- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
------------------------
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 4, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
</Table>
COMMISSION FILE NUMBER: 001-31314
AEROPOSTALE, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 31-1443880
(State of incorporation) (I.R.S. Employer Identification No.)
1372 BROADWAY, 8TH FLOOR, NEW YORK, NY 10018
(Address of Principal Executive Offices) (Zip Code)
</Table>
(646) 485-5398
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
As of June 13, 2002, the registrant had 34,773,594 of shares of common
stock outstanding.
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TABLE OF CONTENTS
<Table>
PART I. FINANCIAL INFORMATION......................................... 2
Item
1. Condensed Consolidated Financial Statements................. 2
Condensed Consolidated Balance Sheets as of May 4, 2002
(unaudited) and February 2, 2002............................ 2
Condensed Consolidated Statements of Operations for the
thirteen weeks ended May 4, 2002 and May 5, 2001
(unaudited)................................................. 3
Condensed Consolidated Statement of Stockholders' Equity for
the thirteen weeks ended May 4, 2002 (unaudited)............ 4
Condensed Consolidated Statements of Cash Flows for the
thirteen weeks ended May 4, 2002 and May 5, 2001
(unaudited)................................................. 5
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item
3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 13
PART II. OTHER INFORMATION............................................ 14
Item
1. Legal Proceedings........................................... 14
Item
2. Changes in Securities and Use of Proceeds................... 14
Item
3. Defaults Upon Senior Securities............................. 14
Item
4. Submission of Matters to a Vote of Security Holders......... 14
Item
5. Other Information........................................... 15
Item
6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES............................................................ 16
</Table>
1
PART I.
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AEROPOSTALE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
MAY 4, FEBRUARY 2,
2002 2002
----------- -----------
(UNAUDITED) (1)
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 29,239 $ 44,958
Merchandise inventory..................................... 40,009 37,979
Other current assets...................................... 6,664 6,843
-------- --------
Total current assets................................... 75,912 89,780
FIXTURES, EQUIPMENT AND IMPROVEMENTS -- Net................. 53,695 48,646
OTHER ASSETS................................................ 8,661 8,501
-------- --------
TOTAL ASSETS......................................... $138,268 $146,927
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... 12,499 13,995
Accrued expenses.......................................... 27,058 37,604
-------- --------
Total current liabilities.............................. 39,557 51,599
OTHER NONCURRENT LIABILITIES:
Other liabilities......................................... 27,532 25,521
SERIES B REDEEMABLE PREFERRED STOCK:
$0.01 par value per share; authorized, issued and
outstanding, 6 shares liquidation preference $6,250;
12.5% cumulative....................................... 9,917 9,617
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock -- par value, $0.01 per share; 75,266 shares
authorized, 31,047 shares issued and outstanding....... 310 310
Common stock -- Nonvoting, par value, $0.01 per share;
75,266 shares authorized, 1,789 and 1,118 shares issued
and outstanding........................................ 18 11
Additional paid-in capital................................ 9,474 9,321
Deferred compensation..................................... (3,853) (4,473)
Retained earnings......................................... 55,313 55,021
-------- --------
Total stockholders' equity............................. 61,262 60,190
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $138,268 $146,927
======== ========
</Table>
- ---------------
Note (1) Balance sheet derived from audited financial statements
See notes to condensed consolidated financial statements.
2
AEROPOSTALE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
13 WEEKS ENDED
-------------------------
MAY 4, 2002 MAY 5, 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
NET SALES................................................... $85,130 $56,629
COST OF SALES (including $132 equity based compensation in
2002 and certain buying, occupancy and warehousing
expenses)................................................. 60,981 44,171
------- -------
Gross profit.............................................. 24,149 12,458
------- -------
COSTS AND EXPENSES:
Selling, general and administrative expenses (including
$488 equity based compensation in 2002)................ 23,213 15,708
Amortization of negative goodwill......................... -- (59)
------- -------
Total costs and expenses............................... 23,213 15,649
------- -------
INCOME (LOSS) FROM OPERATIONS............................... 936 (3,191)
INTEREST (INCOME) EXPENSE -- Net............................ (50) 249
------- -------
INCOME (LOSS) BEFORE INCOME TAXES........................... 986 (3,440)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 394 (1,391)
------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................... 592 (2,049)
GAIN ON DISCONTINUED OPERATIONS............................. -- 2
------- -------
NET INCOME (LOSS)........................................... $ 592 $(2,047)
======= =======
BASIC NET INCOME (LOSS) PER COMMON SHARE
From continuing operations................................ $ 0.01 $ (0.07)
From discontinued operations.............................. -- --
------- -------
Net income (loss) per share............................... $ 0.01 $ (0.07)
======= =======
DILUTED NET INCOME (LOSS) PER COMMON SHARE:
From continuing operations................................ $ 0.01 $ (0.07)
From discontinued operations.............................. -- --
------- -------
Net income (loss) per share............................... $ 0.01 $ (0.07)
======= =======
Basic weighted average number of shares outstanding......... 32,652 31,543
Diluted weighted average number of shares outstanding....... 36,458 31,543
</Table>
See notes to condensed consolidated financial statements.
3
AEROPOSTALE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
COMMON STOCK
COMMON STOCK NONVOTING ADDITIONAL
--------------- --------------- PAID-IN DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION EARNINGS TOTAL
------ ------ ------ ------ ---------- ------------ -------- -------
(IN THOUSANDS)
BALANCE, FEBRUARY 2, 2002:..... 31,047 $310 1,118 $11 $9,321 $(4,473) $55,021 $60,190
Net income................... -- -- -- -- -- -- 592 592
Stock options exercised...... -- -- 671 7 153 -- -- 160
Amortization of equity based
compensation............... -- -- -- -- -- 620 -- 620
Accrued
dividend -- redeemable
preferred stock............ -- -- -- -- -- -- (300) (300)
------ ---- ----- --- ------ ------- ------- -------
BALANCE, MAY 4, 2002
(unaudited).................. 31,047 $310 1,789 $18 $9,474 $(3,853) $55,313 $61,262
====== ==== ===== === ====== ======= ======= =======
</Table>
See notes to condensed consolidated financial statements.
4
AEROPOSTALE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
13 WEEKS ENDED
-------------------------
MAY 4, MAY 5,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 592 $(2,047)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization........................... 1,845 956
Amortization of tenant allowances and above market
leases................................................. (693) (497)
Amortization of negative goodwill....................... -- (59)
Equity based compensation charge........................ 620 --
Gain on discontinued operations......................... -- 2
Deferred rent, net...................................... 640 378
Pension expense......................................... 125 113
Changes in operating assets and liabilities:
Merchandise inventory................................. (2,030) (5,241)
Other current assets.................................. 179 3,408
Other assets.......................................... (177) (865)
Accounts payable...................................... (1,496) 810
Accrued expenses and other liabilities................ (8,607) (964)
-------- -------
Net cash used by operating activities.............. (9,002) (4,006)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixtures, equipment and improvements......... (6,877) (4,938)
-------- -------
Cash used in investing activities....................... (6,877) (4,938)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised................................... 160 7
Net borrowings under revolving credit facility............ -- 8,699
-------- -------
Cash provided by financing activities................... 160 8,706
-------- -------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (15,719) (238)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 44,958 4,791
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 29,239 $ 4,553
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................... $ 6,642 $ 82
======== =======
Interest expense paid..................................... $ 65 $ 214
======== =======
SIGNIFICANT NONCASH INVESTING AND FINANCING TRANSACTIONS:
Accrued dividends on Series B Redeemable Preferred
Stock................................................... $ 300 $ 266
======== =======
</Table>
See notes to condensed consolidated financial statements.
5
AEROPOSTALE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND STORE DATA)
1. BASIS OF PRESENTATION
Aeropostale, Inc. (together with its wholly-owned subsidiary Aeropostale
West, Inc., the "Company") is a mall-based specialty retailer of casual apparel
and accessories for young women and young men with a total of 292 stores as of
May 4, 2002 located in 34 states. On February 3, 2002, Aeropostale, Inc.
contributed all of the assets relating to 10 stores that are located in Arizona
and California to its wholly-owned subsidiary Aeropostale, West Inc. as part of
a tax free reorganization.
The condensed consolidated financial statements, except for the February 2,
2002 balance sheet, are unaudited. These condensed consolidated financial
statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements.
In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments considered necessary to present
fairly the financial position of the Company as of May 4, 2002 and the results
of operations for the thirteen weeks ended May 4, 2002 and May 5, 2001 and cash
flows for the thirteen weeks ended May 4, 2002 and May 5, 2001, but are not
necessarily indicative of the results of operations for a full fiscal year.
These condensed consolidated financial statements and related notes should be
read in conjunction with the Company's audited financial statements for the year
ended February 2, 2002, which were included as part of the Company's
registration statement on Form S-1 (Registration No. 333-84056), as declared
effective by the Securities and Exchange Commission on May 15, 2002.
2. PUBLIC OFFERING OF COMMON STOCK
On May 21, 2002, the Company completed an initial public offering of
14,375,000 shares of common stock of which 1,875,000 and 12,500,000 shares were
offered by the Company and certain selling stockholders, respectively, at a
price to the public of $18.00 per share. Upon completing the offering, net
proceeds of $31.4 million and $209.3 million were distributed to the Company and
selling stockholders, respectively. The Company is now authorized to issue
200,000,000 shares of common stock $0.01 par value, and 5,000,000 shares of
undesignated preferred stock, $0.01 par value. In connection with the Company's
offering, all of the Company's outstanding shares of non-voting common stock
were converted into 1,118,447 shares of common stock. Approximately $10.0
million of the approximately $31.4 million of the net proceeds to the Company
were used to redeem all of the outstanding shares of 12 1/2% Series B redeemable
preferred stock and pay all accrued and unpaid dividends thereon. The remainder
of the proceeds will be used for working capital and for general corporate
purposes, including new store openings.
On February 27, 2002, the Company adopted the Aeropostale 2002 Long-Term
Incentive Plan that became effective upon the consummation of the initial public
offering. A total of 1,735,556 shares of the Company's common stock became
available under issuance under the plan. All references to share information
reflects a 376.328 for 1 stock split of the Company's common stock and nonvoting
common stock which was approved by the Company's Board of Directors and became
effective on May 10, 2002. The respective share and share amounts and conversion
ratios included in the condensed consolidated financial statements reflect the
stock split for all periods presented.
On December 21, 2001, the Company granted 565,997 options with an exercise
price of $0.85 per share which was at a price less than the fair market value of
$15.77 per share. The Company incurred approximately $8,445 equity based
compensation charge as a result of the grant of these options of which $3,972
was recorded in the year ended February 2, 2002. The Company recorded additional
amortization for equity based compensation expense of $620 in the thirteen weeks
ended May 4, 2002, of which $132 and $488 is recorded in cost of sales and
selling, general and administrative expenses, respectively. The
6
AEROPOSTALE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company will recognize acceleration of the unamortized balance of $3,853, in the
second quarter, associated with the immediate vesting following the initial
public offering.
The Company will also incur a $142 compensation charge for a bonus for
certain management stockholders subsequent to the successful completion of the
initial public offering.
3. RECENT ACCOUNTING STANDARDS
New Accounting Standards -- In June 2001, the Financial Accounting
Standards Board ("FASB") issued two new pronouncements: Statement of Financial
Accounting Standard ("SFAS") No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16, Business Combinations, and FASB
Statement No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises. All business combinations in the scope of this Statement are to be
accounted for using one method, the purchase method. SFAS 141 is effective as
follows: a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS 141
also apply to all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 2001 or later). The Company has determined that the adoption of this
statement will not have an impact on the condensed consolidated financial
statements.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17, Intangible
Assets. It changes the accounting for goodwill from an amortization method to an
impairment only approach. The Company adopted SFAS 142 on August 5, 2001 and
recorded negative goodwill of $1,632 as income for a cumulative effect of
accounting change. Accordingly, SFAS 142 does not have a impact on the condensed
consolidated financial statements for the thirteen weeks ended May 4, 2002 and
May 5, 2001 (see Note 5).
In October 2001, the FASB issued Statement of Financial Accounting Standard
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
This statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of, but retains the
fundamental provisions of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be disposed of by sale. However, SFAS No. 144 applies the
fair value method for testing of impairment, which differs from SFAS No. 121.
SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30 as it pertains to disposal of a business segment but retains the
requirement of that opinion to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity
that either has been disposed of or is classified as held for sale. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001, thereby
applying to the Company upon the commencement of its fiscal 2003 fiscal year.
The adoption of SFAS No. 144 did not have a material impact on the condensed
consolidated financial statements for the thirteen weeks ended May 4, 2002.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical
7
AEROPOSTALE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company has determined that the adoption of this statement will
not have an impact on the condensed consolidated financial statements.
4. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share. Basic earnings per share have been computed based upon the
weighted average of common shares and nonvoting common shares outstanding, after
deducting preferred dividend requirements. Diluted earnings per share gives
effect to outstanding stock options.
<Table>
<Caption>
13 WEEKS ENDED 13 WEEKS ENDED
MAY 4, 2002 MAY 5, 2001
----------------- -----------------
BASIC DILUTED BASIC DILUTED
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Income (loss) from continuing operations....... $ 592 $ 592 $(2,049) $(2,049)
Preferred stock dividends...................... (300) (300) (266) (266)
------- ------- ------- -------
Income (loss) from continuing operations
available for per-share calculation.......... 292 292 (2,315) (2,315)
Income (loss) from discontinued operations..... -- -- 2 2
------- ------- ------- -------
Net income (loss) available for per-share
calculation.................................. $ 292 $ 292 $(2,313) $(2,313)
======= ======= ======= =======
Average shares of common stock outstanding..... 32,652 32,652 31,543 31,543
Stock options.................................. -- 3,806 -- (a)
------- ------- ------- -------
Total average equivalent shares................ 32,652 36,458 31,543 31,543
======= ======= ======= =======
Per Common Share:
Income (loss) from continuing operations....... $ 0.01 $ 0.01 $ (0.07) $ (0.07)
Income from discontinued operations............ -- -- -- --
------- ------- ------- -------
Net (loss) income.............................. $ 0.01 $ 0.01 $ (0.07) $ (0.07)
======= ======= ======= =======
</Table>
- ---------------
(a) Options to purchase 4,223 shares of common stock were not included in the
computation of dilutive loss per share for the thirteen weeks ended May 5,
2001 because to do so would have been anti-dilutive.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the purchase by Bear Stearns Merchant Banking and our
management team of all the shares of the Company from Federated Specialty
Stores, Inc. (a wholly-owned subsidiary of Federated Department Stores, Inc.) on
August 3, 1998, the Company recorded gross negative goodwill in the amount of
$12.8 million that was being amortized over an estimated life of ten years.
In connection with the decision to discontinue the operations of the
Chelsea Cambell business in February 2000, an allocation of the negative
goodwill was made between the Aeropostale and the Chelsea Cambell businesses
based upon their relative fair values at the Acquisition date. As a result of
such allocation, approximately $8.8 million of unamortized negative goodwill was
written off as part of the gain on disposal of the Chelsea Cambell business. The
remaining negative goodwill was allocated to Aeropostale and was amortized over
its estimated life of ten years. Net negative goodwill was approximately $0 and
$59 for the thirteen weeks ended May 4, 2002 and May 5, 2001, respectively.
The Company adopted SFAS 142 on August 5, 2001. With the adoption of SFAS
142, the remaining negative goodwill was recorded as income from a cumulative
effect of accounting change.
8
AEROPOSTALE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net income and income from continuing operations for the thirteen weeks
ended May 5, 2001 has been adjusted to reflect net income and income from
continuing operations as though no negative goodwill amortization was recorded.
<Table>
<Caption>
13 WEEKS ENDED
-------------------------
MAY 4, 2002 MAY 5, 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Income (loss) from continuing operations.................... $ 592 $(2,049)
Adjusted income (loss) from continuing operations........... 592 (2,108)
Net income (loss)........................................... 592 (2,047)
Adjusted net income (loss).................................. 592 (2,106)
Diluted income (loss) from continuing operations per
share..................................................... $0.01 $ (0.07)
Adjusted diluted income (loss) from continuing operations
per share................................................. 0.01 (0.08)
Diluted net income (loss) per share......................... 0.01 (0.07)
Adjusted net income (loss) per share........................ 0.01 (0.08)
</Table>
6. REVOLVING CREDIT FACILITY
The Company has a revolving credit agreement, as amended, with a bank under
which the Company may borrow or obtain letters of credit up to an aggregate of
$55 million (the "Credit Facility"), with letters of credit having a sub-limit
of $15 million. The facility matures by its terms on July 31, 2004. Indebtedness
under the Credit Facility is collateralized by the assets of the Company.
Borrowings under the Credit Facility bear interest, at the Company's option,
either at (a) the lender's prime rate or (b) the Euro Dollar Rate plus 1.50% to
2.00%, depending on excess availability. Additionally, the Company must pay
commitment fees on any unused portion of the Credit Facility at an annualized
rate of 0.375 percent of the difference between the unused portion and
borrowings (including outstanding letters of credit) at the preceding month-end.
In connection with the Credit Facility, the Company incurred a one-time
financing fee of $220, which is being amortized over the term of the Credit
Facility, such amount is recorded as additional interest expense. At February 2,
2002 and May 4, 2002, the Company had no borrowings outstanding and no issued
stand-by or commercial letters of credit. At May 4, 2002, the Company was in
compliance with the financial covenants of the credit facility, which require
the Company to achieve certain earnings before interest, income taxes,
depreciation and amortization ("EBITDA" as defined in the Agreement) amounts and
capital spending limitations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Net sales. Net sales consist of sales from comparable stores and
non-comparable stores. A store is not included in comparable store sales until
the first day of the fiscal month following the fourteenth full fiscal month of
sales. Non-comparable store sales include sales in the current fiscal year from
our stores opened during the previous fiscal year before they are considered
comparable stores and new stores opened during the current fiscal year. In
addition, all sales generated from stores that we have closed and through our
arrangements with colleges and universities for organized sales events are
included in non-comparable store sales.
Cost of sales. Cost of sales includes the cost of merchandise,
distribution and warehousing, freight from the distribution center and warehouse
to the stores, payroll for our design, buying and merchandising personnel and
store occupancy costs. Store occupancy costs include rent, contingent rents,
common area maintenance, real estate taxes, utilities, repairs, maintenance and
depreciation. Included in cost of sales during the thirteen weeks ended May 4,
2002 is a charge of approximately $132,000 for equity based compensation.
Selling, general and administrative expenses. Selling, general and
administrative expenses include selling, store management and corporate
expenses, including payroll and employee benefits, other than for our design,
buying and merchandising personnel, employment taxes, management information
systems, marketing, insurance, legal, store pre-opening and other corporate
level expenses. Store pre-opening expenses include store level payroll, grand
opening event marketing, travel, supplies and other store opening expenses.
Corporate level expenses are primarily attributable to our corporate offices in
New York, New York, and Wayne, New Jersey. Included in selling, general and
administrative expenses for the thirteen weeks ended May 4, 2002 is a charge of
approximately $488,000 related to equity based compensation.
Interest expense, net. Interest expense, net of interest income, includes
interest relating to our revolving credit facility and amortization of financing
intangibles.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the appropriate application of certain
accounting policies, many of which require us to make estimates and assumptions
about future events and their impact on amounts reported in our condensed
consolidated financial statements and related notes. Since future events and
their impact cannot be determined with certainty, the actual results will
inevitably differ from our estimates. Such differences could be material to the
condensed consolidated financial statements.
We believe application of accounting policies, and the estimates inherently
required therein, are reasonable. These accounting policies and estimates are
constantly reevaluated, and adjustments are made when facts and circumstances
dictate a change. Historically, we have found our application of accounting
policies to be appropriate, and actual results have not differed materially from
those determined using necessary estimates.
Merchandise inventory. Our merchandise inventory is carried at the lower
of cost or market on a first-in, first-out basis. We make certain assumptions to
adjust inventory based on historical experience and current information in order
to assess that inventory is recorded properly at the lower of cost or market.
These assumptions can have a significant impact on current and future operating
results and financial position.
Long-lived assets. In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated undiscounted future
net cash flows of the related long-lived assets and reduce their carrying value
by the excess, if any, of the result of such calculation. We believe at this
time that the long-lived assets' carrying values and useful lives continues to
be appropriate.
10
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a
percentage of total net sales for the period indicated:
<Table>
<Caption>
13 WEEKS ENDED 13 WEEKS ENDED
MAY 4, 2002 MAY 5, 2001
-------------- --------------
(UNAUDITED) (UNAUDITED)
Net sales.............................................. 100.0% 100.0%
Gross profit........................................... 28.4 22.0
Selling, general and administrative expenses........... 27.3 27.7
Amortization of negative goodwill...................... -- (0.1)
Income (loss) from operations.......................... 1.1 (5.6)
Interest (income) expense, net......................... (0.1) 0.4
Income (loss) before income taxes...................... 1.2 (6.1)
Provision (benefit) for income taxes................... 0.5 (2.5)
Income (loss) from continuing Operations............... 0.7 (3.6)
Gain on discontinued operations........................ -- --
Net income (loss)...................................... 0.7% (3.6)%
</Table>
Thirteen weeks ended May 4, 2002 compared to thirteen weeks ended May 5, 2001
(unaudited).
Net sales. Our net sales for the thirteen weeks ended May 4, 2002,
increased to approximately $85.1 million from approximately $56.6 million for
the thirteen weeks ended May 5, 2001, an increase of approximately $28.5
million. Of this increase, comparable store sales contributed approximately
$12.1 million and non-comparable store sales contributed approximately $16.4
million. Comparable store sales increased by 22.0% for the thirteen weeks ended
May 4, 2002, compared to an increase of 3.4% in comparable store sales in the
thirteen weeks ended May 5, 2001. This increase was due to higher comparable
sales in all merchandise categories: young women's, accessories, and young
men's. The increase in non-comparable store sales was primarily due to 58 more
stores open at the end of the thirteen weeks ended May 4, 2002 as compared to
the prior period.
Gross profit. Our gross profit, which represents net sales less cost of
sales, increased approximately $11.6 million in the thirteen weeks ended May 4,
2002 to approximately $24.1 million from approximately $12.5 million for the
thirteen weeks ended May 5, 2001. As a percentage of net sales, gross profit
increased to 28.4% from 22.0% during these periods. This increase is primarily
attributable to an approximate 5.0% decrease in occupancy, distribution and
warehousing, transportation to stores and buying costs as a percent of net
sales. Our merchandise margin increased approximately 1.4% primarily due to
higher maintained margins in the young women's category offset by a decrease in
our accessories category, while young men's was essentially unchanged from the
prior period. Included in cost of sales during the thirteen weeks ended May 4,
2002 is a charge of approximately $132,000 for equity based compensation.
Selling, general and administrative expenses. Our selling, general and
administrative expenses increased approximately $7.5 million for the thirteen
weeks ended May 4, 2002 to approximately $23.2 million from approximately $15.7
million for the thirteen weeks ended May 5, 2001. This increase was partially
due to an approximate $5.0 million increase in payroll expenses that resulted
from new store growth in addition to compensation costs incurred in connection
with incentive bonus programs. Furthermore, we incurred a charge of
approximately $488,000 for equity-based compensation during the thirteen weeks
ended May 4, 2002. As a percent of net sales, selling, general and
administrative expenses decreased to 27.3% from 27.7%. This decrease as a
percentage of net sales was due to increased leverage of store payroll, offset
by increases in bonus programs, equity based compensation and external
marketing.
Interest expense, net. Our net interest income for the thirteen weeks
ended May 4, 2002 was approximately $50,000 compared to net interest expense of
approximately $249,000 for the thirteen weeks ended May 5, 2001. The Company had
no borrowings on its credit facility in the thirteen weeks ended May 4, 2002 as
compared to average borrowings of $8.1 million for the thirteen weeks ended May
5, 2001.
11
Income taxes. Our effective tax rate of 40.0% for the thirteen weeks ended
May 4, 2002 compares to an effective tax rate of 39.7% for the thirteen weeks
ended May 5, 2001. Our effective tax rate increased as a result of the increase
in our federal tax rate, partially offset by the elimination of the negative
goodwill amortization.
Income (loss) from operations. Our income from continuing operations
increased approximately $2.6 million for the thirteen weeks ended May 4, 2002 to
approximately $0.6 million from a loss from continuing operations of
approximately $2.0 million for the thirteen weeks May 5, 2001. This increase was
primarily due to increased sales and gross profit, partially offset by equity
based compensation expense incurred in this period.
Gain on discontinued operations. All Chelsea Cambell stores were closed by
the end of December 2000; therefore, no activity occurred during the thirteen
weeks May 4, 2002. For the thirteen weeks ended May 5, 2001, our Chelsea Cambell
stores had net income of $2,000.
Net income. Our net income increased by approximately $2.6 million, to
approximately $0.6 million in the thirteen weeks May 4, 2002 from a net loss of
approximately $2.0 million in the thirteen weeks ended May 5, 2001.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, the construction
of new stores, the remodeling of existing stores and the improvement to our
information systems. Historically, these cash requirements have been met through
cash flow from operations and borrowings under our credit facility with Fleet
Retail Finance, Inc. At May 4, 2002, we had working capital of approximately
$36.4 million.
During the thirteen weeks ended May 4, 2002, our net cash used by
operations was approximately $9.0 million. Our cash used by operations was due
to the decrease of accrued expenses and other liabilities, which was primarily
attributable to the payment of estimated income taxes.
Our cash used in investing activities for the quarter ended May 4, 2002 and
May 5, 2001, was entirely used for capital expenditures. These expenditures,
consisting primarily of the construction of new stores, remodeling of existing
stores and investments in technology, were approximately $6.9 million for the 13
weeks ended May 4, 2002 and approximately $4.9 million for the 13 weeks ended
May 4, 2001. Our future capital requirements will depend primarily on the number
of new stores we open and the number of existing stores we remodel and the
timing of these expenditures. We opened 15 new stores in the quarter ended May
4, 2002, and 10 stores in the quarter ended May 5, 2001 and expect to open at
least 80 stores in fiscal 2002. Projected capital expenditures for fiscal 2002
are approximately $27.5 million, to be used primarily to fund new store
openings, store remodelings and technology investments. Historically, we have
financed such capital expenditures with cash from operations and borrowings
under our credit facility. We believe that we will continue to finance capital
expenditures in this manner during fiscal 2002.
In the quarter ended May 4, 2002, we had a net decrease of cash and cash
equivalents of approximately $15.7 million. For the quarter ended May 5, 2001,
we had a net borrowings under our credit facility of approximately $8.7 million.
Our secured revolving credit facility with Fleet, as agent, provides us with up
to $55.0 million based upon our inventory balances, seasonal advance rates and
third party credit card balances. Borrowings bear interest at our option at
either the rate per annum at which deposits on U.S. dollars are offered to Fleet
in the Eurodollar market, referred to as the eurodollar rate, plus 1.50% to
2.00% or the base rate announced from time to time by Fleet, dependent upon
excess availability. As of May 4, 2002, there was no balance under the revolving
credit facility. The revolving credit facility contains financial performance
and capital expense covenants, and has a termination date of July, 2004. There
are fees for early termination. The revolving credit facility contains a minimum
EBITDA covenant, tested monthly. The facility also contains a maximum capital
expenditures covenant, tested quarterly.
Events of default under the credit facility include, subject to grace
periods and notice provisions in certain circumstances, failure to pay principal
amounts when due, failure to perform covenant or liability requirements,
misrepresentation, default of leases, excess uninsured casualty loss, excess
uninsured judgment or restraint of business, business failure or application for
bankruptcy, indictment of or institution
12
of any legal process or proceeding under federal, state, municipal or civil
statutes, legal challenges to loan documents, and a change in control, other
than an initial public offering. If an event of default occurs, the lenders
under the credit facility will be entitled to take various actions, including
the acceleration of amounts due and requiring that all such amounts be
immediately paid in full as well as possession and sale of all assets that have
been used for collateral.
We have not issued any letters of credit for the purchase of merchandise
inventory or any capital expenditure.
As of May 4, 2002 we had approximately $29.2 million in cash available to
fund operations and future store growth. In addition, we had approximately $38.4
million available for borrowings under our credit facility as of May 4, 2002,
which availability is limited by the credit facility's borrowing base collateral
requirements. In general, the borrowing base equals a seasonally adjusted
percentage of the retail value of our inventory and 80% of our third party
credit card balances. We believe that cash flows from operations, our current
cash balance, funds available under our revolving credit facility and cash
proceeds from the initial public offering (Note 2) will be sufficient to meet
our working capital needs and planned capital expenditures for fiscal 2002.
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual obligations and commercial
commitments as of May 4, 2002:
<Table>
<Caption>
PAYMENTS DUE
-----------------------------------------------------------
WITHIN WITHIN WITHIN AFTER
9 MONTHS 12 MONTHS 12 MONTH 12 MONTHS
ENDED FISCAL ENDED FISCAL ENDED FISCAL ENDED FISCAL
TOTAL 2002 2003 AND 2004 2005 AND 2006 2006
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
Contractual Obligations
Employment
contracts.......... $ 1,875 $ 675 $ 1,200 $ -- $ --
Sponsor fee........... 6 6 -- -- --
Merchandise
agreement.......... 3,961 578 1,980 1,403 --
Operating leases...... 181,877 21,776 52,682 39,379 68,040
-------- ------- ------- ------- -------
Total contractual
obligations........ $187,719 $23,035 $55,862 $40,782 $68,040
======== ======= ======= ======= =======
</Table>
<Table>
<Caption>
AMOUNT OF COMMITMENT PER PERIOD
------------------------------------------------------------
WITHIN WITHIN WITHIN AFTER
9 MONTHS 12 MONTHS 12 MONTH 12 MONTHS
ENDED FISCAL ENDED FISCAL ENDED FISCAL ENDED FISCAL
TOTAL 2002 2003 AND 2004 2005 AND 2006 2006
----- ------------- ------------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
Commercial Commitments
Lines of credit, nothing
outstanding........... $ -- $ -- $ -- $ -- $ --
Standby letters of
credit, nothing
outstanding........... -- -- -- -- --
Bear Stearns Merchant
Banking offering
fee................... 338 338 -- -- --
Offering bonus........... 200 200 -- -- --
---- ---- ----- ----- -----
Total commercial
commitments........... $538 $538 $ -- $ -- $ --
==== ==== ===== ===== =====
</Table>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the Company's Registration Statement Form S-1, as amended,
filed with the Securities and Exchange Commission on March 8, 2002 and declared
effective on May 15, 2002 (Registration No. 333-84056), the Company completed
the initial public offering ("IPO") of a total of 14,375,000 shares of common
stock of which the Company sold 1,875,000 shares of common stock. Certain
stockholders sold the remaining 12,500,000 shares of common stock. All
14,375,000 shares were sold at an initial public offering price of $18.00 per
share, for an aggregate offering price of approximately $258.8 million through a
syndicate of underwriters managed by Bear, Stearns & Co. Inc. and Merrill Lynch
& Co. As a result of the IPO, net proceeds of $31.4 million and $209.3 million
were distributed to the Company and selling stockholder, respectively. The
Company incurred approximately $5.0 million of expenses in connection the IPO
(including underwriters' discounts and commissions). Bear Stearns MB 1998-1999
Pre-Fund, LLC (the "Pre-Fund"), a holder of more than 10% of the common stock of
the Company, received an offering fee of $338,000 in connection with the IPO.
Bear, Stearns & Co. Inc., an affiliate of the Pre-Fund, served as co-manager of
the IPO and received a portion of the underwriters' discounts and commissions.
Furthermore, two of the Company's executive officers, and one former officer,
received an aggregate of $200,000 in offering bonuses. No other expenses
incurred by the Company in connection with the IPO were paid to officers or
directors of the Company or their associates, or to a person owning 10% or more
of the Company's common stock.
Upon completing the offering, the Company is now authorized to issue
200,000,000 shares of common stock $0.01 par value, and 5,000,000 shares of
undesignated preferred stock, $0.01 par value. In connection with the Company's
offering, all of the Company's outstanding shares of non-voting common stock
were converted into 1,118,447 shares of common stock. Approximately $10.0
million of the approximately $31.4 million of the net proceeds to the Company
were used to redeem all of the outstanding shares of 12 1/2% Series B redeemable
preferred stock and pay all accrued and unpaid dividends thereon. The remainder
of the proceeds to the Company will be used for working capital and general
corporate purposes, including new store openings. Upon completion of the initial
public offering, the Company had 34,040,507 shares of common stock outstanding.
The share information reflects a 376.328 for 1 stock split of the Company's
common stock and nonvoting common stock which was approved by the Company's
Board of Directors and became effective on May 10, 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Written Consent of Majority Stockholders in Lieu of a Special
Meeting of the Stockholders of Aeropostale, Inc., dated April 29, 2002, the
Company's stockholders consented to taking the following actions in connection
with the IPO: (1) the approval of a 376.328 to 1 split of the Company's common
stock, (2) the approval and adoption of our Amended and Restated Certificate of
Incorporation effective upon the closing of the IPO, and (3) the approval and
adoption of the Company's 2002 Long-Term Incentive Plan effective upon the IPO.
14
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) No Current Reports on Form 8-K were filed during the quarter covered
by this Form 10-Q.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AEROPOSTALE, INC.
/s/ JULIAN R. GEIGER
--------------------------------------
Julian R. Geiger
Chairman and Chief Executive Officer,
Director (Principal Executive Officer)
/s/ MICHAEL J. CUNNINGHAM
--------------------------------------
Michael J. Cunningham
Senior Vice President -- Chief
Financial Officer
(Principal Financial Officer)
Dated: June 17, 2002
16