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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 0-23760
AMERICAN EAGLE OUTFITTERS, INC.
(Exact name of registrant as specified in its charter)
OHIO NO. 25-1724320
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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: (412) 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. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant,
2,718,327 Common Shares, based on the $11.125 closing sale price on April 10,
1997 was $30,241,388.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 9,917,950 Common Shares were
outstanding at April 10, 1997.
Part III - Proxy Statement for 1996 Annual Meeting of Shareholders, in part,
as indicated.
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PART I
ITEM 1. BUSINESS.
GENERAL
American Eagle Outfitters, Inc. (the "Company") is a specialty retailer of
casual fashion merchandise. The Company targets men and women aged 15-30 and
sells its own brand of fashion apparel, blended with an assortment of quality
basics such as denim and khakis, providing distinctive, quality merchandise at
competitive prices. At February 24, 1997 , the Company operated a chain of 305
American Eagle Outfitters retail stores in 39 states. These stores are
principally in the Midwest, Northeast, and Southeast and are located in regional
enclosed shopping malls.
On January 3, 1996, the Company elected to change its fiscal year from a 52/53
week year that ends on the Saturday nearest to July 31 to a 52/53 week year that
ends on the Saturday nearest to January 31, effective for the transition period
ended on February 3, 1996. For tax purposes, the Company has retained its July
year-end. As used herein, "Fiscal 1996" refers to the twelve month period ended
February 1, 1997, "Transition 1996" refers to the twenty-seven week period from
July 30, 1995 to February 3, 1996. Similarly, "1995" and "1994" refer to the
fiscal years ended July 29, 1995 and July 30, 1994. "Fiscal 1997" refers to the
twelve month period ending January 31, 1998.
ORGANIZATION
Until January 2, 1994, the Company's business operated as the American Eagle
Outfitters operations of two corporations owned by members of the Jerome
Schottenstein family (the "Schottenstein Family"), and Sam Forman, a former
officer of the Company. The Company, the related retail corporations and Mr.
Forman entered into an Exchange Agreement pursuant to which: (i) the Company
obtained all of the operating assets of the American Eagle Outfitters
operations, including all inventory, equipment, fixtures, and store leases; (ii)
the Company assumed substantially all of the liabilities relating to these
operations including $7.4 million in notes payable to Schottenstein Stores
Corporation ("SSC"), an affiliate of the Schottenstein Family; and (iii) the
Company issued 7,700,000 shares of stock to the former owners of the retail
operations. In addition, the Company entered into a lease for the Company's
office and distribution center with Linmar Realty Company, a partnership between
SSC and another affiliate, and an agreement pursuant to which SSC provides the
Company with certain importing and other services. See "Item 13. Certain
Relationships and Related Transactions" and Note 3 of Notes to Consolidated
Financial Statements.
The Company was incorporated in Ohio on November 10, 1993. As used herein, the
term "Company" refers to the acquired retail store operations effective January
2, 1994, as if such operations were owned and conducted for all relevant periods
by American Eagle Outfitters, Inc. In 1995, the Company formed two wholly-owned
subsidiaries, one of which holds the trade name American Eagle Outfitters and
receives royalty income from the use of the name. The other is a finance
subsidiary whose only purpose is to help provide financing to the parent. These
subsidiaries are consolidated and no separate financial statements are provided.
The Company's principal offices are located at 150 Thorn Hill Drive, Warrendale,
Pennsylvania 15086-7528 and its telephone number is (412) 776-4857.
DESCRIPTION OF BUSINESS
The principal aspects of the Company's business are summarized below.
Merchandising Strategy. The Company seeks to offer its merchandise in an
appealing retail environment at price points targeted to be competitive or lower
than those of comparable mall-based retailers.
Private Label. A key component of the Company's merchandise strategy focuses on
developing and maintaining the strength of its private label brands of apparel,
footwear and accessories. The Company believes that the American Eagle
Outfitters TM, AE TM and AE Supply TM brands offer the Company's customers
value, quality and consistency. In Fiscal 1996, private label merchandise
accounted for approximately 98% of the dollar value of merchandise purchased by
the Company, compared to approximately 98% in Transition 1996 and approximately
95% in 1995. The Company's private label strategy enables the Company to offer
merchandise that management believes differentiates American Eagle Outfitters
from many of its competitors. It also allows the Company to better control
merchandise quality and to maximize cost savings, resulting in improved initial
markup on the merchandise.
In-House Design Staff. The Company employs an in-house design team to interpret
fashion trends for the American Eagle customer and to design private label
merchandise accordingly. The merchandising group determines the Company's
merchandise needs for the upcoming season and the in-house design team creates
styles to fill those needs. The merchandise designs are then manufactured to the
Company's specifications by outside vendors. The Company has a program to test
market various styles and colors of an item in selected stores, before
finalizing the details of merchandise production and introducing the item
chain-wide. The Company believes that it is important to frequently update its
merchandise with new colors, patterns and fabrics.
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Merchandise Sourcing. The Company continually seeks to improve its merchandise
sourcing to maintain quality, lower costs and shorten delivery cycles.
Identifying and building relationships with cost efficient manufacturers and
suppliers of quality merchandise is essential to the Company's private label
merchandising strategy. The Company identifies and maintains sources for its
private label merchandise in an attempt to assure that the merchandise meets the
Company's quality standards on a timely delivery cycle and at competitive
prices. The Company has several sources that provide a substantial portion of
its merchandise requirements and assist the Company in monitoring its
merchandise sourcing. Please refer to "-Purchasing."
STORE EXPANSION AND RENOVATION
The Company is currently planning to open at least 20 stores during Fiscal 1997.
This forward-looking statement will be influenced by the Company's financial
position and the number of advantageous mall store leases that may become
available. Additionally, the Company has selected approximately 20 locations to
upgrade to the newest store design in Fiscal 1997. These locations were selected
based upon criteria such as sales performance and lease terms. The Company will
also relocate the shoe department in approximately 100 stores to maximize sales
performance. Finally, to accommodate the increased business in women's apparel,
the Company will install additional fitting rooms in approximately 180
locations.
The Company chooses store locations based on a variety of factors, including
rental expense, geographic location, demographic studies, anchor tenants, and
other specialty stores in the mall. Additionally, the Company weights the
proposed lease terms with the location of the proposed store within the mall.
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The table below sets forth certain information relating to the Company's store
growth:
FISCAL YEARS ENDED JULY
FISCAL TRANSITION -----------------------
1996 1996 1995 1994
---- ---- ---- ----
MALL BASED STORES
Stores at beginning of period 272 266 192 147
Stores opened during the period 38 11 81 47
Stores closed during the period (7) (5) (7) (2)
--- --- --- ---
Subtotal 303 272 266 192
--- --- --- ---
OUTLET STORES
Outlet stores at beginning of period 1 31 16 4
Outlets opened during the period - 2 15 12
Outlets closed during the period (1) (4) - -
Outlets stores sold - (28) - -
- ---- - -
Subtotal - 1 31 16
- - -- --
TOTAL STORES AT END OF PERIOD 303 273 297 208
=== === === ===
The Company's ability to continue to open new stores will be dependent upon,
among other things, successful implementation of its business strategies, cash
flow from operations, the continued availability of bank financing, general
economic and business conditions affecting consumer spending, the availability
of desirable locations, and acceptable lease terms.
The Company expects that new stores opened during Fiscal 1997 will average
between approximately 4,000 to 5,000 gross square feet compared to the current
average of approximately 4,000 square feet. The increase in new store square
footage enables the Company to primarily increase its assortment of women's
apparel, as well as menswear. Once an appropriate site has been selected and a
lease signed, the Company generally requires a relatively short lead time to
open a new store, with store construction, fixturing and training typically
requiring approximately six to eight weeks.
RECENT DEVELOPMENTS
NIMIUS
In February 1996, the Company entered into a one-year agreement with Mycal Ltd.,
formerly Nimius Japan Co. Ltd., (Nimius) to sell American Eagle Outfitters
merchandise in shops built by Nimius. This arrangement was not renewed in
February 1997, with the agreement that Nimius may operate their existing
American Eagle stores through November 1997.
ACQUISITION OF PROPHECY LTD.
In March 1997, the independent members of the Board of Directors approved the
Company's acquisition of Prophecy Ltd. (Prophecy), a New York-based contract
apparel manufacturer. The majority partner of Prophecy is the Schottenstein
Family. The goals of the acquisition are to leverage the talent and expense of
the Company's New York design office and to use Prophecy's production expertise
and manufacturing relationships to shorten the product delivery cycle and enable
the Company to continually improve product quality and value. The preliminary
terms of the acquisition include a cash payment of $0.9 million at closing plus
a contingent payment of up to $0.7 million.
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MERCHANDISE CATEGORIES
The Company's merchandise strategy focuses on providing an assortment of items
from each of the following three principal merchandise groups: menswear,
ladieswear, and outdoorwear and accessories, which includes footwear. The
Company offers broad assortments within each merchandise classification, which
are regularly updated with new colors, patterns and fabrics. The following table
sets forth the approximate percentage of net sales attributable to each
merchandise group for each of the periods indicated:
(In percentages) Fiscal Transition
1996 1996 1995 1994
---- ---- ---- ----
Menswear 36 52 57 59
Ladieswear 47 30 24 18
Outdoorwear/Accessories/Footwear 17 18 19 23
-- -- -- --
100 100 100 100
=== === === ===
Included in the Menswear and Outdoorwear groups are certain unisex items, such
as T-shirts, fleecewear and jackets, that are worn by both men and women.
Recognizing the sales and margin opportunities of building a larger customer
base in women's apparel, the Company dramatically increased the percentage of
women's merchandise within American Eagle Outfitters' stores in Fiscal 1996. The
Company intends to seasonally rebalance the mix between Menswear and Ladieswear
more evenly to maximize the opportunity within both merchandise categories.
PURCHASING
The Company believes that it has good relationships with its vendors. The
Company purchases merchandise from both domestic and foreign suppliers either
directly from a factory or through an agent. The Company's domestic vendors
include suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others, or both. During Fiscal 1996, approximately
22% of the Company's merchandise was purchased from North American suppliers and
the remaining 78% overseas. In general, the Company has not experienced any
significant difficulties with merchandise manufactured overseas. Since the
Company relies on a small number of overseas sources for a significant portion
of its purchases, any event causing a disruption of imports, including the
insolvency of a significant supplier, the imposition of additional import
restrictions or political disruptions in a country where vendor factories are
located, could have a material adverse affect on the Company's operations. The
Company does not maintain any long-term or exclusive commitments or arrangements
to purchase from any single supplier.
MERCHANDISE INVENTORY, REPLENISHMENT AND DISTRIBUTION
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
the Company endeavors to test many merchandise items before ordering large
quantities, it is still vulnerable to changing fashion trends and fluctuations
in customer demands. In addition, the cyclical nature of the retail business
requires the Company to carry a significant amount of inventory, especially
prior to peak selling seasons, when the Company and other retailers generally
build up their inventory levels. The Company enters into contracts for the
manufacture and purchase of private label apparel well in advance of the
applicable selling season. As a result, the Company is vulnerable to changes in
consumer demand, pricing shifts, as well as the timing and selection of
merchandise purchases.
The Company reviews its inventory levels in order to identify slow-moving
merchandise and generally uses 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 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 the extent and amount of inventory
affected.
Purchase orders, executed by the Company's buyers, are entered into the
computerized merchandise data system at the time of order. Primarily,
merchandise is shipped directly from vendors to the Company's central
distribution center in Warrendale, PA. Upon receipt, merchandise is entered into
the merchandise data system, then inspected, 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 from two to three times per week depending upon the season
and store requirements.
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STORE DESIGN
In order to promote name recognition and a consistent image, each American Eagle
Outfitters store is similarly presented, with a clean and casual ambience
created by the use of hardwood floors, light colored wooden fixtures, and
off-white walls. Large printed graphics throughout the store portray the
American Eagle Outfitters image and display the Company's merchandise. Current
merchandise collections are displayed prominently on mannequins and also on the
walls and racks throughout the store. Management believes its current design,
together with custom music selections and trained sales associates, creates an
ambience that encourages an enjoyable shopping experience.
STORE OPERATIONS
The Company's store operations are under the supervision of an executive vice
president, five regional managers and thirty-four district managers. The
management of a typical American Eagle Outfitters store consists of a store
manager and two assistant store managers. A typical store also has six or seven
sales associates and two cashiers, consisting of both full-time and part-time
employees.
Managers receive compensation in the form of salaries and performance-based
bonuses. Sales associates and cashiers are paid on an hourly basis. The Company
has a number of programs offering incentives to both management and sales
associates to increase sales. For example, certain incentive programs offer
individual employees cash awards for selling multiple wardrobe items and for
achieving individual sales goals. Other programs provide prizes or cash awards
to all employees in a store that has achieved, for example, the highest
percentage increase in sales for a given period.
The Company has a return policy which it believes is comparable to those offered
by better department stores and other specialty retail stores. The Company's
stores are generally open seven days a week.
CUSTOMER CREDIT
The Company has offered its customers an American Eagle Outfitters credit card
since September 1993. In July 1996, the Company entered into a new agreement
with a different issuing bank to continue offering a private label credit card
to its customers. The Company receives a lower rate and the new card offers a
lower APR % to its customers. The Company has no liability to the card issuer
for any bad debt expense, provided that credit card purchases are made in
accordance with the issuing bank's procedures.
Customers may also pay for their purchases with American Express(R),
Discover(R), MasterCard(R), Visa(R), cash or check. During Fiscal 1996,
approximately 44% of all purchases were paid for with credit cards.
ADVERTISING
The Company locates its stores in high traffic shopping malls. The majority of
advertising by the Company is either done in stores through image displays or by
direct mail through preferred customer lists or purchased lists of potential
customers. The Company's direct mail materials promote the image of the Company
and announce the arrival of new merchandise or an upcoming sale. Promotional
materials are also included in monthly statements for the American Eagle credit
card. In Fiscal 1996, the Company also began advertising in nationwide
publications that are directed to the American Eagle target customer to build
American Eagle Outfitters brand recognition. In Fiscal 1996, the Company's
advertising expense was approximately 2.6% of net sales.
INFORMATION SYSTEMS
New point-of-sale IBM terminals were installed in all American Eagle Outfitters
stores in Fiscal 1996 to improve customer service and increase processing
efficiencies. These terminals capture sales information by merchandise item.
This information is polled daily and used by the Company's buyers to evaluate
and react to merchandise selling trends. A new operating system will be
installed during Spring 1997 that will further improve speed and system
efficiencies. Additionally, the Company began testing hand-held terminals for
data capture and pricing verification in its highest volume stores and intends
to install them in all stores during Fiscal 1997.
The Company also installed a new RISC IBM AS/400 computer system at its
headquarters to meet the ongoing demands of the organization. The Company will
continue to update and improve its hardware and software bases in order to meet
its continuing technological requirements.
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COMPETITION
The retail apparel industry is very competitive. The Company competes primarily
on the basis of quality, fashion, service, selection and price. The Company
competes with various divisions of The Limited and The Gap, as well as with
retail chains such as The Buckle, Abercrombie & Fitch, and other retailers
catering to a youthful customer. The Company also competes with the casual
apparel and footwear departments of department stores, often in the same mall as
the Company's stores.
Many of the Company's competitors are considerably larger and have substantially
greater financial, marketing and other resources than the Company. There can be
no assurance that the Company will be able to successfully compete in the
future.
TRADEMARKS AND SERVICE MARKS
The Company does have common-law rights to the "American Eagle Outfitters"
trademark and service mark for clothing products and retail store services and
it has registered or is in the process of registering them in the states and in
a number of foreign countries in which they are or will be used by the Company.
To date, the Company has not been able to register "American Eagle Outfitters"
in the U.S. Patent and Trademark Office (PTO) as a trademark for clothing
products or as a service mark for retail clothing store service because there
purportedly exist similar marks. Although the Company is continuing to pursue
such registrations, there can be no assurance that they will be granted anytime
in the future. The Company has applied for and successfully registered "AEO" as
a trademark for clothing products and a variety of non-clothing products. The
Company has applied to the PTO for the registration of "AE" and "AE Supply" as
trademarks for clothing products and believes, based on discussions with
counsel, that such registrations, will be obtained. The Company has registered
in the PTO the trademark "American Eagle Outfitters" for a variety of
nonclothing products.
SEASONALITY
Historically, the Company's operations have been seasonal, with highest sales
and net income occurring in the fourth fiscal quarter, reflecting increased
demand during the year-end holiday selling season and, to a lesser extent, the
third quarter, reflecting increased demand during the back-to-school selling
season. The Company has generally recognized net losses during its first and
second fiscal quarters.
EMPLOYEES
As of February 21, 1997 , the Company had 5,441 employees, of whom 1,116 were
full-time salaried employees, 351 were full-time hourly employees and 3,974 were
part-time and seasonal hourly employees. The Company considers its relationship
with its employees to be satisfactory.
ITEM 2. PROPERTIES.
The Company's business is principally conducted from its headquarters and
distribution facilities in Warrendale, PA. The Company's landlord at this
location is Linmar Realty Company (Linmar), an affiliate of the Company. The
Company believes its distribution facilities, as currently configured, will be
capable of supporting up to approximately 500 stores. The Company's design
office is also located in New York, NY.
All store operations are conducted from leased premises. In general, the store
leases have initial terms of approximately 10 years. The Company's leases
provide for base rental and require the payment of a percentage of sales as
additional rent when sales reach specified levels. In addition, the Company
typically is responsible under its leases for maintenance and common area
charges, real estate taxes and certain other expenses. The Company has generally
been successful in negotiating renewals as leases near expiration. Please refer
to Note 7 of Notes to Consolidated Financial Statements for information with
respect to the Company's lease obligations.
The Company's headquarters and distribution center occupies approximately
308,000 square feet, of which 49,000 square feet is used for the Company's
executive, administrative and buying offices. The original building was
completed in 1978 and expanded in 1987 and 1994, and the 46,000 square foot
addition was completed in 1995. As a result of the 1995 expansion, a new lease
was entered into which expires on December 31, 2010. The terms of the lease
provide for minimum monthly rent payments ranging from $4.09 per square foot for
the first five years to $5.96 per square foot for the last five years of the
lease. Additionally, the Company is required to pay all real estate taxes,
insurance, maintenance and certain other expenses. For further discussion,
please refer to "Item 1. Business - - Merchandise Inventory, Replenishment and
Distribution" and "Item 13. Certain Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS.
On November 30, 1995, a complaint was filed in the United States District Court
for the Western District of Pennsylvania under the caption Thomas
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G. Di Cicco v. American Eagle Outfitters, Inc., et al, No. 95-1937, as class
action on behalf of purchasers of the Company's common stock during the period
August 4, 1994 through October 26, 1995. It alleged violations of the federal
securities laws arising out of purported misrepresentations and non-disclosures
concerning the Company and its financial condition. The matter has been settled
on a basis satisfactory to the Company and the plaintiffs. The Fiscal 1996
results of operations reflect an approximate $234,000 cost associated with this
settlement.
The Company is subject to various claims and legal actions which arise in the
ordinary course of its business. The Company believes that such claims and legal
actions, individually and in the aggregate, will not have a material adverse
effect on the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's stock is traded on The Nasdaq National Market under the symbol
"AEOS". The following table sets forth the high and low sales prices of the
common stock as reported on The Nasdaq National Market during the periods
indicated. As of March 1, 1997, there were 110 shareholders of record. The
following market price information conforms to the change in fiscal year as
described in Note 2 of the Consolidated Financial Statements.
For the
Quarters Ended Market Price $
- -------------- --------------
High Low
---- ---
April 1995 23 3/4 12 3/4
July 1995 21 1/2 13 3/4
October 1995 18 1/4 9
January 1996 10 1/2 5 1/2
April 1996 14 3/8 6 1/2
July 1996 19 1/2 13
October 1996 29 1/8 15
January 1997 23 7/8 7 1/2
The Company has paid no dividends and presently anticipates that all of its
future earnings will be retained for the development of its business and does
not anticpate paying cash dividends on its common stock in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, future
earnings, operations, capital requirements, general financial condition of the
Company and general business conditions.
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ITEM 6. SELECTED FINANCIAL DATA.
(dollars in thousands, except per share amounts)
For the Years Ended
February 1, February 3, July 29, July 30, July 31,
1997 1996 (3) 1995 1994 1993
---- -------- ---- ---- ----
(52 weeks) (53 weeks)
Net sales (1)(3) $326,404 $340,323 $296,563 $199,688 $169,431
Operating income (loss) (1) $8,859 ($1,073) $12,043 $11,952 $7,520
Net income (loss) (2) $5,925 ($1,334) $6,765 $6,629 $3,832
Earnings (loss) per share (2) $0.60 ($0.13) $0.68 $0.79 $0.50
Total assets $110,438 $95,363 $134,484 $82,863 $40,056
Working capital (deficit) $34,378 $24,775 $19,264 $27,173 ($1,003)
Stockholders' equity $71,056 $63,796 $57,932 $50,125 $4,358
Current ratio 1.87 1.78 1.25 1.83 0.96
Long term debt - - - - $7,400
Total stores at year end 303 273 297 208 151
Total stores excluding outlets 303 272 266 192 147
Comparable store sales increase
(decrease) -1.8% 6.6% 2.9% 2.1% 5.2%
(1) The fiscal years 1995 through 1993 amounts have been reclassified to
conform to the Fiscal 1996 classifications.
(2) The fiscal years 1994 and 1993 are pro forma.
(3) The 53-weeks ended February 3, 1996 includes 9 months of sales, or $21.5
million, from outlet stores sold in October 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
OVERVIEW
The Company achieved substantially improved results for the year ended February
1, 1997 ("Fiscal 1996"), despite a disappointing fourth quarter. The improved
profitability was the result of several strategic initiatives that included
shifting the merchandise mix to include more women's apparel, reducing inventory
levels and improving inventory productivity. As a result of these actions, gross
profit increased to $98.8 million, or 30.3% of sales, for the 52-week Fiscal
1996, compared to $90.9 million, or 26.7% of sales for the 53-week period ended
February 3, 1996 ("the prior year"). The improved gross profit was principally a
result of higher initial markups as well as reduced markdowns and reflected the
Company's successful transition to increasing the percentage of women's apparel
in the merchandise mix.
Fiscal 1996's higher gross profit translated into significantly improved
operating profit. Operating profit for Fiscal 1996 increased to $8.9 million,
compared to an operating loss of $1.1 million in the prior year. The operating
loss in the prior year included a $3.1 million loss on the sale of the Company's
outlet stores. Excluding the loss on the sale of the outlets, operating income
increased 341% from $2.0 million in the prior year to $8.9 million in Fiscal
1996.
Despite improved profitability in Fiscal 1996, sales and earnings were below the
Company's expectations due particularly to a disappointing fourth quarter
performance. Net sales for the fourth quarter of 1996 were $122.9 million
compared with $140.7 million for the same quarter last year, a decline of 12.6%
in total sales and a 12.2% decrease on a comparable store sales basis. Holiday
sales declined because of several factors including December having five fewer
holiday shopping days, a lower than expected sales performance in women's
apparel due to issues relating to merchandise assortment; a lower level of
inventory in men's apparel which diminished our ability to support men's sales;
and a limited availability of gift-giving items. Primarily as a result of lower
sales, net income was $6.4 million, or $0.65 per share, for the fourth quarter
this year, compared with $8.6 million, or $0.87 per share, for the same quarter
last year.
The Company's focus on improving inventory productivity reduced inventory
investment and led to annual in-store inventory turnover of 4.4 times and an
overall average inventory turnover of 3.3 times in Fiscal 1996 versus 2.5 times
in the prior year. As a result, the Company was able to fund working capital
requirements entirely through cash flow. No borrowings were required under the
Company's $60 million credit facility. Borrowing costs in Fiscal 1996 were
reduced by $2.3 million, including interest earned on excess cash invested.
Net income for Fiscal 1996 was $5.9 million, or $0.60 per share compared to a
loss of $1.3 million or $0.13 per share in the prior year. Excluding the effect
of the sold outlet stores, the net income for the prior year was $0.05 per
share.
The Company's balance sheet improved as a result of the operating performance
achieved in Fiscal 1996. As of February 1, 1997, cash and cash equivalents
increased by 72% to $34.3 million from $20.0 million in the prior year.
Inventory was $27.1 million versus $23.4 million in the prior year. On a per
store basis, inventory increased 4.4% from last year reflecting earlier receipt
of Spring 1997 merchandise. Stockholders' equity increased 11% to $71.1 million,
or $7.19 per share, in Fiscal 1996 compared to $63.8 million, or $6.38 per
share, at the end of the prior period.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of the listed items included in the Company's
Consolidated Statements of Operations.
For the Years Ended For the Six Months Ended For the Years Ended
------------------- ------------------------ -------------------
February 1, February 3, February 3, January 28, July 29, July 30,
1997 1996(1) 1996(2) 1995(2) 1995 1994
----- ------- ------- ------- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain
buying, occupancy and
warehousing expenses 69.7 73.3 70.7 63.3 69.2 67.8
---- ---- ---- ---- ---- ----
Gross profit 30.3 26.7 29.3 36.7 30.8 32.2
Selling, general and
administrative expenses 25.7 24.3 20.9 21.4 25.0 24.4
Loss on sale of assets - 0.9 1.4 - - -
Depreciation and amortization 1.9 1.8 1.5 1.2 1.7 1.8
---- ---- ---- ---- ---- ----
Operating income (loss) 2.7 (0.3) 5.5 14.1 4.1 6.0
Interest (income) expense, net (0.3) 0.4 0.4 0.1 0.3 0.4
---- ---- ---- ---- ---- ----
Income (loss) before
income taxes 3.0 (0.7) 5.1 14.0 3.8 5.6
Provision (benefit) for
income taxes (3) 1.2 (0.3) 2.0 5.7 1.5 2.3
---- ---- ---- ---- ---- ----
Net income (loss) (3) 1.8 % (0.4) % 3.1 % 8.3 % 2.3 % 3.3 %
==== ==== ==== ==== ==== ====
(1) Represents 53 week unaudited period for February 3, 1996.
(2) Represents 27 week transition period and 26 week unaudited period for
February 3, 1996 and January 28, 1995, respectively.
(3) The 1994 tax amount is pro forma, as a substantial portion of the
Company's business was treated as an S corporation (see Note 8 of
Consolidated Financial Statements).
COMPARISON OF 52 WEEKS ENDED FEBRUARY 1, 1997 TO 53 WEEKS ENDED FEBRUARY 3, 1996
Net sales for Fiscal 1996 increased 2.4% to $326.4 million from $318.8 million
for the 53 weeks ended February 3, 1996 (the "prior period"). When including
sales of $21.5 million from the sold outlet stores in prior period sales, sales
decreased by $13.9 million, or 4.1%. The increase in net sales resulted from an
increase of $14.5 million from non-comparable store sales and $2.0 million from
merchandise sales to Mycal Ltd. (formerly Nimius), offset by decreases of $5.2
million or 1.8% in comparable store sales and $3.7 million related to sales from
the 53rd week of the prior period. The total increase in net sales for the
ongoing American Eagle operations resulted from an increase of approximately 3%
in the average unit selling price rather than from an increase in units sold.
The Company operated 303 stores at the end of Fiscal 1996, compared to 273
stores, excluding 3 temporary locations, at the end of the prior period.
Gross profit for Fiscal 1996 increased to $98.8 million from $90.9 million for
the prior period. Gross profit as a percent of net sales for Fiscal 1996
increased to 30.3% from 26.7% for the prior period. The increase in gross profit
was attributable to higher initial mark-ups, lower markdowns, and lower delivery
costs, offset by higher occupancy costs compared to the prior period.
-12-
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Selling, general and administrative expenses for Fiscal 1996 increased to $83.8
million from $82.7 million for the prior period. As a percent of net sales,
these expenses for Fiscal 1996 increased to 25.7% from 24.3% for the prior
period. The increase of $1.1 million resulted primarily from increased supply
costs of $0.9 million. The increase in supply costs included costs related to
the increase in the number of stores, an increase in purchases of holiday bags
and boxes in anticipation of sales, replacing hangers in all stores, and the
write-off of certain obsolete packaging materials.
The loss on sale of assets recognized in the prior year related to the Company's
sale of net assets, including the assignment of related leases, of 32 outlet
stores (4 of which had not yet opened) and a warehouse, to a company owned by
Sam Forman, a former Vice Chairman of the Company. The pre-tax loss on the sale
of the assets recognized during the prior year was $3.1 million.
Depreciation and amortization expense for Fiscal 1996 decreased to $6.1 million
from $6.2 million for the prior period. As a percent of net sales, these
expenses for Fiscal 1996 increased to 1.9% from 1.8% for the prior period. The
year-to-year decrease in depreciation expense primarily resulted from the
additional depreciation expense taken in the prior period related to the
reduction of the estimated useful life of certain computer and related
equipment, offset by additional depreciation expense related to new stores and
capital additions in the current year.
Interest income for Fiscal 1996 was $1.0 million compared to interest expense of
$1.4 million for the prior period. Interest income was generated on cash
available for investment. No borrowings were required under the terms of the
Company's line of credit during Fiscal 1996. During Fiscal 1995, significant
borrowings were required under the line of credit to support inventory purchases
by the Company.
Income before income taxes for Fiscal 1996 increased to $9.8 million from a loss
of $2.4 million for the prior period. As a percent of net sales, income before
income taxes for Fiscal 1996 increased to 3.0% from a loss of 0.7% for the prior
period. The increase in income before income taxes of $12.3 million was
primarily attributable to increased gross profit resulting from higher initial
markup and lower markdowns, as well as reduced interest costs in Fiscal 1996 and
the net loss of $3.1 million recognized in the prior period from the sale of
outlet stores.
COMPARISON OF 27 WEEKS ENDED FEBRUARY 3, 1996 TO 26 WEEKS ENDED JANUARY 28, 1995
Net sales for the 27 weeks ended February 3, 1996 ("Transition 1996") increased
to $226.6 million from $182.8 million for the 26 weeks ended January 28, 1995
(the "prior period"). The $43.8 million or 23.9% increase in net sales was
attributable to an increase of $7.4 million or 5.3% in comparable store sales,
$32.7 million from non-comparable stores, and $3.7 million in sales for the
additional week. The Company operated 273 stores, excluding 3 temporary
locations, at the end of Transition 1996, compared to 262 stores operated at the
end of the prior period. The total increase in net sales resulted primarily from
an increase in units sold rather than from an increase in prices.
Gross profit for Transition 1996 decreased to $66.5 million from $66.9 million
for the prior period. Gross profit as a percent of net sales for Transition 1996
decreased to 29.3% from 36.7% for the prior period. The decrease in gross profit
was primarily attributable to an increase in markdowns over the prior period.
The increased markdowns were a result of competitive pressures in the
marketplace as well as the Company's strategy to accelerate the movement of
merchandise and reduce inventory requirements.
Selling, general and administrative expenses for Transition 1996 increased to
$47.4 million from $39.1 million for the prior period. As a percent of net
sales, these expenses for Transition 1996 decreased to 20.9% from 21.4% for the
prior period. The increase of $8.3 million resulted primarily from additional
salary, advertising and other store expenses necessary to support new and
temporary store openings as compared to the prior period, as well as an
additional selling week during Transition 1996. Additionally, management decided
to adopt the provisions of Financial Accounting Standards No. 121 (FASB 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The early adoption resulted in a charge to operations, for
certain locations in which management's profit objectives were not being met,
totaling $0.7 million during the second quarter of Transition 1996.
The loss on sale of assets recognized in Transition 1996 related to the
Company's sale of net assets, including the assignment of related leases, of 32
outlet stores (4 of which had not yet opened) and a warehouse, to a company
owned by Sam Forman, a former Vice Chairman of the Company. The pre-tax loss on
the sale of the assets recognized during Transition 1996 was $3.1 million. Net
sales for the outlet stores sold were approximately $8.8 million for the period
through the sale date of October 28, 1995 and $15.6 million for the prior
period.
Depreciation and amortization expense for Transition 1996 increased to $3.4
million from $2.2 million for the prior period. As a percent of net sales, these
expenses for Transition 1996 increased to 1.5% from 1.2% from the prior period,
due to additional new stores, capital additions and the reduction of the
estimated useful life of certain computer and related equipment.
Interest expense for Transition 1996 increased to $0.8 million from $0.2 million
for the prior period. The increase was due primarily to higher average daily
notes payable balances required to fund the increased inventory levels that
existed in the first quarter of Transition 1996.
Income before income taxes for Transition 1996 decreased to $11.8 million from
$25.5 million for the prior period. As a percent of net sales,
-13-
14
income before income taxes for Transition 1996 decreased to 5.1% from 14.0% for
the prior period. The decrease in income before income taxes of $13.7 million
was primarily attributable to higher markdowns, the loss on the sale of assets,
and the early adoption of FASB 121.
COMPARISON OF FISCAL 1995 TO FISCAL 1994
Net sales for 1995 increased to $296.6 million from $199.7 million for 1994. The
$96.9 million or 48.5% increase in net sales was attributable to an increase of
$5.5 million or 2.9% in comparable store sales and $91.4 million from
non-comparable stores. The Company operated 297 stores, excluding 17 temporary
locations, at the end of 1995 compared to 208 stores operated at the end of
1994. The total increase in net sales resulted primarily from an increase in
units sold rather than from an increase in prices.
Gross profit for 1995 increased to $91.4 million from $64.4 million for 1994.
The $27.0 million increase in gross profit was primarily attributable to the
increase in net sales. Gross profit as a percent of net sales for 1995 decreased
to 30.8% from 32.2% for 1994. The 1.4% decrease in gross margin was the result
of higher markdowns related to increased inventory levels, and the Company's
goal to accelerate inventory movement.
Selling, general and administrative expenses for 1995 increased to $74.4 million
from $48.8 million for 1994. As a percent of net sales, these expenses for 1995
increased to 25.0% from 24.4% for 1994. The increase of $25.6 million and 0.6%
consisted of additional expenses necessary to support the increased number of
stores.
Depreciation and amortization expense for 1995 increased to $5.0 million from
$3.7 million for 1994. As a percent of net sales, these expenses for 1995
decreased to 1.7% from 1.8% for 1994. The depreciation and amortization expense
increase of $1.3 million was primarily the result of store growth.
Interest expense for 1995 increased to $0.8 million from $0.7 million in 1994.
As a percent of sales, interest expense for 1995 decreased to 0.3% from 0.4% for
1994. Even though notes payable increased by $25.4 million and the average
interest rates increased for 1995 compared to 1994, the Company's interest
expense did not reflect a commensurate change because of the pay down of a
related party note payable in 1994.
Income before income taxes for 1995 was unchanged at $11.2 million. As a percent
of net sales, income before income taxes for 1995 decreased to 3.8% from 5.6%
for 1994. The decrease of 1.8% was largely attributable to higher markdowns
related to the increased inventory levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital in Fiscal 1996 was cash flow
provided by operating activities. The primary uses were for increases in
inventory and fixed assets. The Company had working capital of $34.4 million,
$24.8 million and $19.3 million at the end of Fiscal 1996, Transition 1996, and
1995, respectively. Fiscal 1996's increase resulted primarily from the increase
in cash provided by operating activities.
For Fiscal 1996, the cash provided by operating activities of $18.6 million was
primarily the result of the net income generated by the business as well as
noncash charges of depreciation and amortization. A portion of the cash flow
provided by operating activities was used to fund new store expansion, remodel
existing stores, and fund other capital expenditures with the remainder retained
to fund future store growth and improvements. Additionally, the Company received
cash of $3.6 million from the payoff of notes receivable as part of the sale of
the outlet operation and $2.3 million from the sale of the Company's old
point-of-sale terminals and other assets. The Company funds merchandise
purchases through the use of cash flows provided by operating activities.
At February 1, 1997, the Company had an unsecured demand lending arrangement
with a bank to provide a $60.0 million line of credit at either the lender's
prime lending rate (8.25% at February 1, 1997) or a negotiated rate such as
LIBOR. The facility has a limit of $40.0 million to be used for direct
borrowing. Cash generated from operations was sufficient enough so that no
borrowings were required against the line during Fiscal 1996. Letters of credit
in the amount of $19.4 million were outstanding at February 1, 1997. The
remaining available balance on the line was $40.6 million at February 1, 1997.
Capital expenditures, net of construction allowances, totaled $10.5 million for
Fiscal 1996. These expenditures included the addition of 38 new stores, as well
as 7 remodeled locations.
The Company is currently planning to open at least 20 stores during Fiscal
1997. This forward-looking statement will be influenced by the Company's
financial position and the number of advantageous mall store leases that may
become available. Additionally, the Company has selected approximately 20 of its
better performing older stores to upgrade to the newest store design in Fiscal
1997. These locations were selected based upon criteria such as sales
performance and lease terms. The Company will also relocate the shoe department
in approximately 100 stores to maximize sales performance. Finally, to
accommodate the increased business in women's apparel, the Company will install
-14-
15
additional fitting rooms in approximately 180 locations. The Company believes
that the cash flow from operations and its bank line of credit will be
sufficient to meet its presently anticipated cash requirements through Fiscal
1997.
SEASONALITY
Historically, the Company's operations have been seasonal, with highest sales
and net income occurring in the fourth fiscal quarter, reflecting increased
demand during the year-end holiday selling season and, to a lesser extent, the
third quarter, reflecting increased demand during the back-to-school selling
season. The Company has generally recognized net losses during its first and
second fiscal quarters.
INCOME TAXES
The provisions of FAS No. 109, "Accounting for Income Taxes", have been
reflected in the accompanying consolidated financial statements. See Note 8
"Income Taxes" in the Notes to Consolidated Financial Statements. The Company
recorded a $5.8 million deferred tax asset at February 1, 1997 which relates to
financial and tax differences. The Company has had profitable operations for the
past three tax years and anticipates that future taxable income will be able to
recover the full amount of the deferred tax asset.
IMPACT OF INFLATION
The Company does not believe that the relatively modest levels of inflation
which have been experienced in the United States in recent years have had a
significant effect on its net sales or its profitability. Substantial increases
in cost, however, could have a significant impact on the Company and the
industry in the future.
SAFE HARBOR STATEMENT AND BUSINESS RISKS
This report contains various "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events, including the following: the
planned opening of at least 20 stores in Fiscal 1997; the selection of
approximately 20 stores for remodeling; the relocation of the shoe department in
approximately 100 stores; the installation of additional fitting rooms in
approximately 180 locations; the planned store size of 4,000 to 5,000 square
feet; and sufficiency of cash flows and line of credit facilities to meet Fiscal
1997 cash requirements. The Company cautions that these statements are further
qualified by factors that could cause actual results to differ materially from
those in the forward-looking statements, including without limitation, the
following: a decline in demand for the merchandise offered by the Company; any
events causing the disruption of imports including the insolvency of a
significant supplier; ability of the Company to locate and obtain favorable
store sites and negotiate acceptable lease terms; the ability of the Company to
gauge the fashion tastes of its customers and provide merchandise that satisfies
customer demand; the effect the of economic conditions; and the effect of
competitive pressures from other retailers. Results actually achieved thus may
differ materially from expected results in these statements.
The Company's results of operations will also fluctuate from quarter to quarter
in the future as a result of numerous other factors. These include factors the
Company cannot control that impact mall-based apparel retailers generally, such
as factors affecting the amount of traffic in enclosed shopping malls and
regional and national economic conditions affecting disposable consumer income.
They also include factors over which the Company has some control, such as
distinguishing itself from its competitors based on the quality and design of
its private label brand names; identifying and responding to fashion trends in a
timely manner; the ability to direct source merchandise closer to need and in
appropriate quantities; the ability to retain qualified personnel; and the
number and timing of the opening of new stores. Any one or a combination of
these factors could have a material adverse affect on the Company's results of
operations and financial condition.
-15-
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
February 1, February 3, January 28,
Assets 1997 1996 1995
-------- ------- --------
(Unaudited)
Current assets:
Cash and cash equivalents $ 34,326 $19,986 $ 10,363
Merchandise inventory 27,117 23,394 50,037
Receivables 3,556 5,642 8,730
Prepaid expenses and other 4,381 4,429 1,448
Deferred income taxes 4,380 2,891 2,231
-------- ------- --------
Total current assets 73,760 56,342 72,809
-------- ------- --------
Fixed assets:
Fixtures and equipment 23,118 26,447 24,913
Leasehold improvements 32,671 30,326 26,923
-------- ------- --------
55,789 56,773 51,836
Less: Accumulated depreciation and amortization 21,598 23,044 22,322
-------- ------- --------
34,191 33,729 29,514
-------- ------- --------
Notes receivable -- 3,568 --
Other assets 2,487 1,724 1,771
-------- ------- --------
Total assets $110,438 $95,363 $104,094
======== ======= ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 20,430 $16,166 $ 25,698
Accrued compensation and payroll taxes 4,926 4,255 2,206
Accrued rent 6,006 4,550 3,404
Accrued income and other taxes 5,478 3,536 4,572
Other liabilities and accrued expenses 2,542 3,060 2,432
-------- ------- --------
Total current liabilities 39,382 31,567 38,312
Stockholders' equity 71,056 63,796 65,782
-------- ------- --------
Total liabilities and stockholders' equity $110,438 $95,363 $104,094
======== ======= ========
See notes to Consolidated Financial Statements
-16-
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Six
For the Years Ended Months Ended For the Years Ended
------------------- ------------ -------------------
Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29, July 30,
1997 1996 1996 1995 1995 1994
--------- ------- -------- -------- -------- ---------
(Unaudited) (Unaudited)
Net sales $ 326,404 $340,323 $226,569 $182,809 $296,563 $ 199,688
Cost of sales, including certain
buying, occupany and warehousing
expenses 227,648 249,415 160,096 115,867 205,186 135,328
--------- ------- -------- -------- -------- ---------
Gross profit 98,756 90,908 66,473 66,942 91,377 64,360
Selling, general and
administrative expenses 83,810 82,679 47,372 39,069 74,378 48,757
Loss on sale of outlets -- 3,081 3,081 -- -- --
Depreciation and amortization 6,087 6,221 3,441 2,179 4,956 3,651
--------- ------- -------- -------- -------- ---------
Operating income (loss) 8,859 (1,073) 12,579 25,694 12,043 11,952
Interest (income) expense, net (973) 1,366 813 243 797 716
--------- ------- -------- -------- -------- ---------
Income (loss) before income taxes 9,832 (2,439) 11,766 25,451 11,246 11,236
Provision (benefit) for income taxes 3,907 (1,105) 4,624 10,210 4,481 (962)
--------- ------- -------- -------- -------- ---------
Net income (loss) $ 5,925 ($1,334) $ 7,142 $ 15,241 $ 6,765 $ 12,198
========= ====== ======== ========= ======== =========
Net income (loss) per common share $ 0.60 ($0.13) $ 0.72 $ 1.52 $ 0.68
========= ====== ======== ========= ========
Weighted average common shares
outstanding 9,889 9,964 9,930 10,000 10,000
========= ====== ======== ========= ========
Pro forma information:
Income before income taxes, as stated $ 11,236
Pro forma provision for income taxes 4,607
---------
Pro forma net income $ 6,629
=========
Pro forma net income per common
share $ 0.79
=========
Pro forma weighted average
common shares outstanding 8,389
=========
See notes to Consolidated Financial Statements
-17-
18
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the year ended February 1, 1997, the six months ended February 3, 1996 and
the years ended July 29, 1995 and July 30, 1994
(In thousands) Retained
Acquired (1) Common Contributed Earnings
Entities Shares Stock Capital (Deficit)
-------- ------ ------ ----------- ---------
Balance at July 31, 1993 $ 4,358 -- $ -- $ -- $ --
Net income through January
2, 1994 14,911 -- -- -- --
Formation of American Eagle Outfitters, Inc.:
Stock exchange for acquired
entities (19,269) 7,700 19,269 -- --
Net proceeds from initial
public offering -- 2,300 33,326 -- --
Contributed capital -- -- -- 4,164 --
Restricted stock -- -- -- -- --
compensation
Net loss for seven months
ended July 30, 1994 -- -- -- -- (2,713)
------
Balance at July 30, 1994 -- 10,000 52,595 4,164 (2,713)
Net income -- -- -- -- 6,765
Restricted stock -- -- -- -- --
compensation
Tax benefit realized on
vested restricted stock -- -- -- 98 --
-----
Balance at July 29, 1995 -- 10,000 52,595 4,262 4,052
Net income -- -- -- -- 7,142
Restricted stock -- -- -- -- --
compensation
Contributed capital -- 15 (88) -- --
Treasury stock -- (140) -- -- --
----
Balance at February 3, 1996 -- 9,875 52,507 4,262 11,194
Net income -- -- -- -- 5,925
Exercise and cancellation of
stock options and
restricted stock -- 43 356 -- --
(In thousands) Deferred
Treasury Compensation Stockholders
Stock Expense Equity
-------- ------------ -----------
Balance at July 31, 1993 $ -- $ -- $ 4,358
Net income through January
2, 1994 -- -- 14,911
Formation of American Eagle Outfitters, Inc.:
Stock exchange for acquired
entities -- -- --
Net proceeds from initial
public offering -- -- 33,326
Contributed capital -- (4,164) --
Restricted stock -- 243 243
compensation
Net loss for seven months
ended July 30, 1994 -- -- (2,713)
------
Balance at July 30, 1994 -- (3,921) 50,125
Net income -- -- 6,765
Restricted stock -- 944 944
compensation
Tax benefit realized on
vested restricted stock -- -- 98
------
Balance at July 29, 1995 -- (2,977) 57,932
Net income -- -- 7,142
Restricted stock -- 420 420
compensation
Contributed capital 182 (94) --
Treasury stock (1,698) -- (1,698)
------ ------
Balance at February 3, 1996 (1,516) (2,651) 63,796
Net income -- -- 5,925
Exercise and cancellation of
stock options and
restricted stock (109) 53 300
-18-
19
Tax benefit realized on
exercised stock options and
vested restricted stock -- -- -- 44 -- -- -- 44
Restricted stock and stock
option compensation -- -- -- -- -- 991 991
Contributed capital -- -- -- 1,229 -- -- (1,229) --
------ -------
Balance at February 1, 1997 $-- 9,918 $52,863 $5,535 $17,119 $(1,625) $(2,836) $ 71,056
==== ===== ======= ====== ======= ======= ======= ========
(1) 30 million authorized, 10 million issued at July 29, 1995, February 3, 1996,
and February 1, 1997.
See notes to Consolidated Financial Statements
-19-
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AMERICAN EAGLE OUTFITTERS, INC.
STATEMENTS OF CASH FLOWS
(In thousands) For the Years Ended For the Six Months Ended For the Years Ended
------------------- ------------------------ -------------------
Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29, July 30,
1997 1996 1996 1995 1995 1994
---- ---- ---- ---- ---- ----
OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net income (loss) $ 5,925 $ (1,334) $ 7,142 $ 15,241 $ 6,765 $ 12,198
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 6,087 6,221 3,441 2,179 4,956 3,651
Loss on impairment and write-off of fixed assets 2,067 2,185 2,012 188 363 395
Loss on sale of outlets -- 3,081 3,081 -- -- --
Restricted stock compensation 991 948 420 416 944 243
Deferred income taxes (1,898) (297) 12 3,451 3,142 (7,027)
Changes in assets and liabilities:
Merchandise inventory (3,723) 16,893 45,875 (4,873) (33,855) (20,798)
Receivables 2,055 2,975 1,500 (3,365) (1,890) (4,150)
Prepaid and other (400) (3,081) 1,337 2,164 (2,254) (2,285)
Receivables from officers (30) (345) (12) -- (333) --
Accounts payable 4,018 (9,533) (21,656) 1,886 14,009 12,550
Accrued liabilities 3,489 2,546 5,229 7,088 4,405 (110)
-------- -------- -------- -------- -------- --------
Total adjustments 12,656 21,593 41,239 9,134 (10,513) (17,531)
-------- -------- -------- -------- -------- --------
Net cash provided by (used for) operating activities 18,581 20,259 48,381 24,375 (3,748) (5,333)
-------- -------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures (10,540) (15,636) (5,137) (10,843) (21,341) (12,658)
Proceeds from sale of assets 5,874 5,000 5,000 -- -- --
-------- -------- -------- -------- -------- --------
Net cash used for investing activities (4,666) (10,636) (137) (10,843) (21,341) (12,658)
-------- -------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Net borrowings (payments) on notes payable -- -- (28,800) (3,400) 25,400 (8,000)
Payment of related party note -- -- -- -- -- (7,400)
Net proceeds from initial public offering -- -- -- -- -- 33,326
Net proceeds from stock options exercised 425 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net cash provided by (used for) financing activities 425 -- (28,800) (3,400) 25,400 17,926
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash 14,340 9,623 19,444 10,132 311 (65)
Cash - beginning of period 19,986 10,363 542 231 231 296
-------- -------- -------- -------- -------- --------
Cash - end of period $ 34,326 $ 19,986 $ 19,986 $ 10,363 $ 542 $ 231
======== ======== ======== ======== ======== ========
See notes to Consolidated Financial Statements
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AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 1997
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION
American Eagle Outfitters, Inc. (the "Company") is a specialty retailer of
casual fashion merchandise. The Company targets men and women aged 15 to 30 and
sells its own brand of fashion apparel, blended with an assortment of quality
basics such as denim and khakis. The Company operates retail stores located 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 and investment subsidiaries. All
inter-company transactions have been eliminated.
On April 13, 1994, the Company successfully completed an initial public offering
of 2,300,000 shares of its common stock. In connection with this offering, the
Company increased its authorized shares of no par value stock to 30,000,000.
Prior to the consummation of the Company's offering, the existing stockholders
contributed 260,250 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
On January 3, 1996, the Company elected to change its fiscal year from a 52/53
week year that ends on the Saturday nearest to July 31 to a 52/53 week year that
ends on the Saturday nearest to January 31, effective for the transition period
ended on February 3, 1996. For tax purposes, the Company has retained its July
year-end. As used herein, "Fiscal 1996" refers to the twelve month period ended
February 1, 1997, "Transition 1996" refers to the twenty-seven week period from
July 30, 1995 to February 3, 1996 and the six months ended January 28, 1995
refers to the twenty-six week period from July 31, 1994 to January 28, 1995.
Similarly, "1995" and "1994" refer to the fiscal years ended July 29, 1995 and
July 30, 1994. "Fiscal 1997" refers to the twelve month period ending January
31, 1998. All references to amounts related to the six months ended January 28,
1995 and the twelve months ended February 3, 1996 are unaudited. However, in the
opinion of management, such amounts are fairly stated, in conformity with
generally accepted accounting principles, and contain all adjustments necessary
for a fair presentation.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. On an ongoing basis,
management reviews its estimates based on currently available information.
Changes in facts and circumstances may result in revised estimates.
CASH
Cash includes cash equivalents. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
MERCHANDISE INVENTORY
Merchandise inventory is valued at the lower of average cost or market,
utilizing the retail method. Average cost includes merchandise design costs and
related expenses.
The Company reviews its inventory levels in order to identify slow-moving
merchandise and may use markdowns to clear merchandise. Markdowns may be used if
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.
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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. Depreciation and amortization expense is summarized as follows:
(In thousands)
For the Years Ended For the Six Months Ended For the Years Ended
------------------- ------------------------ -------------------
Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29, July 30,
1997 1996 1996 1995 1995 1994
------ ------ ------ ------ ------ ------
(Unaudited) (Unaudited)
Depreciation expense $5,933 $6,113 $3,392 $2,144 $4,862 $3,637
Amortization expense 154 108 49 35 94 14
------ ------ ------ ------ ------ ------
Total $6,087 $6,221 $3,441 $2,179 $4,956 $3,651
====== ====== ====== ====== ====== ======
In accordance with FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",which the Company
adopted for Transition 1996, 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 statement defines a fair value
based method of accounting for an employee stock option and allows companies to
continue to measure compensation cost for such plans using the intrinsic value
based method of accounting prescribed in Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees." Beginning in 1996,
companies electing to remain with accounting under APB 25 must make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied. The Company plans to continue accounting
for its stock-based employee compensation plan under APB 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. Deferred tax
amounts included in operations represents the change in the deferred tax asset
and liability balances.
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.
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ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense is summarized as
follows:
(In thousands)
For the Years Ended For the Six Months Ended For the Years Ended
------------------- ------------------------ -------------------
Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29, July 30,
1997 1996 1996 1995 1995 1994
------ ------ ------ ------ ------ ------
(Unaudited) (Unaudited)
Advertising expense $8,501 $7,967 $4,740 $3,227 $8,161 $4,235
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the Years Ended For the Six Months Ended For the Years Ended
------------------- ------------------------ -------------------
Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29, July 30,
1997 1996 1996 1995 1995 1994
------ ------ ------ ------ ------ ------
(Unaudited) (Unaudited)
CASH PAID DURING THE PERIODS
FOR:
Income taxes $4,420 $1,610 $ 21 $1,282 $2,531 $6,839
Interest $ 3 $1,662 $1,103 $ 326 $ 885 $ 878
NON-CASH TRANSACTIONS FROM THE
SALE OF OUTLETS:
Treasury stock $ - $1,698 $1,698 $ - $ - $ -
Notes receivable $ - $3,708 $3,708 $ - $ - $ -
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common shares
outstanding (assumed weighted average for pro forma) during the periods
presented. Common share equivalents, principally in the form of employee stock
option awards, are not reflected in the common stock outstanding as they have a
nominal effect on the number of shares outstanding.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for prior periods in order to conform to the Fiscal 1996
presentation.
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3. RELATED PARTY TRANSACTIONS
As described in the information that follows, the Company has various
transactions with related parties. The nature of the relationship is primarily
through common ownership. The Company has an operating lease for its corporate
headquarters and distribution center with an affiliate of the Company. The
lease, which was entered into on January 1, 1996, and expires on December 31,
2010, provides for annual rental payments of approximately $1.2 million through
2001, $1.6 million through 2006, and $1.8 million through the end of the lease.
In addition, the Company purchases merchandise from and sells merchandise to
various related parties and uses the services of a related importing company.
During 1995, the Company entered into a royalty agreement with respect to
consulting services related to merchandise purchased by affiliates. Transactions
with these related parties and associated balance sheet amounts were as follows:
(In thousands)
For the Years Ended For the Six Months Ended For the Years Ended
------------------- ------------------------ -------------------
Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29, July 30,
1997 1996 1996 1995 1995 1994
-------- -------- ------- ------- ------- --------
(Unaudited) (Unaudited)
Merchandise purchases plus
import administrative charges $42,629 $41,303 $18,246 $20,753 $43,810 $46,949
Accounts payable $ 7,068 $ 4,432 $ 4,432 $11,197 $16,002 $13,984
Accounts receivable $ 1,334 $ 2,246 $ 2,246 $ 1,733 $ 804 $ --
Rent expense $ 1,407 $ 754 $ 236 $ 544 $ 1,062 $ 1,228
Royalty fee income $ -- $ 1,308 $ 208 $ -- $ 1,100 $ --
Merchandise sales $ 2,812 $ 5,683 $ 4,760 $ 813 $ 1,710 $ --
The Company has provided one-year loans, which are renewed annually, to certain
officers and other individuals to pay the taxes on the restricted stock that
vested in April 1995. As of February 1, 1997 and February 3, 1996, the
outstanding value of these loans, including interest at 6.8%, approximated
$376,000 and $345,000, respectively.
4. NOTES PAYABLE
The Company has an unsecured demand lending arrangement with a bank to provide a
$60 million line of credit at either the lender's prime lending rate (8.25 % at
February 1, 1997) or a negotiated rate such as LIBOR. Because no borrowings were
required under the terms of the Company's line of credit, there were no amounts
paid for interest during Fiscal 1996. The weighted average interest rate on
these borrowings in Transition 1996 was 8.27%. The facility has a limit of $40
million to be used for direct borrowing. No borrowings were outstanding as of
February 1, 1997 and February 3, 1996. The Company had letters of credit of
approximately $19.4 million outstanding at February 1, 1997 which were primarily
related to the purchase of inventory. The remaining balance which could be
borrowed under this lending arrangement was $40.6 million at February 1, 1997.
5. 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 $1.5 million were impaired and accordingly, provided for this
impairment during Fiscal 1996, compared with $0.7 million for Transition 1996.
The expense included in selling, general, and administrative expenses for Fiscal
1996 and Transition 1996 was $0.8 million and $0.7 million, respectively. Fair
value was based on management's estimate of the potential future benefits of
such assets to the remaining store locations or future store locations of the
Company.
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25
6. LOSS ON SALE OF ASSETS
The Company sold net assets (including the assignment of related leases,
generally with recourse to the Company) of 32 outlet stores and a warehouse,
effective as of the close of business on October 28,1995 to Forman Enterprises,
Inc., which is owned by Sam Forman, a former Vice Chairman and director of the
Company, for approximately $11.4 million. The Company recognized a loss of $3.1
million on the sale of these stores.
The proceeds from the sale were payable in cash of $5.0 million, two notes
receivable totaling $4.7 million, which were discounted and paid off during the
first quarter of Fiscal 1996, and 140,000 shares of common stock held by Mr.
Forman amounting to $1.7 million.
7. LEASE COMMITMENTS
All store operations are conducted from leased premises. These leases 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:
(In thousands)
For the Years Ended For the Six Months Ended For the Years Ended
------------------- ------------------------ -------------------
Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29, July 30,
1997 1996 1996 1995 1995 1994
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Minimum rentals $42,738 $38,900 $20,303 $16,802 $35,384 $23,162
Contingent rentals 674 996 773 630 854 697
------- ------- ------- ------- ------- -------
Total $43,412 $39,896 $21,076 $17,432 $36,238 $23,859
======= ======= ======= ======= ======= =======
The table below summarizes future minimum lease obligations under operating
leases in effect at February 1, 1997.
(In thousands)
Fiscal years:
1997 $29,491
1998 28,248
1999 26,782
2000 23,091
2001 22,278
Thereafter 78,762
--------
Total future minimum lease obligations $208,652
========
The Company is contingently liable for the rental payments totaling
approximately $7.9 million for the outlet stores which were sold in October
1995.
8. INCOME TAXES
The provisions of FASB Statement No. 109 (FASB 109), "Accounting for Income
Taxes", have been reflected in the preparation of the accompanying Consolidated
Financial Statements for the acquired retail operations, effective August 1,
1993. Temporary differences that existed at the date of adoption represented
future deductible amounts of approximately $3.6 million at August 1, 1993. A
valuation allowance was provided in
-25-
26
an amount equal to the deferred tax asset at that date. As a result, there was
no cumulative effect of adopting FASB 109.
As a result of profitable operations during 1994, the valuation allowance
established at adoption of FASB No. 109 of $3.6 million was eliminated and the
benefit was recognized in the second quarter of 1994.
The significant components of the Company's deferred tax assets (there are no
deferred tax liabilities) were as follows:
(In thousands) February 1, February 3, January 28,
1997 1996 1995
---- ---- ----
(Unaudited)
CURRENT:
Inventories $1,326 $ 452 $ 909
Accrued rent 2,015 1,464 1,122
Salaries and compensation 773 729 200
Other 266 246 --
------ ------ ------
4,380 2,891 2,231
LONG TERM:
Basis differences in fixed assets 1,391 982 1,346
------ ------ ------
Total $5,771 $3,873 $3,577
====== ====== ======
Significant components of the provision (benefit) for income taxes are as
follows:
For the Years Ended For the Six Months Ended For the Years Ended
------------------- ------------------------ -------------------
(In thousands) February 1, February 3, February 3, January 28, July 29, July 30,
1997 1996 1996 1995 1995 1994
---- ---- ---- ---- ---- ----
CURRENT: (Unaudited) (Unaudited)
Federal $ 4,709 $ (674) $3,848 $ 5,644 $1,089 $ 4,955
State 1,096 (134) 764 1,115 250 1,110
------- ------- ------ ------- ------ -------
Total current 5,805 (808) 4,612 6,759 1,339 6,065
------- ------- ------ ------- ------ -------
DEFERRED:
Federal (1,584) (249) 11 2,882 2,622 (5,999)
State (314) (48) 1 569 520 (1,028)
------- ------- ------ ------- ------ -------
Total deferred (1,898) (297) 12 3,451 3,142 (7,027)
------- ------- ------ ------- ------ -------
Provision (benefit) for
income taxes $ 3,907 $(1,105) $4,624 $10,210 $4,481 $ (962)
======= ======= ====== ======= ====== =======
A tax benefit has been recognized as contributed capital, in the amount of
$44,000 for the year ended February 1, 1997 and $98,000 for the years ended
February 3, 1996 and July 29, 1995, resulting from additional tax deductions
related to vested restricted stock grants and stock options exercised. The tax
information for July 30, 1994 reflected on the consolidated statements of
operations includes pro forma adjustments for income taxes based on the
statutory rates in effect for C corporations as if the reorganization of the
Company occurred on August 1, 1992.
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A reconciliation between the statutory federal income tax and the effective tax
rate follows. The Fiscal 1996, Transition 1996 and 1995 percentages are actual
and the 1994 percentages are pro forma.
Provision (Benefit)
-------------------
For the Years Ended For the Six Months Ended For the Years Ended
------------------- ------------------------ -------------------
Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29, July 30,
1997 1996 1996 1995 1995 1994
------ ------ ------ ------- ------- ------
(Unaudited) (Unaudited)
Federal income tax rate 35% (35)% 35% 35% 35% 35%
State income taxes, net of federal income
tax effect 4 (4) 4 5 4 6
Tax rate differential from prior interim
periods - (6) - - - -
Other items, net 1 - - - 1 -
-- --- -- -- -- --
40% (45)% 39% 40% 40% 41%
== ==== == == == ==
9. PROFIT SHARING PLAN AND EMPLOYEE STOCK PURCHASE PLAN
The Company maintains a contributory profit sharing plan that covers all
employees that have met certain length-of-service requirements. Contributions to
the 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 $350,000 in expense during
Fiscal 1996. No expense was recognized in Transition 1996, 1995, and 1994.
Effective in August 1994, the Company amended its profit sharing plan to include
a 401(k) retirement plan option. 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 plan on a pre-tax basis, subject to IRS
limitations. The Company will match up to 3% of the participants eligible
compensation. Total expense for Fiscal 1996 was $319,000 as compared with
$153,000 for Transition 1996.
The Employee Stock Purchase Plan (ESPP), effective on April 1, 1996, covers
employees who are at least 20 1/2 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 the Company stock at the
average market price.
10. STOCK OPTION PLAN AND RESTRICTED STOCK AGREEMENTS
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB25), "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 600,000 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 300,000 shares for which options may be granted under the Plan. 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. The members of the Board of Directors
who are not officers or employees of the Company are granted options for 2,500
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 1,000 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
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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 1996 and Transition 1996: 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) For the Years Ended
-------------------
Feb. 1, 1997 Feb. 3, 1996
------------ ------------
(Unaudited)
Pro forma net income (loss) $5,354 $(1,383)
Pro forma net income (loss) per share
Primary $ 0.51 $ (0.14)
Fully diluted $ 0.51 $ (0.14)
Stock options granted prior to August 1, 1995 are specifically excluded from the
determination of pro forma net income. As such, future stock options grants will
serve to increase the Fiscal 1996 and 1995 pro forma compensation costs.
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29
A summary of the Company's stock option activity follows:
For the Year Ended For the Six
------------------ -----------
Months Ended
------------
February 1, 1997 (1)(3) February 3, 1996
----------------------- ----------------
Weighted- Weighted-
Avg. Avg.
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
Outstanding - beginning of year 355,950 $ 13.78 319,950 $ 15.98
Granted
(Exercise Price equal to Fair
Value) 473,950 $ 10.22 109,000 $ 6.96
Granted
(Exercise Price less than Fair
Value) 117,000 $ 6.75 -- --
Exercised (2) (42,950) $ 7.10 -- --
Cancelled (272,050) $ 14.95 (73,000) $ 15.99
-------- -------
Outstanding - end of year (4) 631,900 $ 8.92 355,950 $ 13.22
======== =======
Exercisable - end of year (5) 105,430 $ 7.71 69,390 $ 13.78
Weighted avg. fair value of
options granted during the year $ 7.46 $ 4.75
For the Years Ended
-------------------
July 29, 1995 July 30, 1994
------------------------ ----------------------
Weighted- Weighted-
Avg. Avg.
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
Outstanding - beginning of year 309,000 $ 16.00 -- $ 0.00
Granted
(Exercise Price equal to Fair
Value) 19,950 $ 15.76 311,500 $ 16.00
Granted
(Exercise Price less than Fair
Value) -- -- -- --
Exercised (2) -- -- -- --
Cancelled (9,000) $ 16.00 (2,500) $ 16.00
------- -------
Outstanding - end of year (4) 319,950 $ 15.98 309,000 $ 16.00
======= =======
Exercisable - end of year (5) 60,000 $ 16.00 -- $ 16.00
Weighted avg. fair value of
options granted during the year -- --
(1) Shares granted and cancelled during Fiscal 1996 include 241,950 in options
that were repriced to $6.75 on February 5, 1996.
(2) Options exercised during Fiscal 1996 ranged in price from $5.88 - $17.00
with an average of $7.10.
(3) As of February 1, 1997, the Company had 225,150 shares available for
grant.
(4) As of February 1, 1997, the exercise price of 463,400 options outstanding
ranged between $6.25 and $6.75 with weighted average remaining contractual
lives between 8 and 9 years.
(5) As of February 1, 1997, the exercise price of 64,430 options exercisable
ranged between $6.25 and $6.75.
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30
The Company maintains a restrictive stock plan for compensating certain
employees and selected related party consultants. The summary of stock grant
activity is as follows:
Fair market
value per share Number of
at grant date shares Vested
------------- ------ ------
Granted on April 13, 1994 $16.00 260,250
-------
Balance at July 30, 1994 $16.00 260,250
Cancelled $16.00 (9,375)
-------
Balance at July 29, 1995 $16.00 250,875 50,175
Granted $5.88 15,000
--------
Balance at February 3, 1996 $5.88-$16.00 265,875 53,175
Exercised $5.88 (6,000)
Cancelled $5.88 (9,000)
--------
Balance at February 1, 1997 $16.00 250,875 100,350
======== =======
For Fiscal 1996 and Transition 1996, the Company recorded $1,049,710 and
$420,150 in compensation expense, respectively, on restrictive stock and certain
stock options granted during Fiscal 1996 where the exercise price is less than
fair value of the underlying stock. For the year ended July 29, 1995, the
Company recorded as compensation expense $944,150, which included an early
vesting provision of $113,150 for executives no longer employed by the Company.
The Company recorded $242,900 as compensation expense for the period April 13,
1994 through July 30, 1994. Assuming no acceleration of vesting, the Company
will record $1,048,500 per year in compensation expense during the remaining
vesting periods.
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11. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
The following quarterly financial information conforms to the change in fiscal
year as described in Note 2.
(In thousands, except per share data) Quarters Ended
May 4, August 3, November 2, February 1,
1996 1996 1996 1997
---- ---- ---- ----
Net Sales (1) $ 54,396 $ 70,257 $ 78,846 $122,905
Gross Profit (1) 13,610 21,239 25,850 38,057
Income (loss) before provision for income taxes (4,929) 569 3,535 10,657
Net income (loss) (2,991) 346 2,145 6,425
Earnings (loss) per share $ (0.30) $ 0.04 $ 0.21 $ 0.65
April 29, July 29, October 28, February 3,
1995 1995 1995 1996(2)
------- ------- --------- ----------
Net sales (1) $ 48,417 $ 65,337 $ 85,885 $140,684
Gross Profit (1) 6,332 18,103 23,796 42,677
Income (loss) before provision for income taxes (11,806) (2,399) (2,367) 14,133
Net income (loss) (6,923) (1,553) (1,436) 8,578
Earnings (loss) per share ($ 0.69) ($ 0.15) ($ 0.14) $ 0.87
(1) The quarterly amounts have been reclassified to conform to the Fiscal 1996
presentation.
(2) Represents 14 week period ended February 3, 1996.
12. LEGAL PROCEEDINGS
On November 30, 1995, a complaint was filed in the United States District Court
for the Western District of Pennsylvania under the caption Thomas G. Di Cicco v.
American Eagle Outfitters, Inc., et al, No. 95-1937, as class action on behalf
of purchasers of the Company's common stock during the period August 4, 1994
through October 26, 1995. It alleged violations of the federal securities laws
arising out of purported misrepresentations and non-disclosures concerning the
Company and its financial condition. The matter has been settled on a basis
satisfactory to the Company and the plaintiffs. The Fiscal 1996 results of
operations reflect an approximate $234,000 cost associated with this settlement.
The Company is subject to various claims and legal actions which arise in the
ordinary course of its business. The Company believes that such claims and legal
actions, individually and in the aggregate, will not have a material adverse
effect on the business or financial condition of the Company.
13. SUBSEQUENT EVENTS
In February 1996, the Company entered into a one-year agreement with Mycal Ltd.,
formerly Nimius Japan Co. Ltd., (Nimius) to sell American Eagle Outfitters
merchandise in shops built by Nimius. This arrangement was not renewed in
February 1997, with the agreement that Nimius may operate their existing
American Eagle stores through November 1997.
In March 1997, the independent members of the Board of Directors approved the
Company's acquisition of Prophecy Ltd. (Prophecy), a New Yorkbased contract
apparel manufacturer. The majority partner of Prophecy is the Schottenstein
Family. The goals of the acquisition are to leverage the
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talent and expense of the Company's New York design office and to use Prophecy's
production expertise and manufacturing relationships to shorten the product
delivery cycle and enable the Company to continually improve product quality and
value. The preliminary terms of the acquisition include a cash payment of $0.9
million at closing plus a contingent payment of up to $0.7 million.
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
American Eagle Outfitters, Inc.
We have audited the accompanying consolidated balance sheets of American Eagle
Outfitters, Inc. as of February 1, 1997 and February 3, 1996 and the related
statements of income, stockholders' equity, and cash flows for the year ended
February 1, 1997, the six month period ended February 3, 1996 and each of the
two years in the period ended July 29, 1995. 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 audits 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 February 1, 1997 and February 3, 1996 and the
consolidated results of its operations and its cash flows for the year ended
February 1, 1997, the six month period ended February 3, 1996, and for each of
the two years in the period ended July 29, 1995, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Pittsburgh, Pennsylvania
March 7, 1997
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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 the Company's Proxy Statement relating to the Company's Annual Meeting of
Shareholders to be held on May 7, 1997, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing in the Company's Proxy Statement relating to the
Company's Annual Meeting of Shareholders to be held on May 7, 1997 under the
captions "Executive Officer Compensation", "Option/SAR Grants in Last Fiscal
Year", "Ten-Year Option/SAR Repricings" 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
Shareholders and Management" in the Company's Proxy Statement relating to the
Company's Annual Meeting of Shareholders to be held on May 7, 1997, 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 Shareholders to be held on May 7, 1997, 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 of the Company,
included in the Annual Report of the Company to its stockholders for
the period ended February 1, 1997, are included in Item 8:
Consolidated Balance Sheets as of February 1, 1997, February 3,
1996, and January 28, 1995 (unaudited)
Consolidated Statements of Operations for the years ended
February 1, 1997 and February 3, 1996 (unaudited) ,the six month
periods ended February 3, 1996 and January 28, 1995 (unaudited)
and for each of the two years in the period ended July 29, 1995
Consolidated Statements of Stockholders' Equity for the year
ended February 1, 1997, the six month period ended February 3,
1996, and for each of the two years in the period ended July 29,
1995
Consolidated Statements of Cash Flows for the years ended
February 1, 1997 and February 3, 1996 (unaudited), six month
periods ended February 3, 1996 and January 28, 1995 (unaudited)
and for each of the two years in the period ended July 29, 1995
Notes to the Consolidated Financial Statements
(a)(2) No financial statement schedules for the Company are supplied because
of the absence of the conditions under which they are required.
-34-
35
(a)(3) Exhibits:
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
Exhibit_ Exhibit Index
No. Page No.
--------
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
2.1 Exchange Agreement, dated as of January 2, 1994, among the Previously filed as Exhibit 2 to Registration Statement on Form
Registrant, Retail Ventures, Inc., Natco Industries, Inc., S-1 (file no. 33-75294) filed February 14, 1994, as amended,
Peatro Corporation and Sam Forman. and incorporated herein by reference.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
2.2 First Amendment to Exchange Agreement, dated as of February Previously filed as Exhibit 2.1 to Registration Statement on
14, 1994. Form S-1 (file no. 33-75294) filed February 14, 1994, as
amended, and incorporated herein by reference.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
3.1 First Amended and Restated Articles of Incorporation of the Previously filed as Exhibit 4(b) to Registration Statement on
Registrant, as amended. Form S-8 (file no. 33-79358) filed May 25, 1994, and
incorporated herein by reference.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
3.2 Code of Regulation of the Registrant. Previously filed as Exhibit 3.3 to Registration Statement on
Form S-1 (file no. 33-75294) filed February 14, 1994 as
amended, and incorporated herein by reference.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
3.3 Agreement and Plan of Merger, dated as of February 10, 1994, Previously filed as Exhibit 3.4 to Registration Statement on
between the Registrant and Peatro Corporation. Form S-1 (file no. 33-75294) filed February 14, 1994, as
amended, and incorporated herein by reference.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
4.1 Articles Fourth, Fifth, Sixth, Seventh, Eighth, Ninth and Previously filed as Exhibit 4.1 to Form 10-Q for the quarter
Tenth of the Registrant's Articles of Incorporation ended April 30, 1994.
(contained as an exhibit to the Agreement and Plan of Merger
filed as Exhibit 3.3)
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
4.2 Articles I and II of the Registrant's Code of Regulations Previously filed as Exhibit 4.1 to Registration Statement on
(contained in the Registrant's Code of Regulations filed as Form S-1 (file no. 33-75294) filed February 14, 1994, as
Exhibit 3.2) amended, and incorporated herein by reference.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
10.1 Office/Distribution Center Lease dated January 1, 1996 Previously filed as Exhibit 10.1 to the Transition Report to
between the Registrant and Linmar Realty Company. Stockholders for the 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 Employment Agreement between the Registrant and Sam Previously filed as Exhibit 10.3 to Registration Statement on
Forman. Form S-1 (file no. 33-75294) filed February 14, 1994, as
amended, and incorporated herein by reference.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
10.4 Employment Agreement between the Registrant and Roger S. Previously filed as Exhibit 10.4 to Registration Statement on
Markfield. Form S-1 (file no. 33-75294) filed February 14, 1994, as
amended, and incorporated herein by reference.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
10.5 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.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
10.6 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.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
-35-
36
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
10.7 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.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
10.8 Merchandise Royalty Agreement Previously filed as Exhibit 10.8 to Form 10-K for the year
ended July 29, 1995.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
10.9 Employee Stock Purchase Plan Previously filed on April 5, 1996 on Form S-8
(file no. 33-33278)
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
11 Statement re: Computation of Per Share Earnings
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
21 Subsidiaries Previously filed as Exhibit 21 to Form 10-K for the year ended
July 29, 1995.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
23.1 Consent of Ernst & Young LLP.
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
24 Powers of Attorney
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
27 Financial Data Schedule
- ------- ----------------------------------------------------------- ---------------------------------------------------------------
(B) REPORTS ON FORM 8-K
None
(C) EXHIBITS
The exhibits to this report begin on page 38.
(D) FINANCIAL STATEMENT SCHEDULES
None
-36-
37
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 the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman and Chief Executive Officer April 16, 1997
- -------------------------------------
Jay L. Schottenstein
(Principal Executive Officer)
* Vice Chairman and Director April 16, 1997
- -------------------------------------
Saul Schottenstein
* Vice Chairman, Chief Operating Officer April 16, 1997
- ------------------------------------- and Director
George Kolber
/s/ Laura A. Weil Executive Vice President April 16, 1997
- ------------------------------------- and Chief Financial Officer
Laura A. Weil
* Vice President, Secretary and Treasurer April 16, 1997
- -------------------------------------
William P. Tait
* Vice President, Controller and April 16, 1997
- ------------------------------------- Chief Accounting Officer
Dale E. Clifton
* Director April 16, 1997
- -------------------------------------
Martin P. Doolan
* Director April 16, 1997
- -------------------------------------
Thomas R. Ketteler
* Director April 16, 1997
- -------------------------------------
David W. Thompson
* Director April 16, 1997
- -------------------------------------
John L. Marakas
*By: /s/ Laura A. Weil
---------------------------------------
Laura A. Weil, Attorney-in-Fact
-37-