INTEREST-EXPENSE> (2,436)
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<INCOME-TAX> 35,371
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