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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0001
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-23760
AMERICAN EAGLE OUTFITTERS, INC.
(Exact name of registrant as specified in its charter)
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: (724) 776-4857
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant,
6,253,648 Common Shares, based on the $44.50 closing sale price on April 1, 1998
was $278,287,336.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 15,076,033 Common Shares were
outstanding at April 1, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for 1998 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 leading specialty retailer
of women's and men's quality casual lifestyle apparel, footwear, outerwear and
accessories. The Company's objective is to completely outfit its core customers
with American Eagle Outfitters(R) products, which feature denim, khakis, skirts,
wool and cotton sweaters, casual tops and shirts, footwear, outerwear and
accessories such as belts, socks and bags. As of April 1, 1998, the Company
operated 335 mall-based stores in 39 states principally in the Midwest,
Northeast and Southeast.
The Company opened its first American Eagle Outfitters(R) store in 1977. Since
that time, management has refined the merchandise concept of the store to
provide private label merchandise to men and women who want fashionable and
affordable casual apparel for an active, youthful lifestyle. Substantially all
of the Company's products carry the American Eagle Outfitters(R) brand names.
The merchandise conveys a clean, fresh, collegiate appeal and is designed with
20-year old men and women in mind to appeal to customers ranging from 16- 34
years old. The Company's target customer is an active, middle to upper middle
income consumer who appreciates value as well as style when purchasing his or
her casual apparel. Consequently, the Company's merchandise offers
interpretations of current fashion trends at price points intended to be
competitive with or lower than comparable mall-based retailers.
Over the past several years, the Company has reconfigured its merchandise mix
and refined the look of its stores to increase its appeal to women. Management
believes that this strategy provides the Company with several advantages,
including a larger target customer base and the potential to increase sales
productivity because women typically shop more frequently, particularly in the
first and second quarters of the year. Women's merchandise accounted for 50% of
annual sales in Fiscal 1997. Management believes it is important to maintain a
balanced presentation of men's and women's apparel to take full advantage of the
American Eagle Outfitters(R) brand potential.
ORGANIZATION AND HISTORY
Until January 2, 1994, the Company's business was operated by Retail Ventures,
Inc. ("RVI") and Natco Industries, Inc. ("Natco"), two corporations owned
principally by members of the Jerome Schottenstein family (the "Schottenstein
Family"). Effective on that date, the Company obtained all of the operating
assets and liabilities of the American Eagle Outfitters(R) operations in
exchange for the issuance of shares of Common Stock. The Company leases its
office and distribution center from Linmar Realty Company, a partnership owned
by the Schottenstein Family, and Schottenstein Stores Corporation ("SSC") which
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 retail store operations acquired 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(R) 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.
Effective May 4, 1997, the Company acquired Prophecy, Ltd. ("Prophecy"), a New
York-based production and sourcing company. The majority partner of Prophecy was
the Schottenstein Family. The results of operations of Prophecy are included in
the accompanying Consolidated Financial Statements from the date of acquisition.
The Company's principal offices are located at 150 Thorn Hill Drive, Warrendale,
Pennsylvania 15086-7528 and its telephone number is (724) 776-4857.
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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 1997" and "Fiscal 1996" refers to the
respective twelve month periods ended January 31, 1998 and February 1, 1997,
"Transition 1996" refers to the twenty-seven week period from July 30, 1995 to
February 3, 1996. Similarly, "Fiscal 1995" and "Fiscal 1994" refer to the fiscal
years ended July 29, 1995 and July 30, 1994, respectively. "Fiscal 1998" refers
to the twelve month period ending January 30, 1999.
OPERATING STRATEGIES
Management has developed and continues to implement five core operating
strategies to differentiate the Company from its competition, improve
profitability and consistently increase net sales. The following is a brief
description of these strategies.
Build the American Eagle Outfitters(R) brand. Approximately 99% of the Company's
merchandise purchases for Fiscal 1997 were American Eagle Outfitters(R), AE(R),
and AE Supply(TM) branded merchandise. Management believes the image and
strength of its brand are integral components of the Company's success. The
wholesome, youthful, outdoor image of the brand is supported by the Company's
merchandise and by its marketing and advertising programs. The Company has
developed marketing and promotional alliances with corporate partners whose
customer demographics are similar to those of the Company's customers. Examples
of co-marketing efforts include music compact disc promotions and contests for
mountain bikes, four wheel drive vehicles and jet skis. The Company utilizes
print advertising in magazines such as Mademoiselle, Seventeen and Spin to
convey the lifestyle image of its brand to its target customers.
Provide value to the target customer. The Company is committed to providing its
target customers with fashionable interpretations of fundamental wardrobe items
such as jeans, sweaters, khakis, T-shirts, flannel shirts, rugbys and fleece.
The Company seeks to provide quality merchandise at price points competitive
with or lower than those of comparable mall-based retailers. This merchandise
strategy is designed to appeal to a broad customer base.
Design merchandise to support the Company strategy. The Company employs its own
in-house design team to create quality apparel, outerwear and accessories in
support of the casual lifestyle image of the American Eagle Outfitters(R),
AE(R), and AE Supply(TM) brand names. The merchandise is designed so that it can
be produced at a cost consistent with the Company's value orientation. The
Company believes that its in-house design capability provides it with a
competitive advantage through its ability to quickly interpret fashion trends
for its target customer at attractive price points.
Integrate merchandise production and sourcing. Management believes that a
cornerstone of its business is its ability to maintain product quality, achieve
lower costs and shorten delivery cycles through careful management of its
merchandise sourcing. To enhance its abilities in this area, in May 1997, the
Company acquired Prophecy, a production and sourcing company based in New York
City. Management believes that Prophecy's production and sourcing expertise will
enable the Company to (i) further improve product quality and consistency
through close monitoring of the production process, (ii) lower the cost of
merchandise by identifying improved sourcing opportunities, and (iii) better
assure timely delivery of merchandise that meets the Company's specifications
and cost requirements. See "Item 13. Certain Relationships and Related
Transactions".
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Execute an in-season, regionally based merchandise strategy. Recently, the
Company began implementing its strategy to present seasonal merchandise closer
to and during much of the season in which that merchandise is intended to be
worn. Management believes that this merchandising approach better parallels the
purchasing patterns of its target customer than the more traditional method of
retailing seasonal merchandise in advance of its season. In addition, the
Company adjusts the timing, fabric weight and merchandise mix of its seasonal
inventory on a region by region basis in response to differing seasonal
climates.
GROWTH STRATEGY
The Company intends to open stores in new and existing geographic markets as
well as to increase sales in existing stores. Since August 1993, the Company has
added 213 American Eagle Outfitters stores. In Fiscal 1997, the Company opened
36 locations. The Company expects to increase its store base by approximately 50
stores in Fiscal 1998 and to continue to increase the store base by 15% to 20%
thereafter. This forward-looking statement will be influenced by the Company's
financial position and the number of acceptable mall store leases that may
become available. As a result of the development of its women's apparel
business, the Company plans to seek stores that are up to 20% larger in order to
better accommodate a full men's and women's merchandise assortment.
The Company uses an independent consulting firm to assist it in evaluating
potential store 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 weighs the proposed lease terms with the location of the proposed
store within the mall.
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 desirable locations and
acceptable lease terms.
The Company's stores are located in regional shopping malls and American Eagle
expects to continue to focus on regional mall locations. The Company believes
that selected street locations in high traffic urban settings and university
towns as well as airports and strip centers also provide attractive expansion
opportunities. The Company believes that there are at least 500 additional
enclosed mall locations in the United States suitable for an American Eagle
Outfitters store.
Management is also considering non-store opportunities as a means to further
strengthen the American Eagle Outfitters(R) brand and augment sales. In Fiscal
1998, the Company plans to sell merchandise through its internet site,
AE-Outfitters.com, on the World Wide Web and is exploring the development of a
catalog. The Company is also considering opportunities to sell its products
internationally through licensing arrangements, joint ventures or on a wholesale
basis.
The table below sets forth certain information relating to the Company's store
growth:
FISCAL FISCAL TRANSITION FISCAL FISCAL
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
MALL BASED STORES
Stores at beginning of period 303 272 266 192 147
Stores opened during the period 36 38 11 81 47
Stores closed during the period (7) (7) (5) (7) (2)
--- --- --- --- ---
Subtotal 332 303 272 266 192
--- --- --- --- ---
OUTLET STORES
Outlet stores at beginning of period - 1 31 16 4
Outlets opened during the period - - 2 15 12
- ---------------------------------------------------------------------------------------------------------------------------
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Outlets closed during the period - (1) (4) - -
Outlets stores sold - - (28) - -
--- --- --- --- ---
Subtotal - - 1 31 16
--- --- --- --- ---
TOTAL STORES AT END OF PERIOD 332 303 273 297 208
=== === === === ===
MERCHANDISE CATEGORIES
The Company designs and sells virtually all of its merchandise under the
American Eagle Outfitters(R) brands. The Company's merchandising strategy
focuses on providing a carefully selected merchandise assortment within its
principal merchandise groups: men's and women's apparel, outerwear, footwear and
accessories. Merchandise is regularly updated with new styles, colors and
fabrics. The Company offers quality fashionable interpretations of fundamental
wardrobe items such as jeans, sweaters, khakis, T-shirts, flannel shirts, rugbys
and fleece. The following table sets forth the approximate percentage of net
sales attributable to each merchandise group for each of the periods indicated:
Fiscal Fiscal Transition Fiscal Fiscal
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
Menswear 41% 36% 52% 57% 59%
Ladieswear 50% 47% 30% 24% 18%
Outerwear/Accessories/Footwear 9% 17% 18% 19% 23%
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
Included in the Menswear and Outerwear 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 significantly increased the percentage of
women's merchandise within its stores beginning in Spring 1995. The Company
intends to seasonally adjust the mix between men's and women's apparel to
maximize the opportunity within each merchandise category.
STORE OPERATIONS
The Company's store operations are managed by an Executive Vice President-Store
Operations, six regional managers and thirty-seven district managers, each of
whom supervises an average of nine stores. Individual stores are typically
managed by a store manager and two assistant store managers. A typical store has
three full-time and six to ten part-time sales associates, depending on the
season. The hiring and training of new employees are the responsibility of the
store manager and district manager, and the Company has established training and
operations procedures to assist them.
The Company's continued success is dependent in part on its ability to attract,
retain, and motivate qualified employees. The Company's incentive compensation
and training programs are intended to attract and retain qualified store
employees. Sales associates are trained to provide superior customer service in
order to maximize sales, to ensure that store merchandising plans are executed
properly and to minimize inventory shrinkage. The Company recently introduced AE
University, an in-store training curriculum that was developed to provide
on-site training and skills development to sales associates and managers. The
training and development modules are administered by the store manager and
completed by the sales associate or manager at his or her own pace. Management
believes that AE University is an important tool through which the Company can
provide consistent, quality training to its sales associates, which in turn,
should lead to improved customer service and higher sales.
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Store, district and regional managers receive compensation in the form of
salaries and performance bonuses based primarily on sales, payroll and shrinkage
goals of the stores for which they are responsible. Sales associates and
assistant managers are eligible for a number of incentives, including cash
awards and prizes for achieving certain sales goals. In Fiscal 1997, the Company
introduced AE Rewards(TM), an incentive program which enables hourly sales
associates to earn points for achieving sales productivity goals. These points
are used to select merchandise awards from an AE Rewards(TM) catalogue.
STORE ENVIRONMENT
The Company considers its stores and in-store marketing as principal elements
that signify and convey the image of its brand. The store design, furniture,
fixtures and music are carefully coordinated to create a store environment that
is consistent with the casual, fashionable image of the brand. To promote
consistency and name recognition, the stores are designed to be substantially
identical, with a warm and casual ambiance created by the use of worn hardwood
floors, light colored wooden fixtures and off white walls. Large in-store
photographs depict young people enjoying an active, casual lifestyle with
friends and family and reflect the Company's casual, "live your life" attitude.
Management believes that American Eagle's store ambiance is welcoming and
comfortable and promotes a pleasant shopping experience.
The Company maintains a uniform appearance throughout its store base, in terms
of merchandise display and location on the selling floor. Store managers receive
detailed store plans that outline fixture and merchandise placement to ensure
uniform execution of the merchandising strategy at the store level.
Additionally, regional visual directors were recently added to ensure that the
visual presentation of the merchandise and marketing materials are executed
uniformly throughout the stores.
The Company believes that an important aspect of American Eagle's brand and
marketing strategy is personalized customer service. The Company's sales
associates are a central element in creating a comfortable atmosphere in the
stores that underscores American Eagle's wholesome, friendly appeal. Sales
associates are encouraged to wear American Eagle Outfitters merchandise and must
follow a standard of personal appearance to ensure they properly reflect
American Eagle's image.
The Company regularly refurbishes and renovates its stores to provide better
customer service and upgrade to its newest store design, particularly in
connection with lease renewals. In Fiscal 1997, the Company installed additional
fitting rooms in approximately 100 of its stores to accommodate the increase in
female customers and improve customer service. Additionally, 16 higher volume,
older stores were renovated to the newest store design.
STORE LOCATIONS
At April 1, 1998, the Company operated 335 stores in 39 states, principally in
the Midwest, Northeast and Southeast. The Company's stores average approximately
4,200 gross square feet and approximately 3,300 on a selling square foot basis.
The table below sets forth the Company's existing store locations by state.
Alabama Kansas Nebraska South Carolina
- ------- ------ -------- --------------
7 stores 5 stores 3 stores 6 stores
Arkansas Kentucky New Hampshire South Dakota
- -------- -------- ------------- ------------
2 stores 6 stores 4 stores 2 stores
Colorado Louisiana New Jersey Tennessee
- -------- --------- ---------- ---------
3 stores 2 stores 11 stores 14 stores
Connecticut Maine New Mexico Texas
- ----------- ----- ---------- -----
7 stores 1 store 2 stores 13 stores
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Delaware Maryland New York Vermont
- -------- -------- -------- -------
1 store 10 stores 21 stores 2 stores
Florida Massachusetts North Carolina Virginia
- ------- ------------- -------------- --------
16 stores 7 stores 14 stores 16 stores
Georgia Michigan North Dakota Washington
- ------- -------- ------------ ----------
13 stores 19 stores 2 stores 1 store
Illinois Minnesota Ohio West Virginia
- -------- --------- ---- -------------
20 stores 8 stores 23 stores 6 stores
Indiana Mississippi Oklahoma Wisconsin
- ------- ----------- -------- ---------
10 stores 5 stores 4 stores 8 stores
Iowa Missouri Pennsylvania
- ---- -------- ------------
9 stores 9 stores 23 stores
PURCHASING
The Company believes that it has good relationships with its vendors. The
Company purchases merchandise from approximately 120 domestic and foreign
suppliers who either manufacture their own merchandise or supply merchandise
manufactured by others, or both. During Fiscal 1997, approximately 25% of the
Company's merchandise was purchased from North American suppliers and the
remaining 75% overseas. Since the Company relies on a small number of overseas
sources for a significant portion of its purchases, any event causing the
disruption of imports including the insolvency of a significant supplier, the
imposition of additional import restrictions, or political or economic
disruptions in a country where 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.
All of the Company's suppliers receive a vendor compliance manual which sets
forth the Company's quality standards and shipping instructions. The Company
maintains a quality control department at its distribution center to inspect
incoming merchandise shipments for uniformity of sizes and colors, as well as
for overall quality of manufacturing. Periodic quality inspections are also made
by the Company's employees at the suppliers' manufacturing facilities in the
United States and internationally to identify potential problems prior to
shipment of merchandise. Additionally, the Company's vendor compliance manager
works directly with many factories where goods are produced to address quality
control issues before the merchandise is shipped.
MERCHANDISE DESIGN
A key element of the Company's business strategy is its ability to design
products geared to a well-defined customer group and which embody the image of a
casual, youthful lifestyle. The Company's internal design group is divided
primarily into separate men's and women's design teams. The product development
process begins with senior management in the merchandising and design areas, who
develop seasonal merchandise themes and concepts. These design themes and
concepts are developed through domestic and foreign travel, retail shopping and
an awareness of fashions and activities currently favored by the young, active
segment of the population. These themes and concepts are then used to create
items for the merchandise line that are then developed by the designers. The
designers collaborate with
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the Company's buyers to create a coordinated merchandise presentation for each
season, which is augmented by periodic, in-season merchandise updates.
MERCHANDISE INVENTORY, REPLENISHMENT AND DISTRIBUTION
Purchase orders, executed by the Company's buyers, are entered into the
computerized merchandise data system at the time of order. Merchandise is
normally shipped directly from vendors to the Company's central distribution
center near Pittsburgh, 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 two to three times per week depending upon the season and
store requirements.
The specialty retail apparel business fluctuates according to changes in the
economy and customer preferences, dictated by fashion and season. These
fluctuations especially affect the inventory owned by apparel retailers, since
merchandise usually must be ordered well in advance of its selling season. While
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 agreements 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 continually 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.
CUSTOMER CREDIT
The Company offers its customers an American Eagle Outfitters(R) private label
card. 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. The Company believes that providing eligible customers with
additional in-store credit through use of its proprietary credit card promotes
incremental sales and encourages customer loyalty. American Eagle Outfitters(R)
credit card holders receive special promotional offers and advance notice of all
in-store sales events. The names and addresses of these preferred customers are
added to the Company's customer database which is used primarily for direct mail
purposes. Customers may also pay for their purchases with American Express(R),
Discover(R), MasterCard(R), Visa(R), cash or check. During Fiscal 1997,
approximately 44% of all purchases were paid for with credit cards.
MARKETING AND ADVERTISING
The Company's marketing and advertising strategies are designed to increase
consumer recognition of the Company's merchandise and establish American Eagle
Outfitters(R) as a differentiated lifestyle brand. The Company focuses its
advertising efforts on in-store displays and promotional events, direct mail and
print media. In Fiscal 1997, the Company's advertising expenses were
approximately 2.5% of net sales.
In-store advertising is primarily communicated through large graphics that
portray men and women engaged in activities associated with an active lifestyle.
Promotions, contests and gifts with purchase are also offered to customers,
often in conjunction with corporate partners whose target customer demographics
are similar to those of the Company. Examples of co-marketing efforts include
music compact discs produced in conjunction with a national music magazine and
contests for prizes including mountain bikes, four-wheel drive vehicles and
vacation trips.
The Company utilizes direct mail to announce upcoming sales and the arrival of
new merchandise as well as to promote the image of American Eagle. Promotional
materials are also included in the monthly statement for the Company's
proprietary credit card. The Company uses its own list of customers and database
mining techniques to target its mailing of direct mail materials to existing and
potential
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customers.
The Company also utilizes print advertising to build recognition of the American
Eagle Outfitters(R) brand. The Company's print ads appear in nationwide
publications with reader demographic profiles that are consistent with the
Company's targeted youthful customer.
INFORMATION SYSTEMS
The Company's computer information systems consist of a full range of retail
financial and merchandising systems which include credit, inventory distribution
and control, sales reporting, financial processing and reporting, and
merchandise planning, reporting and distribution.
In Fiscal 1997, new merchandise planning software systems were implemented. In
Fiscal 1998, the Company plans to install new merchandise allocation software
that contains sophisticated algorithms intended to refine the selection and
placement of merchandise in its stores. In 1998, the Company will implement
staff-scheduling software which will better align store staffing with expected
customer traffic. Additionally, the Company plans to employ hand-held terminals
for data capture and pricing verification, augment its merchandise sorting and
pricing systems with additional "put to light" technology, invest in its
distribution center receiving function and continue to enhance and expand its
Electronic Data Interchange ("EDI") capabilities.
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 Abercrombie & Fitch, The Buckle, Pacific Sunwear, and
other national, regional and local 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. There can be no assurance that the
Company will be able to successfully compete in the future.
TRADEMARKS AND SERVICE MARKS
The Company has registered American Eagle Outfitters(R) in the U.S. Patent and
Trademark Office ("PTO") as a trademark for clothing products and for a variety
of nonclothing products and as a service mark for retail clothing store service.
American Eagle has also registered AEO(R) as a trademark for clothing products
and a variety of non-clothing products. American Eagle has applied to the PTO
for the registration of AE(TM) and AE Supply(TM) as trademarks for clothing
products.
SEASONALITY
The Company experiences seasonal fluctuations in its net sales and net income,
with a disproportionate amount of the Company's net sales and a majority of its
net income typically realized during the fourth quarter. The Company's quarterly
results of operations may also fluctuate significantly as a result of a variety
of other factors, including the timing of certain holiday seasons and new store
openings and the net sales contributed by new stores, merchandise mix and the
timing and level of markdowns.
EMPLOYEES
As of March 14, 1998, the Company had 6,685 employees, of whom 1,175 were
full-time salaried employees, 305 were full-time hourly employees and 5,205 were
part-time and seasonal hourly employees. The Company considers its relationship
with its employees to be satisfactory.
ITEM 2. PROPERTIES.
The Company rents its headquarters and distribution facilities near Pittsburgh,
PA from Linmar Realty Company ("Linmar"), a related party. In Fiscal 1998, the
Company is planning to spend approximately $4.7 million to upgrade and expand
its distribution center facilities to enhance operating efficiencies and
accommodate merchandise processing for up to 700 stores. The Company's
headquarters and
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distribution center occupy approximately 308,000 square feet, 49,000 square feet
of which is used for the Company's executive, administrative and buying offices.
As a result of a 1995 expansion, a new lease was entered into which expires on
December 31, 2010. The Company also leases its design and production offices in
New York, NY.
All of the Company's stores are leased. The store leases generally have terms of
approximately 10 years. Most of these leases provide for base rental and require
the payment of a percentage of sales as additional rent when sales reach
specified levels. 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.
ITEM 3. LEGAL PROCEEDINGS.
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 Common Stock trades on the Nasdaq National Market under the symbol
"AEOS". The following table sets forth the range of high and low sales prices of
the Common Stock for the periods indicated, as reported on by the Nasdaq
National Market. As of April 1, 1998, there were 83 shareholders of record. The
following market price information conforms to the January 1998 stock split as
described in Note 1 of the Consolidated Financial Statements.
For the Quarters Ended Market Price
- ---------------------- ------------
High Low
---- ---
April 1996 $9.58 $4.33
July 1996 $13.00 $8.67
October 1996 $19.42 $10.00
January 1997 $15.92 $5.00
April 1997 $8.33 $5.42
July 1997 $11.17 $6.71
October 1997 $19.33 $10.33
January 1998 $26.94 $19.67
The Company has never paid cash dividends and presently anticipates that all of
its future earnings will be retained for the development of its business and
does not anticipate paying cash dividends in the foreseeable future. The payment
of any future dividends will be at the discretion of the Company's Board of
Directors and will be based on future earnings, financial condition, capital
requirements and other relevant factors.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
(dollars in thousands, except per share amounts and square footage data)
For the Years Ended
January 31, February 1, February 3, July 29, July 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Net sales (1)(2) $405,713 $326,404 $340,323 $296,563 $199,688
Operating income (loss) (1) $31,120 $8,859 ($1,073) $12,043 $11,952
Net income (loss) (3) $19,537 $5,925 ($1,334) $6,765 $6,629
Basic Earnings (loss) per share (3)(4) $1.33 $0.40 ($0.09) $0.46 $0.53
Diluted Earnings (loss) per share (3)(4) $1.28 $0.39 ($0.09) $0.45 $0.53
Total assets $144,795 $110,438 $95,363 $134,484 $82,863
Working capital $48,486 $34,378 $24,775 $19,264 $27,173
Shareholders' equity $90,808 $71,056 $63,796 $57,932 $50,125
Current ratio 1.90 1.87 1.78 1.25 1.83
Long term debt -- -- -- -- --
Total stores at year end 332 303 273 297 208
Total stores excluding outlets 332 303 272 266 192
Comparable store sales increase (decrease) 15.1% -1.8% 6.6% 2.9% 2.1%
Net sales per average selling square foot (5) $391 $340 $381 $351 $341
Total selling square feet at end of period 1,080,657 990,980 916,796 1,001,262 690,214
Net sales per average gross square foot (5) $303 $261 $288 $264 $252
Total gross square foot at end of period 1,393,361 1,285,598 1,200,816 1,317,857 928,472
(1) The fiscal years 1996 through 1994 amounts have been reclassified to
conform to the Fiscal 1997 classifications.
(2) The 53-weeks ended February 3, 1996 includes 9 months of sales, or $21.5
million from
(3) Fiscal 1994 includes a pro forma provision for income taxes.
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outlet stores sold in October 1995.
(4) Earnings (loss) per share has been restated for the January 1998
three-for-two stock split and for the effect of Financial Accounting
Standards Board Statement No. 128, Earnings per Share. See Notes 1 and 2
to the Consolidated Financial Statements.
(5) Net sales per average square foot is calculated using sales for the period
divided by the average of the beginning and ending square footage for the
period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
The Company achieved record sales and earnings for the year ended January 31,
1998 ("Fiscal 1997"). The improved sales and profitability resulted from the
implementation of several strategic and merchandising initiatives developed to
improve operating performance and differentiate the Company from its
competition. Merchandising strategies emphasized providing a carefully selected
merchandise assortment within principal merchandise groups, executing an
in-season, regionally based merchandise strategy, and continuing to incorporate
a merchandise assortment that is more equally balanced between men's and women's
apparel. Strategic marketing initiatives focused on efforts to build the
American Eagle Outfitters (R) brand by refining the definition of our target
customer as well as expanded direct marketing efforts to target customers.
Operating initiatives implemented during Fiscal 1997 included the upgrade of 16
locations to our newest store design, installation of additional fitting rooms
in over 100 stores to accommodate our growing number of female customers,
technological improvements within our stores and home office, and the
implementation of additional incentive compensation and associate training
programs.
As a result of these initiatives, sales for Fiscal 1997 increased to $405.7
million compared to $326.4 million for the period ended February 1, 1997 ("the
prior year" or "Fiscal 1996"), an increase of 24.3%. Comparable store sales
achieved record levels for Fiscal 1997, increasing 15.1% compared to the prior
year. Comparable sales were driven by a 28% increase over last year in the
number of merchandise units sold. Additionally, gross profit increased to $137.0
million, or 33.8% of sales, for Fiscal 1997, compared to $98.8 million, or 30.3%
of sales for the prior year. The increased gross profit reflected implementation
of these strategic initiatives, resulting in improved merchandise mark-ons,
decreased markdowns as a percent of sales, and improved leveraging of buying,
occupancy and warehousing costs.
The Company continued its focus on improving inventory productivity, which is
reflected in annual in-store inventory turnover of 4.5 times in Fiscal 1997
versus 4.4 in the prior year. The Company's liquidity, as measured by the
current ratio, improved to 1.90 as of January 31, 1998 compared to 1.87 at the
end of the prior year.
Fiscal 1997's higher gross profit translated into significantly improved
operating profit and net income. Operating profit for Fiscal 1997 increased
nearly 250% to $31.1 million compared to $8.9 million in the prior year. Net
income for Fiscal 1997 was $19.5 million, or $1.28 per share on a diluted basis,
compared to $5.9 million, or $0.39 per share on a diluted basis, in the prior
year. The strong operating performance for the year as well as continued
inventory productivity allowed the Company to fund working capital requirements
entirely through cash flow. No borrowings were required under the Company's $60
million credit facility.
The Company's balance sheet improved as a result of the operating performance
achieved in Fiscal 1997. As of January 31, 1998, cash and cash equivalents
increased by almost 41% to $48.4 million from $34.3 million in the prior year as
a result of cash provided by operating activities. Inventory was $36.3 million
versus $27.1 million in the prior year. Inventory on a per store basis increased
22.1%, reflecting earlier receipt of Spring 1998 merchandise. Shareholder's
equity increased 27.7% to $90.8 million, or $6.05 per share, in Fiscal 1997
compared to $71.1 million, or $4.79 per share, at the end of the prior period.
Certain events have occurred during the past three years which affect the
presentation of the Company's results of operations. Results for the 53 weeks
ended February 3, 1996 reflect the October 1995 loss on the sale of the
Company's outlet store operations, which resulted in an operating loss for the
Company. Additionally, Fiscal 1997 reflects the
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results of Prophecy, Ltd., a production and sourcing company, from the date of
its acquisition by the Company in May 1997. See further discussion in Note 1 to
the Consolidated Financial Statements.
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 Fiscal Years Ended
--------------------------
January 31, February 1, February 3,
1998 1997 1996(1)
---- ----- -------
Net sales 100.0% 100.0% 100.0%
Cost of sales, including certain buying,
occupancy and warehousing expenses 66.2 69.7 73.3
----- ----- -----
Gross profit 33.8 30.3 26.7
Selling, general and administrative expenses 24.3 25.7 24.3
Loss on sale of assets - - 0.9
Depreciation and amortization 1.8 1.9 1.8
----- ----- -----
Operating income (loss) 7.7 2.7 (0.3)
Interest (income) expense, net (0.3) (0.3) 0.4
----- ----- -----
Income (loss) before income taxes 8.0 3.0 (0.7)
Provision (benefit) for income taxes 3.2 1.2 (0.3)
----- ----- -----
Net income (loss) 4.8% 1.8% (0.4)%
===== ===== =====
(1) Represents the unaudited 53-week period ended February 3, 1996.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Net sales for Fiscal 1997 increased 24.3% to $405.7 million from $326.4 million
for Fiscal 1996. The increase in net sales resulted primarily from increases of
$47.5 million or 15.1% from comparable store sales, $15.9 million from
non-comparable store sales and $22.3 million from new stores, offset by
decreases of $4.8 million from closed store sales and $1.6 million from
merchandise sales to Mycal Ltd. (formerly Nimius). The total increase in net
sales resulted from an increase in units sold rather than from an increase in
prices. The Company operated 332 stores at the end of Fiscal 1997, compared to
303 stores at the end of Fiscal 1996.
Gross profit for Fiscal 1997 increased to $137.0 million from $98.8 million for
Fiscal 1996. Gross profit as a percent of net sales for Fiscal 1997 increased to
33.8% from 30.3% for Fiscal 1996. The increase in gross profit as a percent of
net sales, was attributable to a 2.0% increase in merchandise margins as well as
a 1.5% improvement in buying, occupancy, and warehousing costs reflecting
improved leveraging of these expenses. The increase in merchandise
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margins resulted primarily from improved mark-ups as compared to Fiscal 1996 as
well as decreased markdowns as a percent of sales.
Selling, general and administrative expenses for Fiscal 1997 increased to $98.5
million from $83.8 million for Fiscal 1996. As a percent of net sales, these
expenses for Fiscal 1997 decreased to 24.3% from 25.7% for Fiscal 1996. The
increase of $14.7 million resulted from an increase of $6.9 million in
compensation costs to support increased sales and new incentive programs as well
as the increase in minimum wage effective September 1, 1997, $4.3 million in
store operating expenses to support new store growth, and $3.5 million for
increased promotional advertising and general services purchased.
Depreciation and amortization expense for Fiscal 1997 increased to $7.3 million
from $6.1 million for Fiscal 1996. As a percent of net sales, these expenses for
Fiscal 1997 decreased to 1.8% from 1.9% for Fiscal 1996.
Interest income for Fiscal 1997 increased to $1.2 million from $1.0 million
primarily due to interest earned on the short-term note receivable from Azteca
Production International. No borrowings were required under the terms of the
Company's line of credit during the current or prior period.
Income before income taxes for Fiscal 1997 increased to $32.3 million from $9.8
million for Fiscal 1996. As a percent of net sales, income before income taxes
for Fiscal 1997 increased to 8.0% from 3.0% for Fiscal 1996. The increase in
income before income taxes as a percent of sales was attributable to a 2.0%
increase in merchandise margins, a 1.5% improvement in leveraging of store
occupancy and warehousing expenses and 1.4% improvement in selling, general and
administrative expenses, and a decrease of 0.1% in depreciation costs as a
percent of sales.
COMPARISON OF 52 WEEKS ENDED FEBRUARY 1, 1997 (FISCAL 1996) 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.
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 related to the increase in
the number of stores, the 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 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-
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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
mark-ups 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash in Fiscal 1997 was cash flow provided by
operating activities. The primary uses of cash in Fiscal 1997 was cash flow used
by operating activities, primarily to support inventory increases of $8.9
million and for anticipated sales and new store growth. Additionally, the
Company used cash of $12.6 million for capital expenditures and $0.9 million to
acquire Prophecy, Ltd. The Company had working capital of $48.5 million, $34.4
million, and $24.8 million at the end of Fiscal 1997, Fiscal 1996 and Transition
1996, respectively. Fiscal 1997's increase resulted primarily from the increase
in cash provided by operating activities.
For Fiscal 1997, the cash provided by operating activities of $26.2 million was
primarily the result of the net income generated by the business as well as
non-cash charges for 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. The Company funds merchandise
purchases through the use of cash flow provided by operating activities. The
Company's business follows a seasonal pattern with sales reaching a peak during
the back to school and holiday months.
At January 31, 1998, 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 (8.50% at January 31, 1998) 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 1997. Letters of credit
in the amount of $34.2 million were outstanding and the remaining available
balance on the line was $25.8 million at January 31, 1998.
Capital expenditures, net of construction allowances, totaled $12.6 million for
Fiscal 1997. These expenditures included the addition of 36 new stores, 16
remodeled locations, as well as the installation of additional fitting rooms in
approximately 100 locations to accommodate our increased number of female
customers. The Company is currently planning to open approximately 50 stores
during Fiscal 1998 at an estimated cost of $6.7 million. This forward-looking
statement will be influenced by the Company's financial position and the number
of acceptable mall store leases that may become available. Additionally, the
Company has selected approximately 15 locations to upgrade to its newest store
design in Fiscal 1998. These locations were selected based upon criteria such as
sales performance and lease terms and their remodeling is estimated to cost $3.8
million. Additionally, the Company is planning to spend approximately $5.8
million to upgrade and expand its distribution center facilities and to enhance
operating efficiencies and accommodate planned future store growth. Finally, in
Fiscal 1998, the Company plans to install new merchandise allocation software
which will refine the selection and placement of merchandise in its stores,
employ hand-held terminals for data capture and pricing verification, and
enhance and expand Electronic Data Interchange ("EDI") capabilities. These
information systems enhancements are estimated to cost $1.8 million. The Company
believes that the cash flow from operations and its bank line of credit will be
sufficient to meet its presently anticipated cash requirements through Fiscal
1998.
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17
SEASONALITY
The Company experiences seasonal fluctuations in its net sales and net income,
with a disproportionate amount of net sales and a majority of its net income
typically realized during the fourth quarter. The Company's quarterly results of
operations may also fluctuate significantly as a result of a variety of other
factors, including the timing of certain holiday seasons and new store openings,
the net sales contributed by new stores, merchandise mix and the timing and
level of markdowns.
INCOME TAXES
The tax provisions disclosed in the accompanying consolidated financial
statements reflect FAS No. 109, "Accounting for Income Taxes". See Note 9
"Income Taxes" in the Notes to Consolidated Financial Statements. The Company
recorded a $7.6 million and a $5.8 million deferred tax asset at January 31,
1998 and February 1, 1997, respectively, which relates to financial and tax
accounting differences. The Company reported profitable operations for the
past three tax years and anticipates that future taxable income will be
sufficient to utilize the full amount of the deferred tax asset. Assuming a 40%
effective tax rate, the Company would need to recognize pre-tax income of $19.0
million to utilize existing deferred tax amounts.
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.
IMPACT OF YEAR 2000
Management has developed a comprehensive plan designed to enable its computer
information systems to properly process transactions in the year 2000 and
beyond. The project team began working on the plan in Fiscal 1997 during which
the Company incurred approximately $0.2 million in payroll and related costs.
These costs were expensed as incurred and are included in selling, general and
administrative expenses in the Consolidated Statement of Operations. The Company
expects to incur an additional $0.7 million in payroll and related costs and
$0.4 million in hardware and software costs to complete the project by July
1999. The hardware and software costs will be capitalized and amortized over
their estimated useful lives. The Company is currently communicating with its
significant suppliers and business partners to determine to what extent they are
addressing their own Year 2000 issues. The failure of the Company or any of its
significant suppliers or business partners to properly address Year 2000 issues
could potentially adversely affect the Company's business and financial
performance.
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 approximately 50 stores in Fiscal 1998; the selection of
approximately 15 stores for remodeling; the planned upgrade and expansion of
distribution center facilities; the completion of modifications to computer
systems to enable the processing of transactions in the year 2000 and beyond;
events causing the disruption of imports including the insolvency of any
significant supplier; and sufficiency of cash flows and line of credit
facilities to meet Fiscal 1998 cash requirements. The Company
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18
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: decline in demand for
the merchandise offered by the Company; the ability to obtain suitable sites
for new stores at acceptable costs, the retention, hiring, and training of
qualified personnel, the integration of new stores into existing operations;
the expansion of buying and inventory capabilities; the availability of
capital; the ability of the Company to anticipate and respond to changing
consumer preferences and fashion trends in a timely manner; the effect of
economic conditions; and the effect of competitive pressures from other
retailers. Results actually achieved may differ materially from expected
results in these statements.
Historically, the Company's operations have been seasonal, with a
disproportionate amount of net sales and a majority of net income occurring in
the fourth fiscal quarter, reflecting increased demand during the year-end
holiday selling season and, to a lesser extent, the third quarter, reflecting
increased demand during the back-to-school selling season. As a result of this
seasonality, any factors negatively affecting the Company during the third and
fourth fiscal quarters of any year, including adverse weather or unfavorable
economic conditions, could have a material adverse effect on the Company's
financial condition and results of operations for the entire year. The Company's
quarterly results of operations also may fluctuate based upon such factors as
the timing of certain holiday seasons, the number and timing of new store
openings, the amount of net sales contributed by new and existing stores, the
timing and level of markdowns, store closings, refurbishments and relocations,
competitive factors, weather and general economic conditions.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
January 31, February 1, February 3,
1998 1997 1996
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 48,359 $ 34,326 $19,986
Merchandise inventory 36,278 27,117 23,394
Accounts and note receivable, including related party 7,647 3,556 5,642
Prepaid expenses and other 5,388 4,381 4,429
Deferred income taxes 4,801 4,380 2,891
-------- -------- -------
Total current assets 102,473 73,760 56,342
-------- -------- -------
Fixed assets:
Fixtures and equipment 25,842 23,118 26,447
Leasehold improvements 35,978 32,671 30,326
-------- -------- -------
61,820 55,789 56,773
Less: Accumulated depreciation and amortization 23,273 21,598 23,044
-------- -------- -------
38,547 34,191 33,729
-------- -------- -------
Notes receivable -- -- 3,568
Other assets 3,775 2,487 1,724
-------- -------- -------
Total assets $144,795 $110,438 $95,363
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,606 $ 20,430 $16,166
Accrued compensation and payroll taxes 9,227 4,926 4,255
Accrued rent 7,909 6,006 4,550
Accrued income and other taxes 8,738 5,478 3,536
Other liabilities and accrued expenses 3,507 2,542 3,060
-------- -------- -------
Total current liabilities 53,987 39,382 31,567
Shareholders' equity 90,808 71,056 63,796
-------- -------- -------
Total liabilities and shareholders' equity $144,795 $110,438 $95,363
======== ======== =======
See Notes to Consolidated Financial Statements
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Six For the Year
For the Years Ended Months Ended Ended
------------------- ------------ -----
Jan. 31 Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales $ 405,713 $ 326,404 $ 340,323 $226,569 $182,809 $296,563
Cost of sales, including certain
buying, occupancy and warehousing
expenses 268,746 227,648 249,415 160,096 115,867 205,186
--------- --------- --------- -------- -------- --------
Gross profit 136,967 98,756 90,908 66,473 66,942 91,377
Selling, general and administrative
expenses 98,529 83,810 82,679 47,372 39,069 74,378
Loss on sale of outlets -- -- 3,081 3,081 -- --
Depreciation and amortization 7,318 6,087 6,221 3,441 2,179 4,956
--------- --------- --------- -------- -------- --------
Operating income (loss) 31,120 8,859 (1,073) 12,579 25,694 12,043
Interest (income) expense, net (1,158) (973) 1,366 813 243 797
--------- --------- --------- -------- -------- --------
Income (loss) before income taxes 32,278 9,832 (2,439) 11,766 25,451 11,246
Provision (benefit) for income taxes 12,741 3,907 (1,105) 4,624 10,210 4,481
--------- --------- --------- -------- -------- --------
Net income (loss) $ 19,537 $ 5,925 ($ 1,334) $ 7,142 $ 15,241 $ 6,765
========= ========= ========= ======== ======== ========
Basic income (loss) per common
share $ 1.33 $ 0.40 ($ 0.09) $ 0.49 $ 1.04 $ 0.46
========= ========= ========= ======== ======== ========
Diluted income (loss) per common
share $ 1.28 $ 0.39 ($ 0.09) $ 0.49 $ 1.02 $ 0.45
========= ========= ========= ======== ======== ========
Weighted average common shares
outstanding - basic 14,727 14,633 14,630 14,593 14,624 14,646
========= ========= ========= ======== ======== ========
Weighted average common shares
outstanding - diluted 15,211 15,129 14,630 14,601 15,008 14,953
========= ========= ========= ======== ======== ========
See notes to Consolidated Financial Statements
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended January 31, 1998 and February 1, 1997, the six months ended
February 3, 1996 and the year ended July 29, 1995
(In thousands)
Retained Deferred
(1) Common Contributed Earnings Treasury Compensation Shareholders'
Shares Stock Capital (Deficit) Stock Expense Equity
------ ----- ------- --------- ----- ------- ------
Balance at July 30, 1994 10,000 $ 52,595 $ 4,164 ($ 2,713) $ -- ($3,921) $ 50,125
Net income -- -- -- 6,765 -- -- 6,765
Restricted stock compensation -- -- -- -- -- 944 944
Tax benefit realized on vested restricted
stock -- -- 98 -- -- -- 98
------- -------- ------- -------- ------- ------- --------
Balance at July 29, 1995 10,000 52,595 4,262 4,052 -- (2,977) 57,932
Net income -- -- -- 7,142 -- -- 7,142
Restricted stock compensation -- -- -- -- -- 420 420
Contributed capital 15 (88) -- -- 182 (94) --
Treasury stock (140) -- -- -- (1,698) -- (1,698)
------- -------- ------- -------- ------- ------- --------
Balance at February 3, 1996 9,875 52,507 4,262 11,194 (1,516) (2,651) 63,796
Net income -- -- -- 5,925 -- -- 5,925
Exercise and cancellation of stock
options and restricted stock 43 356 -- -- (109) 53 300
Tax benefit realized on exercised stock
options and vested restricted stock -- -- 44 -- -- -- 44
Restricted stock and stock option
compensation -- -- -- -- -- 991 991
Restricted stock grant -- -- 1,229 -- -- (1,229) --
------- -------- ------- -------- ------- ------- --------
Balance at February 1, 1997 9,918 52,863 5,535 17,119 (1,625) (2,836) 71,056
Net income -- -- -- 19,537 -- -- 19,537
Exercise of stock options 115 974 -- -- -- -- 974
Tax benefit realized on exercised stock
options and vested restricted stock -- -- 277 -- -- -- 277
Investment in Prophecy, Ltd. -- -- (1,350) (900) -- -- (2,250)
Restricted stock and stock option
compensation -- -- 370 -- -- 844 1,214
Three-for-two stock split 4,978 -- -- -- -- -- --
------- -------- ------- -------- ------- ------- --------
BALANCE AT JANUARY 31, 1998 15,011 $ 53,837 $ 4,832 $ 35,756 $(1,625) $(1,992) $ 90,808
======= ======== ======= ======== ======= ======= ========
(1) 30 MILLION AUTHORIZED, 15 MILLION ISSUED (ADJUSTED FOR THE JANUARY 1998
STOCK SPLIT) AT JANUARY 31, 1998, FEBRUARY 1, 1997, FEBRUARY 3, 1996, AND
JULY 29, 1995
See Notes to Consolidated Financial Statements
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) For the Year
For the Years Ended For the Six Months Ended Ended
------------------- ------------------------ ------------
Jan. 31, Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Operating activities:
Net income (loss) $ 19,537 $ 5,925 $ (1,334) $ 7,142 $ 15,241 $ 6,765
Adjustments to reconcile net income (loss) to
net cash provided by (used for)
operating activities:
Depreciation and amortization 7,318 6,087 6,221 3,441 2,179 4,956
Loss on impairment and write-off of fixed
assets 2,292 2,067 2,185 2,012 188 363
========
Loss on sale of outlets -- -- 3,081 3,081 -- --
Restricted stock compensation 1,214 991 948 420 416 944
Deferred income taxes (496) (1,898) (297) 12 3,451 3,142
Changes in assets and liabilities:
Merchandise inventory (8,903) (3,723) 16,893 45,875 (4,873) (33,855)
Receivables (2,611) 2,055 2,975 1,500 (3,365) (1,890)
Prepaid and other (1,578) (400) (3,081) 1,337 2,164 (2,254)
Receivables from officers 376 (30) (345) (12) -- (333)
Accounts payable (1,657) 4,018 (9,533) (21,656) 1,886 14,009
Accrued liabilities 10,676 3,489 2,546 5,229 7,088 4,405
-------- -------- -------- -------- -------- --------
Total adjustments 6,631 12,656 21,593 41,239 9,134 (10,513)
-------- -------- -------- -------- -------- --------
Net cash provided by (used for) operating
activities 26,168 18,581 20,259 48,381 24,375 (3,748)
-------- -------- -------- -------- -------- --------
Investing activities:
Capital expenditures (12,646) (10,540) (15,636) (5,137) (10,843)) (21,341)
Investment in Prophecy, Ltd. (900) -- -- -- -- --
Proceeds from sale of assets 54 5,874 5,000 5,000 -- --
-------- -------- -------- -------- -------- --------
Net cash used for investing activities (13,492) (4,666) (10,636) (137) (10,843)) (21,341)
-------- -------- -------- -------- -------- --------
Financing activities:
Net borrowings (payments) on notes payable -- -- -- (28,800) (3,400) 25,400
Net proceeds from stock options exercised 1,357 425 -- -- -- --
-------- -------- -------- -------- -------- --------
Net cash provided by (used for) financing
activities 1,357 425 -- (28,800) (3,400) 25,400
-------- -------- -------- -------- -------- --------
Net increase in cash 14,033 14,340 9,623 19,444 10,132 311
Cash - beginning of period 34,326 19,986 10,363 542 231 231
-------- -------- -------- -------- -------- --------
Cash - end of period $ 48,359 $ 34,326 $ 19,986 $ 19,986 $ 10,363 $ 542
======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements
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23
AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION
American Eagle Outfitters, Inc. (the "Company") is a specialty retailer of
quality, casual, lifestyle merchandise targeted to men and women aged 16 to 34.
The Company sells its own brand of fashionable, outdoor-inspired apparel,
footwear, and accessories, providing distinctive quality merchandise at
competitive prices. 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 and sourcing subsidiaries. All
inter-company transactions have been eliminated.
Effective May 4, 1997, the Company acquired Prophecy, Ltd. ("Prophecy"), a New
York-based production and sourcing company. The majority partner of Prophecy was
the Schottenstein family. The goals of the acquisition are to leverage the
talent and expense of the Company's New York design office and to use Prophecy's
production and sourcing expertise and manufacturing relationships to shorten
product delivery cycles and enable the Company to improve product quality and
value. The terms of the acquisition included a cash payment of $0.9 million at
closing as well as the assumption of net liabilities of approximately $2.7
million. The acquisition was accounted for as a purchase; however, the assets
acquired and the liabilities assumed have been recorded at historic carrying
value because Prophecy was under common control with the Company. The premium in
excess of Prophecy's book value was recorded as a reduction to equity. The
results of operations of Prophecy are included in the accompanying Consolidated
Financial Statements from the date of acquisition.
On April 13, 1994, the Company successfully completed an initial public offering
of 3,450,000 shares (adjusted for the January 1998 stock split) 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 390,375 shares (adjusted for the January 1998 stock split) 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.
On December 8, 1997, the Company's Board of Directors announced a three-for-two
stock split to be distributed on January 5, 1998, to shareholders of record on
December 19, 1997. Accordingly, all share amounts and per share data have been
restated to reflect the stock split.
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 1997" and "Fiscal 1996" refer to the twelve
month periods
-24-
24
ended January 31, 1998 and 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, "Fiscal 1995" and "Fiscal 1994" refer to
the fiscal years ended July 29, 1995 and July 30, 1994. "Fiscal 1998" refers to
the twelve month period ending January 30, 1999. All references to amounts
related to the six months ended January 28, 1995 and the 53 weeks 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 and
sourcing costs and related expenses.
The Company reviews its inventory levels in order to identify slow-moving
merchandise and generally uses markdowns to clear merchandise. Markdowns may
occur when inventory exceeds customer demand for reasons of style, seasonal
adaptation, changes in customer preference, lack of consumer acceptance of
fashion items, competition, or if it is determined that the inventory in stock
will not sell at its currently ticketed price. Such markdowns may have an
adverse impact on earnings, depending on their extent and amount of inventory
affected.
FIXED ASSETS
Fixed assets are recorded on the basis of cost with depreciation and
amortization computed utilizing the straight-line method over the estimated
useful lives. Estimated useful lives range from three to ten years. Depreciation
and amortization expense is summarized as follows:
(Dollars in thousands)
For the
For the Years Ended For the Six Months Ended Year Ended
------------------- ------------------------ ----------
Jan. 31, Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Depreciation expense $ 6,943 $ 5,933 $ 6,113 $ 3,392 $ 2,144 $ 4,862
Amortization expense 375 154 108 49 35 94
--------- ---------- ---------- --------- ---------- ----------
Total $ 7,318 $ 6,087 $ 6,221 $ 3,441 $ 2,179 $ 4,956
========= ========== ========== ========= ========== ==========
-25-
25
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 11.
INCOME TAXES
Income taxes are accounted for using the liability method. Under this method,
the deferred taxes are determined based on the differences between the financial
statement and tax basis of assets and liabilities at enacted tax rates in effect
for the years in which the differences are expected to reverse.
PREOPENING EXPENSES AND CLOSING COSTS
Expenditures of a noncapital nature incurred prior to the opening of a new store
are charged to operations as incurred. Costs of closing a store are recognized
when, in management's judgment, it is probable that the store will be closed.
ADVERTISING COSTS
Advertising costs are expensed as incurred, except for direct-response
advertising, which is deferred and amortized over its expected period of future
benefits. Direct-response advertising consists of costs related to development
of customer lists utilized for direct mail promotions. The deferred costs are
amortized over twelve months. At January 31, 1998, $0.3 million of advertising
was included in prepaid assets and other. Advertising expense is summarized as
follows:
(Dollars in thousands)
For the
For the Years Ended For the Six Months Ended Year Ended
------------------- ------------------------ ----------
Jan. 31, Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Advertising expense $ 10,067 $ 8,501 $ 7,967 $ 4,740 $ 3,227 $ 8,161
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-26-
26
(Dollars in thousands) For the Year
For the Years Ended For the Six Months Ended Ended
------------------- ------------------------ -----
Jan. 31, Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
CASH PAID DURING THE PERIODS
FOR:
Income taxes $ 9,675 $ 4,420 $ 1,610 $ 21 $ 1,282 $ 2,531
Interest $ 17 $ 3 $ 1,662 $ 1,103 $ 326 $ 885
NON-CASH TRANSACTIONS FROM
THE SALE OF OUTLETS:
Treasury stock $ - $ - $ 1,698 $ 1,698 $ - $ -
Notes receivable $ - $ - $ 3,708 $ 3,708 $ - $ -
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", (FASB 128) which is required to be adopted for fiscal
periods ending after December 15, 1997. Accordingly, the Company adopted the
Statement for Fiscal 1997. Earnings per share amounts for all periods have been
restated to give effect to the application of FASB No. 128. The effect of the
restatement on earnings per share for the restated periods is immaterial.
The following table shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
For the
For the Years Ended For the Six Months Ended Year Ended
------------------- ------------------------ ----------
Jan. 31, Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Net income (loss) used in basic EPS $19,537 $ 5,925 $ (1,334) $ 7,142 $15,241 $ 6,765
======= ======= ======== ======= ======= =======
Weighted average number of common shares
used in basic EPS 14,727 14,633 14,630 14,593 14,624 14,646
Effect of dilutive stock options and nonvested
restricted stock 484 496 -- 8 384 307
------- ------- -------- ------- ------- -------
Weighted average number of common shares
and dilutive potential common stock used in
diluted EPS 15,211 15,129 14,630 14,601 15,008 14,953
======= ======= ======== ======= ======= =======
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27
Options on approximately 200,000 shares of common stock were not included in
computing diluted EPS for the year ended February 3, 1996 because their effects
were antidilutive. Options to purchase 315,950 common shares were issued to
employees and related party consultants and 80,925 options to purchase common
shares were exercised after January 31, 1998, which, had they taken place during
Fiscal 1997, would have changed the number of shares used in the earnings per
share computations.
RECLASSIFICATION
Certain reclassifications have been made to the consolidated financial
statements for prior periods in order to conform to the Fiscal 1997
presentation.
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. The lease, which was
entered into on January 1, 1996, and expires on December 31, 2010 provides for
annual rental payments of approximately $1.2 million through 2001, $1.6 million
through 2006, and $1.8 million through the end of the lease.
In addition, the Company and its subsidiaries purchase merchandise from and sell
merchandise to various related parties and use the services of a related
importing company.
During Fiscal 1997, the Company provided a short-term loan in the amount of $3.0
million to Azteca Production International, a related party vendor. The terms of
the note include annual interest at 7% plus a margin defined as the difference
between 8.5% and National City Bank's prime lending rate. Management expects the
loan to be paid in full by April 1998. The note receivable outstanding balance
at January 31, 1998 was approximately $1.3 million.
Related party amounts follow:
(Dollars in thousands)
For the Year
For the Years Ended For the Six Months Ended Ended
------------------- ------------------------ -----
Jan. 31, Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Merchandise purchases plus
import administrative charges $65,192 $42,629 $41,303 $18,246 $20,753 $43,810
Accounts payable $ 7,826 $ 7,068 $ 4,432 $ 4,432 $11,197 $16,002
Accounts and notes receivable $ 3,755 $ 1,334 $ 2,246 $ 2,246 $ 1,733 $ 804
Rent expense $ 1,549 $ 1,407 $ 754 $ 236 $ 544 $ 1,062
Royalty fee income $ -- $ -- $ 1,308 $ 208 $ -- $ 1,100
Merchandise sales $ 8,669 $ 2,812 $ 5,683 $ 4,760 $ 813 $ 1,710
The Company had provided one-year loans, which were renewed annually, to certain
officers and other individuals to pay the taxes on the
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28
restricted stock that vested in April 1995. These loans were paid in full as of
January 31, 1998. 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. ACCOUNTS RECEIVABLE
Accounts Receivable is comprised of the following:
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
---- ---- ----
Accounts receivable - landlord $ 1,518 $ 1,336 $ 1,063
Related party accounts and note receivable 3,755 1,334 2,246
Accounts receivable - other 2,374 886 2,333
------- ------- -------
Total $ 7,647 $ 3,556 $ 5,642
======= ======= =======
5. 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 (8.50% at
January 31, 1998) 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 1997. 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
January 31, 1998, February 1, 1997 and February 3, 1996. The Company had letters
of credit of approximately $34.2 million outstanding at January 31, 1998 which
were primarily related to the purchase of inventory. The remaining balance which
could be borrowed under this lending arrangement was $25.8 million at
January 31, 1998.
6. IMPAIRMENT OF ASSETS
In accordance with FASB No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", management evaluates the
ongoing value of leasehold improvements and store fixtures associated with
retail stores which have been open longer than one year. Based on these
evaluations, the Company determined that assets with a net carrying amount of
approximately $2.3 million were impaired and accordingly, provided for this
impairment during Fiscal 1997 compared with $1.5 million for Fiscal 1996. The
expense included in selling, general and administrative expenses for Fiscal 1997
and Fiscal 1996 was $1.7 million and $0.8 million, respectively. Fair value was
based on management's estimate of the potential future benefits of such assets.
7. 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 a former Vice Chairman 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, one of which was discounted based on payment
terms, which were paid off during the first quarter of Fiscal 1996, and 210,000
shares of common stock (adjusted for the January 1998 stock split) held by Mr.
Forman amounting to $1.7 million.
8. 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
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29
additional rent when sales exceed specified levels. Minimum rentals relating to
these leases are recorded on a straight-line basis. In addition, the Company is
typically responsible under its leases for common area maintenance charges, real
estate taxes and certain other expenses. These leases are classified as
operating leases.
Rent expense charged to operations, including amounts paid under short-term
cancelable leases, was as follows:
(Dollars in thousands)
For the
For the Years Ended For the Six Months Ended Year Ended
------------------- ------------------------ ----------
Jan. 31, Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Minimum rentals $47,421 $42,738 $38,900 $20,303 $16,802 $35,384
Contingent rentals 1,725 674 996 773 630 854
------- ------- ------- ------- ------- -------
Total $49,146 $43,412 $39,896 $21,076 $17,432 $36,238
======= ======= ======= ======= ======= =======
The table below summarizes future minimum lease obligations under operating
leases in effect at January 31, 1998:
(In thousands)
Fiscal years Amount
- ------------- --------------------
1998 $ 32,641
1999 31,101
2000 27,536
2001 26,621
2002 25,483
Thereafter 76,095
--------
Total $219,477
========
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30
The Company is contingently liable for the rental payments totaling
approximately $5.6 million for the outlet stores which were sold in October
1995.
9. INCOME TAXES
The significant components of the Company's deferred tax assets (there are no
deferred tax liabilities) were as follows:
(In thousands) January 31, February 1, February 3,
1998 1997 1996
---- ---- ----
CURRENT:
Inventories $1,297 $1,326 $ 452
Accrued rent 2,545 2,015 1,464
Salaries and compensation 743 773 729
Other 216 266 246
------ ------ ------
4,801 4,380 2,891
------ ------ ------
LONG TERM:
Basis differences in fixed assets 2,790 1,391 982
Other 55 -- --
------ ------ ------
2,845 1,391 982
------ ------ ------
Total $7,646 $5,771 $3,873
====== ====== ======
Significant components of the provision (benefit) for income taxes are as
follows:
For the Year
For the Years Ended For the Six Months Ended Ended
------------------- ------------------------ -----
(In thousands) January 31, February 1, February 3, February 3, January 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
CURRENT: (Unaudited) (Unaudited)
Federal $12,366 $4,709 $(674) $3,848 $5,644 $1,089
State 2,250 1,096 (134) 764 1,115 250
------- ------ ----- ------ ------ ------
Total current 14,616 5,805 (808) 4,612 6,759 1,339
------- ------ ----- ------ ------ ------
-31-
31
DEFERRED:
Federal (1,733) (1,584) (249) 11 2,882 2,622
State (142) (314) (48) 1 569 520
-------- ------- ------- ------ ------- ------
Total deferred (1,875) (1,898) (297) 12 3,451 3,142
-------- ------- ------- ------ ------- ------
Provision (benefit) for
income taxes $ 12,741 $ 3,907 $(1,105) $4,624 $10,210 $4,481
======== ======= ======= ====== ======= ======
A tax benefit has been recognized as contributed capital, in the amount of
$277,000 for the year ended January 31, 1998, $44,000 for the year ended
February 1, 1997 and $98,000 for the year ended July 29, 1995, resulting from
additional tax deductions related to vested restricted stock grants and stock
options exercised.
A reconciliation between the statutory federal income tax and the effective tax
rate follows:
Provision (Benefit)
-------------------
For the
For the Years Ended For the Six Months Ended Year Ended
------------------- ------------------------ ----------
Jan. 31, Feb. 1, Feb. 3, Feb. 3, Jan. 28, July 29,
1998 1997 1996 1996 1995 1995
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Federal income tax rate 35% 35% (35)% 35% 35% 35%
State income taxes, net of federal
income tax effect 4 4 (4) 4 5 4
Tax rate differential from prior interim
periods -- -- (6) -- -- --
Other items, net 1 1 -- -- -- 1
40% 40% (45)% 39% 40% 40%
== === === == == ==
10. 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 $848,000 and $350,000 in expense
during Fiscal 1997 and Fiscal 1996, respectively. No expense was recognized in
Transition 1996 or Fiscal 1995.
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 1997 was $394,000 and $319,000 in Fiscal
1996, 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
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32
Company matching 15% of the investment. These contributions are used to purchase
shares of the Company stock at the average market price.
11. STOCK OPTION PLAN AND RESTRICTED STOCK AGREEMENTS
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123
(FASB 123), "Accounting for Stock-Based Compensation," requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
On February 10, 1994, the Company's Board of Directors adopted the American
Eagle Outfitters, Inc. 1994 Stock Option Plan (the "Plan"). The Plan provides
for the grant of 900,000 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 450,000 shares for which options may be granted under the Plan. On
May 7, 1997, the Plan was further amended to provide for the grant of an
additional 450,000 shares for which options may be granted under the Plan.
Additionally, the amendment provided that the maximum number of options which
may be granted to one individual may not exceed 600,000 shares. All full-time
employees and selected related party consultants to the Company are eligible to
receive options which are approved by the Compensation and Stock Option
Committee of the Board of Directors. These options primarily vest over five
years and are exercisable for a ten-year period from the date of grant.
Directors who are not officers or employees of the Company were previously
granted options for 3,750 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 1,500 shares (restated for the January 1998 stock split) of stock at fair
value to the members of the Board of Directors who are not officers or employees
of the Company on the first trading day of each fiscal quarter of the Company
which vest one year after the date of grant and are exercisable for a ten-year
period from the date of grant. This provision became effective for the third
quarter of Fiscal 1996.
Pro forma information regarding net income and earnings per share is required by
FASB 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted beginning in the
fiscal year subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for Fiscal 1997: risk-free interest rates of 6%; no dividend yield;
volatility factors of the expected market price of the Company's common stock of
.644; weighted-average expected life of the option of 6 years; and an expected
forfeiture rate of approximately 13%. 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 :
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33
(In thousands, except earnings per share) For the Years Ended
-------------------
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
------------- ------------ ------------
(Unaudited)
Pro forma net income (loss) $ 19,060 $ 5,354 $ (1,383)
Pro forma net income (loss) per share
Basic $ 1.29 $ 0.37 $ (0.09)
Dilutive $ 1.25 $ 0.35 $ (0.09)
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 pro forma compensation costs.
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34
A summary of the Company's stock option activity follows:
For the Years Ended
--------------------
January 31, 1998 February 1, 1997
---------------- ----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding - beginning of year 947,850 $5.94 533,925 $8.81
Granted
(Exercise Price equal to Fair
Value) 345,000 $7.89 710,925 $6.35
Granted
(Exercise Price less than Fair
Value) -- -- 175,500 $4.50
Exercised (2) (147,405) $6.61 (64,425) $4.74
Cancelled (26,700) $6.81 (408,075) $9.97
-------- --------
Outstanding - end of year (4) 1,118,745 $6.32 947,850 $5.94
========= ===== ========
Exercisable - end of year (5) 221,475 $4.88 158,145 $5.14
Weighted average fair value of
options granted during the year $4.38 $4.98
For the Six For the Year Ended
Months Ended ------------------
------------
February 3, 1996 July 29, 1995
---------------- -------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding - beginning of year 479,925 $10.65 463,500 $10.67
Granted
(Exercise Price equal to Fair
Value) 163,500 $4.64 29,925 $10.51
Granted
(Exercise Price less than Fair
Value) -- -- -- --
Exercised (2) -- -- -- --
Cancelled (109,500) $10.67 (13,500) $10.67
------- --------
Outstanding - end of year (4) 533,925 $8.81 479,925 $10.65
======= ========
Exercisable - end of year (5) 104,085 $9.18 90,000 $10.67
Weighted average fair value of
options granted during the year $3.16
(1) Shares granted and cancelled during Fiscal 1996 include 362,175 in options
that were repriced to $4.50 on February 5, 1996.
(2) Options exercised during Fiscal 1997 ranged in price from $4.17 - $11.67
with an average of $6.61.
(3) As of January 31, 1998 and February 1, 1997, the Company had 469,425 and
337,725 shares available for grant.
(4) As of January 31, 1998, the exercise price of 959,445 options outstanding
ranged between $4.17 and $8.33 with weighted average remaining contractual
lives between approximately 8 and 9 years.
(5) As of January 31, 1998, the exercise price of 208,425 options exercisable
ranged between $4.17 and $5.17.
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35
The Company maintains a restricted stock plan for compensating certain employees
and selected related party consultants. At January 31, 1998, 376,313 shares of
restricted stock were outstanding at a grant price of $10.67, with 225,788
shares vested.
For Fiscal 1997,Fiscal 1996 and Transition 1996, the Company recorded
$1,214,167, $1,049,710 and $420,150 in compensation expense, respectively, on
restricted stock, certain stock options granted during Fiscal 1996 where the
exercise price is less than fair value of the underlying stock, and certain
options granted to non-employees. 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 $1,106,292 per year in compensation expense during the remaining vesting
periods.
12. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
(In thousands, except per share data) Quarters Ended
May 3, August 2, November 1, January 31,
1997 1997 1997 1998
---- ---- ---- ----
Net sales $ 60,952 $86,159 $104,902 $153,700
Gross profit 14,253 25,053 38,654 59,007
Income (loss) before provision for income taxes (5,996) 1,878 10,339 26,057
Net income (loss) (3,619) 1,120 6,276 15,760
Basic income (loss) per common share (1) $ (0.25) $ 0.08 $ 0.43 $ 1.06
Diluted income (loss) per common share (1) $ (0.25) $ 0.07 $ 0.41 $ 1.01
May 4, August 3, November 2, February 1,
1996 1996 1996 1997
---- ---- ---- ----
Net sales $ 54,396 $70,257 $78,846 $122,905
Gross profit 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
Basic income (loss) per common share (1) $ (0.21) $ 0.02 $ 0.15 $ 0.44
Diluted income (loss) per common share (1) $ (0.21) $ 0.02 $ 0.14 $ 0.43
(1) Net income (loss) per share amounts have been restated to reflect the
adoption of FASB 128 and the January 1998 three-for-two stock split.
13. SUBSEQUENT EVENT
On April 13, 1998, the Company's Board of Directors approved a three-for-two
stock split to be distributed on May 8, 1998, to shareholders of record on April
24, 1998. This report does not reflect the effect of this stock split since the
Company's public release of its Fiscal 1997 financial results preceded the Board
of Directors' approval of this transaction. All future reports will include a
restatement of share amounts and per share data to reflect the May 1998 stock
split.
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36
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 January 31, 1998, February 1, 1997 and February 3, 1996
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the years ended January 31, 1998 and February 1, 1997, the
six-month period ended February 3, 1996 and the year 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Eagle Outfitters, Inc. at January 31, 1998, February 1, 1997 and
February 3, 1996 and the consolidated results of its operations and its cash
flows for the years ended January 31, 1998 and February 1, 1997, the six-month
period ended February 3, 1996, and the year ended July 29, 1995, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Pittsburgh, Pennsylvania
March 3, 1998,
except for Note 13, as to which the date is
April 14, 1998
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37
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 June 3, 1998, 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 June 3, 1998 under the
captions "Executive Officer Compensation", "Option/SAR Grants in Last Fiscal
Year", and "Aggregated Option Exercises and Fiscal Year-End Option Value" is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Security Ownership of Principal
Shareholders and Management" in the Company's Proxy Statement relating to the
Company's Annual Meeting of Shareholders to be held on June 3, 1998, 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 June 3, 1998, 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 shareholders for the period
ended January 31, 1998, are included in Item 8:
Consolidated Balance Sheets as of January 31, 1998, February 1,
1997, and February 3, 1996
Consolidated Statements of Operations for the years ended January
31, 1998, February 1, 1997 and February 3, 1996 (unaudited), the
six month periods ended February 3, 1996 and January 28, 1995
(unaudited) and for the year ended July 29, 1995
Consolidated Statements of Stockholders' Equity for the years
ended January 31, 1998 and February 1, 1997, the six month period
ended February 3, 1996, and for the year ended July 29, 1995
Consolidated Statements of Cash Flows for the years ended January
31, 1998, February 1, 1997 and February 3, 1996 (unaudited), the
six month periods ended February 3, 1996 and January 28, 1995
(unaudited) and for the year 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.
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38
(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
Registrant, Retail Ventures, Inc., Natco Industries, Inc., Form S-1 (file no. 33-75294) filed February 14, 1994, as
Peatro Corporation and Sam Forman. amended, and incorporated herein by reference.
2.2 First Amendment to Exchange Agreement, dated as of Previously filed as Exhibit 2.1 to Registration Statement on
February 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, Previously filed as Exhibit 3.4 to Registration Statement on
1994, 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 (contained ended April 30, 1994.
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.
10.4 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.
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39
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 and Form S-8 (file no.
33-44759) filed January 22, 1998.
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.
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)
10.10 Purchase Agreement re: Prophecy Acquisition. Previously filed as Exhibit 10.10 to Form 10-Q for the
quarterly period ended May 3, 1997.
10.11 Loan and Security Agreement with Azteca Production Previously filed as Exhibit 10.11 to Form 10-Q for the
International, Inc. quarterly period ended August 2, 1997.
10.12 First Amendment to Loan with Azteca Production Previously filed as Exhibit 10.12 to Form 10-Q for the
International, Inc. quarterly period ended November 1, 1997.
21 Subsidiaries
23.1 Consent of Ernst & Young LLP.
24 Power of Attorney
27- 27.9 Financial Data Schedules
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits to this report begin on page 42.
(d) Financial Statement Schedules
None
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40
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
/s/ JAY L. SCHOTTENSTEIN
- ----------------------------------
Jay L. Schottenstein Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ GEORGE KOLBER
- ----------------------------------
George Kolber Vice Chairman and Chief Operating Officer
/s/ LAURA A. WEIL
- ----------------------------------
Laura A. Weil Executive Vice President and Chief Financial Officer
/s/ DALE E. CLIFTON
- ----------------------------------
Dale E. Clifton Vice President, Controller, and Chief Accounting Officer
/s/ SAUL SCHOTTENSTEIN
- ----------------------------------
Saul Schottenstein Vice Chairman
/s/ ARI DESHE
- ----------------------------------
Ari Deshe Director
/s/ JON P. DIAMOND
- ----------------------------------
Jon P. Diamond Director
/s/ MARTIN P. DOOLAN
- ----------------------------------
Martin P. Doolan Director
/s/ GILBERT W. HARRISON
- ----------------------------------
Gilbert W. Harrison Director
/s/ MICHAEL G. JESSELSON
- ----------------------------------
Michael G. Jesselson Director
/s/ THOMAS R. KETTELER
- ----------------------------------
Thomas R. Ketteler Director
/s/ John L. Marakas
- ----------------------------------
John L. Marakas Director
/s/ DAVID W. THOMPSON
- ----------------------------------
David W. Thompson Director
GERALD E. WEDREN
- ----------------------------------
Gerald E. Wedren Director
*By: /s/ LAURA A. WEIL
----------------------------------
Laura A. Weil, Attorney-in-Fact
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