1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0001
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
COMMISSION FILE NUMBER: 0-23760
AMERICAN EAGLE OUTFITTERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE NO. 13-2721761
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 THORN HILL DRIVE, WARRENDALE, PA 15086-7528
(Address of principal executive offices) (Zipcode)
(724) 776-4857
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE, 46,658,087 SHARES OUTSTANDING AS OF NOVEMBER 16,
1999
2
AMERICAN EAGLE OUTFITTERS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
- ----------------------------- --------
Item 1. Financial Statements
Consolidated Balance Sheets
October 30, 1999 (unaudited) and January 30, 1999 3
Consolidated Statements of Operations (unaudited)
Three and nine months ended October 30, 1999 and October 31, 1998 4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended October 30, 1999 and October 31, 1998 5
Notes to Consolidated Financial Statements 6-8
Review By Independent Accountants 9
Independent Accountants' Review Report 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 15 Acknowledgement of Independent Accountants 16
Exhibit 27 Financial Data Schedule 17
3
PART I. FINANCIAL INFORMATION AMERICAN EAGLE OUTFITTERS, INC.
Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS
October 30, January 30,
(Dollars in thousands) 1999 1999
---- ----
ASSETS
Current assets: (Unaudited)
Cash and cash equivalents $ 52,028 $ 71,940
Short-term investments 63,826 13,360
Merchandise inventory 81,912 49,688
Accounts and note receivable, including related party 13,020 8,560
Prepaid expenses and other 5,678 2,757
Deferred income taxes 13,246 8,199
-------- --------
Total current assets 229,710 154,504
-------- --------
Fixed assets:
Fixtures and equipment 45,185 36,307
Leasehold improvements 68,676 46,996
-------- --------
113,861 83,303
Less: Accumulated depreciation and amortization 35,576 29,933
-------- --------
78,285 53,370
-------- --------
Other assets 7,508 3,074
-------- --------
Total assets $315,503 $210,948
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,396 $ 18,551
Accrued compensation and payroll taxes 18,396 17,739
Accrued rent 18,015 13,042
Accrued income and other taxes 7,279 3,208
Other liabilities and accrued expenses 9,569 7,211
-------- --------
Total current liabilities 92,655 59,751
-------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 467 461
Contributed capital 88,101 64,561
Retained earnings 143,403 89,874
-------- --------
231,971 154,896
Less: Deferred compensation 5,679 2,419
Accumulated other comprehensive loss 3,444 --
Treasury stock -- 1,280
-------- --------
Total stockholders' equity 222,848 151,197
-------- --------
Stockholders' equity
Total liabilities and stockholders' equity $315,503 $210,948
======== ========
Stockholders' equity
See Notes to Consolidated Financial Statements
3
4
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $222,693 $149,068 $546,679 $374,493
Cost of sales, including certain buying, occupancy
and warehousing expenses 126,849 88,648 319,220 227,793
-------- -------- -------- --------
Gross profit 95,844 60,420 227,459 146,700
Selling, general and administrative expenses 53,708 36,186 133,509 94,191
Depreciation and amortization 3,193 2,142 8,430 6,201
-------- -------- -------- --------
Operating income 38,943 22,092 85,520 46,308
Interest income, net 1,153 593 2,672 1,676
-------- -------- -------- --------
Income before income taxes 40,096 22,685 88,192 47,984
Provision for income taxes 15,759 8,814 34,663 18,755
-------- -------- -------- --------
Net income $ 24,337 $ 13,871 $ 53,529 $ 29,229
======== ======== ======== ========
Basic income per common share $ 0.52 $ 0.31 $ 1.16 $ 0.65
======== ======== ======== ========
Diluted income per common share $ 0.50 $ 0.29 $ 1.10 $ 0.61
======== ======== ======== ========
Weighted average common shares outstanding - basic 46,562 45,396 46,332 45,160
======== ======== ======== ========
Weighted average common shares outstanding - diluted 49,007 48,000 48,682 47,840
======== ======== ======== ========
Retained earnings, beginning $119,066 $ 51,114 $ 89,874 $ 35,756
Net income 24,337 13,871 53,529 29,229
-------- -------- -------- --------
Retained earnings, ending $143,403 $ 64,985 $143,403 $ 64,985
======== ======== ======== ========
See Notes to Consolidated Financial Statements
4
5
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
-----------------
October 30, October 31,
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 53,529 $ 29,229
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Depreciation and amortization 8,430 6,201
Loss on impairment and write-off of fixed assets 1,489 1,129
Restricted stock compensation 3,737 2,333
Deferred income taxes 8,092 (2,873)
CHANGES IN ASSETS AND LIABILITIES:
Merchandise inventory (32,224) (38,656)
Accounts and note receivable (4,460) 1,305
Prepaid expenses and other (5,046) (1,096)
Accounts payable 20,858 11,495
Accrued liabilities 14,856 6,707
-------- --------
Total adjustments 15,732 (13,455)
-------- --------
Net cash provided by operating activities 69,261 15,774
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (34,822) (21,208)
Net purchase of short-term investments (56,697) --
-------- --------
Net cash used for investing activities (91,519) (21,208)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from stock options exercised 2,346 1,120
-------- --------
Net cash provided by financing activities 2,346 1,120
-------- --------
Net decrease in cash and cash equivalents (19,912) (4,314)
Cash and cash equivalents - beginning of period 71,940 48,359
-------- --------
Cash and cash equivalents - end of period $ 52,028 $ 44,045
======== ========
See Notes to Consolidated Financial Statements
5
6
AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of American Eagle Outfitters,
Inc. (the "Company") at October 30, 1999 and for the three and nine month
periods ended October 30, 1999 (the "current period") and October 31, 1998 (the
"prior period") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The Consolidated Balance
Sheet at January 30, 1999 was derived from the audited financial statements. The
Company's business is affected by the pattern of seasonality common to most
retail apparel businesses. The results for the current and prior periods are not
necessarily indicative of future financial results.
Certain notes and other information have been condensed or omitted from the
interim Consolidated Financial Statements presented in this Quarterly Report on
Form 10-Q. Therefore, these Consolidated Financial Statements should be read in
conjunction with the Company's Fiscal 1998 Annual Report.
2. BASIS OF PRESENTATION
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. On an ongoing basis,
management reviews its estimates based on currently available information.
Changes in facts and circumstances may result in revised estimates.
CASH AND CASH EQUIVALENTS
Cash includes cash equivalents. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS AND OTHER COMPREHENSIVE LOSS
Cash in excess of operating requirements is invested in marketable equity or
government debt obligations. As of October 30, 1999, short-term investments
include investments with an original maturity of greater than three months
(averaging approximately 11 months) and consist primarily of tax-exempt
municipal bonds classified as available for sale and marketable equity
securities. The primary difference between net income and comprehensive income
is related to the change in the market value, net of tax, of the above described
investments as follows:
(In thousands) Three Months Ended Nine Months Ended
------------------ -----------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
---- ---- ---- ----
Net income $24,337 $13,871 $53,529 $29,229
Other comprehensive income (loss) , net of tax 861 -- (3,444) --
------- ------- ------- -------
Total comprehensive income $25,198 $13,871 $50,085 $29,229
======= ======= ======= =======
6
7
CAPITAL STRUCTURE
The Company has 125,000,000 common shares authorized at $.01 par value, and
46,657,667 shares issued and outstanding as of October 30, 1999 and 46,110,984
shares outstanding as of January 30, 1999. There are 5,000,000 preferred shares
authorized at $.01 par value with none outstanding.
EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share and
the effect on income per share and the weighted average number of shares of
dilutive potential common stock (stock options and restricted stock).
(In thousands) Three Months Ended Nine Months Ended
------------------ -----------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
---- ---- ---- ----
Net income $24,337 $13,871 $53,529 $29,229
======= ======= ======= =======
Weighted average number of common shares used in
basic EPS 46,562 45,396 46,332 45,160
Effect of dilutive stock options and non-vested
restricted stock 2,445 2,604 2,350 2,680
------- ------- ------- -------
Weighted average number of common shares and dilutive
potential common stock used in diluted EPS 49,007 48,000 48,682 47,840
======= ======= ======= =======
RECLASSIFICATION
Certain reclassifications have been made to the Consolidated Financial
Statements for the prior period in order to conform to the October 30, 1999
presentation.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Because there were no borrowings under the terms of the Company's line of
credit, there were no amounts paid for interest during the three or nine months
ended October 30, 1999 or October 31, 1998. Income tax payments were $20.1
million and $22.3 million during the nine months ended October 30, 1999 and
October 31, 1998, respectively. During the nine months ended October 30, 1999
and October 31, 1998, $15.4 million and $1.4 million, respectively, were
recognized as increases to contributed capital, related to the tax benefits
associated with the exercise and vesting of stock options and restricted stock.
4. RELATED PARTY TRANSACTIONS
The Company has various transactions with related parties. The nature of the
relationship is primarily through common ownership. In September 1999, the
distribution center facility has been expanded to add 120,000 square feet which
will increase our capacity to handle distribution needs for future growth. As a
result, the Company entered into an amended and restated operating lease for its
corporate headquarters and distribution center with an affiliate. The lease
which commenced on September 1, 1999, and expires on December 31, 2020, provides
for annual rental payments of approximately $2.0 million through 2000, $2.4
million through 2005, $2.6 million through 2015, and $2.7 million through 2020.
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.
7
8
Related party amounts follow:
(In thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
---- ---- ---- ----
Merchandise purchases through a
related party importer $17,611 $25,689 43,876 $61,015
Accounts payable $ 4,295 $ 9,182 4,295 $ 9,182
Accounts receivable $ 3,922 $ 189 3,922 $ 189
Rent expense $ 501 $ 387 1,275 $ 1,161
Merchandise sales $ 1,277 $ -- 5,410 $ 2,510
The Company provides short-term loans to certain officers to pay the taxes on
the restricted stock that vests each year. As of October 30, 1999 and October
31, 1998, the outstanding value of these loans approximated $2,207,000 and
$843,000, respectively. The loans as of October 30, 1999 were paid in full in
November 1999.
5. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
(In thousands)
October 30, January 30,
1999 1999
---- ----
Accounts receivable - construction allowances $ 4,438 $4,008
Related party accounts and note receivable 3,992 2,829
Note receivable 2,322 --
Accounts receivable - other 2,268 1,723
------- ------
Total $13,020 $8,560
======= ======
6. INCOME TAXES
For the three and nine months ended October 30, 1999 and October 31, 1998, the
effective tax rate used for the provision of income tax approximated 39%.
7. LEGAL PROCEEDINGS
The Company is a party to ordinary routine litigation incidental to its
business. Management does not expect the results of the litigation to be
material to the financial statements individually or in the aggregate.
8
9
REVIEW BY INDEPENDENT ACCOUNTANTS
Ernst & Young LLP, our independent accountants, have performed a limited review
of the Consolidated Financial Statements for the three and nine month periods
ended October 30, 1999 and October 31, 1998, as indicated in their report on the
limited review included below. Since they did not perform an audit, they express
no opinion on the Consolidated Financial Statements referred to above.
Management has given effect to any significant adjustments and disclosures
proposed in the course of the limited review.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
American Eagle Outfitters, Inc.
We have reviewed the accompanying consolidated balance sheet of American Eagle
Outfitters, Inc. as of October 30, 1999, and the related consolidated statements
of operations for the three and nine month periods ended October 30, 1999 and
October 31, 1998 and the consolidated statements of cash flows for the nine
month periods ended October 30, 1999 and October 31, 1998. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of American Eagle Outfitters, Inc. as
of January 30, 1999, and the related consolidated statements of operations and
cash flows for the year then ended (not presented herein) and in our report
dated February 26, 1999 (except for Note 12, as to which the date is April 7,
1999) we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of January 30, 1999, is fairly stated, in all
material respects, in relation to the consolidated financial statements from
which it has been derived.
Pittsburgh, Pennsylvania
November 15, 1999
9
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
This table shows the percentage relationship to net sales of the listed items
included in the Company's Consolidated Statements of Operations.
Three Months Ended Nine Months Ended
------------------ -----------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain buying, occupancy
and warehousing expenses 57.0 59.5 58.4 60.8
----- ----- ----- -----
Gross profit 43.0 40.5 41.6 39.2
Selling, general and administrative expenses 24.1 24.3 24.4 25.1
Depreciation and amortization 1.4 1.4 1.6 1.7
----- ----- ----- -----
Operating income 17.5 14.8 15.6 12.4
Interest income, net 0.5 0.4 0.5 0.4
----- ----- ----- -----
Income before income taxes 18.0 15.2 16.1 12.8
Provision for income taxes 7.1 5.9 6.3 5.0
----- ----- ----- -----
Net income 10.9% 9.3% 9.8% 7.8%
===== ===== ===== =====
COMPARISON OF THREE MONTHS ENDED OCTOBER 30, 1999 TO THE THREE MONTHS ENDED
OCTOBER 31, 1998
Net sales increased 49.4% to $222.7 million from $149.1 million. The increase
includes:
- -$38.1 million from comparable store sales, representing a 26.4% increase over
the prior year, and
- -$35.5 million from new and non-comparable store sales, and non-store sales.
The increase resulted from an increase of 43.0% in units sold as well as a 4.3%
increase in prices. We operated 457 stores at the end of the current period,
compared to 372 stores at the end of the prior period.
Gross profit increased to $95.8 million from $60.4 million. Gross profit as a
percent of net sales increased to 43.0% from 40.5% . The increase in gross
profit as a percent of net sales, was attributable primarily to a 2.4% increase
in merchandise margins, which resulted primarily from improved mark-ons and
decreased markdowns as a percent of sales.
Selling, general and administrative expenses increased to $53.7 million from
$36.2 million. As a percent of net sales, these expenses decreased to 24.1% from
24.3%. The $17.5 million increase includes:
- -$5.6 million in store operating expenses to support new store growth,
10
11
- -$3.7 million in increased compensation costs,
- -$1.7 million in services purchased costs to support non-store business, and
additional outside service costs to support the growing business,
- -$1.4 million to support increased information technology capabilities in our
stores,
- -$1.1 million for increased promotional advertising, direct mail, and non-store
advertising costs, and
- -$4.0 million for other selling, general, and administrative expenses.
Depreciation and amortization expense increased to $3.2 million from $2.1
million. These expenses were 1.4 % of net sales for each period.
Interest income increased to $1.2 million from $0.6 million because of higher
cash reserves available for investment. No borrowings were required under the
terms of our line of credit during the current or prior periods.
Income before income taxes increased to $40.1 million from $22.7 million. As a
percent of net sales, income before income taxes increased to 18.0% from 15.2% .
The increase in income before income taxes as a percent of sales was
attributable to the factors noted above.
COMPARISON OF NINE MONTHS ENDED OCTOBER 30, 1999 TO THE NINE MONTHS ENDED
OCTOBER 31, 1998
Net sales increased 46.0% to $546.7 million from $374.5 million. The increase
includes:
- -$89.7 million from comparable store sales, representing a 24.5% increase over
the prior year, and
- -$82.5 million from new and non-comparable store sales, and non-store sales.
The increase resulted from an increase of 47.4% in units sold, offset by a 1.7%
decrease in prices. We operated 457 stores at the end of the current period,
compared to 372 stores at the end of the prior period.
Gross profit increased to $227.5 million from $146.7 million. Gross profit as a
percent of net sales increased to 41.6% from 39.2% . The increase in gross
profit as a percent of net sales, was attributable to a 1.4% increase in
merchandise margins as well as a 1.0% improvement in buying, occupancy, and
warehousing costs. The increase in merchandise margins resulted primarily from
improved mark-ons, offset by increased markdowns as a percent of sales. This
improvement in buying, occupancy, and warehousing costs reflect improved
leveraging achieved through comparable store sales growth.
Selling, general and administrative expenses increased to $133.5 million from
$94.2 million. As a percent of net sales, these expenses decreased to 24.4% from
25.1%. The $39.3 million increase includes:
- -$11.0 million in store operating expenses to support new store growth,
- -$10.2 million in increased compensation costs,
- -$5.5 million in services purchased costs to support non-store business, and
additional outside service costs to support the growing business,
- -$4.6 million for increased promotional advertising, direct mail, and non-store
advertising costs,
- -$1.5 million to support increased information technology capabilities in our
stores, and
- -$6.5 million for other selling, general, and administrative expenses.
Depreciation and amortization expense increased to $8.4 million from $6.2
million. As a percent of net sales, these expenses decreased to 1.6% from 1.7%.
Interest income increased to $2.7 million from $1.7 million because of higher
cash reserves available for investment. No borrowings were required under the
terms of our line of credit during the current or prior periods.
Income before income taxes increased to $88.2 million from $48.0 million. As a
percent of net sales, income before income taxes increased to 16.1% from 12.8% .
The increase in income before income taxes as a percent of sales was
attributable to the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash in the current period was from net income. Our
primary uses of cash included $56.7 million to purchase short-term investments,
$34.8 million in capital expenditures, and $32.2 million to support inventory
increases for anticipated sales and new store growth. Working capital at October
30, 1999 was $137.1 million compared to $67.5 million at October 31, 1998. The
increase in working
11
12
capital resulted primarily from the increase in cash provided by operating
activities.
Capital expenditures, net of construction allowances, totaled $34.8 million for
the nine months ended October 30, 1999. These expenditures included:
- -new stores totaling $18.1 million including future new store openings,
- -remodeling of store locations totaling $7.6 million including future remodels,
- -improvements to our distribution center of $4.2 million,
- -costs related to the purchase and upgrade of computer equipment and software of
$1.2 million,
- -improvements to the home office totaling $1.0 million, and -other capital
expenditures of $2.7 million.
At October 30, 1999, the Company had an unsecured demand lending arrangement
with a bank to provide a $100 million line of credit at either the lender's
prime lending rate (8.25% at October 30, 1999) or a negotiated rate such as
LIBOR. The facility has a limit of $40.0 million that can be used for direct
borrowing. No borrowings were required against the line for the current or prior
period. At October 30, 1999, letters of credit in the amount of $85.2 million
were outstanding leaving a remaining available balance on the line of $14.8
million.
We are currently planning to open approximately nine stores during the remainder
of the fiscal year. This forward-looking statement will be influenced by factors
including our financial position, consumer spending, and the number of
acceptable mall store leases that may become available. We believe that our
existing cash and investment balances, our cash flow from operations, and our
bank line of credit will be sufficient to meet our anticipated cash requirements
through Fiscal 1999.
IMPACT OF INFLATION
We do not believe that the relatively modest levels of inflation occurring in
the United States in recent years have significantly effected our net sales or
our profitability. Substantial increases in cost, however, could have a
significant impact on us and the industry in the future.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000.
State of Readiness: As of June 30, 1999, the Company's systems were Year 2000
ready. Our plan to resolve the internal Year 2000 issue involved two major
phases: detection and correction. The detection phase included planning,
inventory, triage, and detailed assessment. We took an inventory of all our
information technology and non-information technology systems to determine which
of our systems were not Year 2000 compliant. We also implemented procedures to
review the Year 2000 readiness in all recently acquired equipment. Next, the
Company prioritized actions related to the Year 2000 problems based upon their
potential impact on the Company. This detailed assessment of the problems and
their connections were completed in October 1998.
The correction phase included repair and resolution and testing and
implementation. We had four mission critical systems: distribution center
systems, point of sale systems, merchandising software, and financial software.
All systems are now Year 2000 ready.
With respect to suppliers and business partners, we have sent letters to
approximately 1,800 parties in an attempt to determine the possible impact of
failure of third parties to be Year 2000 compliant. Approximately 75% of the
parties contacted have returned our questionnaire. We have had discussions with
our major suppliers and continue to follow up with third parties to ensure that
they remain on schedule with their Year 2000 compliance. We are in the process
of visiting our major suppliers to review their Year 2000 readiness. We have
determined that approximately 10% of our vendors will not be Year 2000
compliant. However, none of these third parties are critical to our continuing
operations. We believe that all of our major suppliers and business partners
will be Year 2000 compliant.
Costs to Address Our Year 2000 Issues: The total cost of the Year 2000 project
was $2.1 million of which $0.6 million relates to hardware and software which
was capitalized. The remaining costs were expensed as incurred and include
salaries, incentive compensation and third party consulting services. These
costs were funded through cash flows from operations.
Risks of Our Year 2000 Issues: We are dependent on our suppliers and business
partners. If efforts on our part, our customers' part, our suppliers' and
business partners' part, or the part of public utilities or the government fail
to adequately address the relevant Year 2000 issues, the most likely worst case
scenario would be possible delays in the delivery of merchandise to our stores.
We do not
12
13
currently believe that any such delay will have a materially adverse effect on
us.
Our Contingency Plans: While we anticipate that all of our major suppliers and
business partners will be Year 2000 compliant, we have developed comprehensive
contingency plans which will allow the continuation of business operations in
the event that we or any of our significant suppliers or business partners do
not properly address Year 2000 issues. Testing of these contingency plans will
continue through the end of the year. We will obtain early delivery of some
merchandise from suppliers in an attempt to mitigate any Year 2000 issues that
may arise. We are also looking for alternative vendors to supply products and
services in the event that some of our current non-mission critical vendors are
unable to perform because of Year 2000 problems. Further, we are searching for
ways that we can support our current vendors who may have Year 2000 problems. We
cannot assure you that our efforts will prevent all consequences and there may
be undetermined future costs due to business disruption that may be caused by
suppliers, transportation disruptions, or unforeseen circumstances.
SAFE HARBOR STATEMENT, SEASONALITY, AND BUSINESS RISKS
This report contains various `forward-looking statements' within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent our expectations or
beliefs concerning future events, including the following:
- -the planned opening of approximately nine stores during the remainder of Fiscal
1999,
- -the sufficiency of our cash and investment balances, cash flows, and line of
credit facilities to meet Fiscal 1999 requirements, and
- -the completion of modifications to computer systems to enable the processing of
transactions in the year 2000 and beyond.
We caution that these statements are further qualified by factors that could
cause actual results to differ materially from those in the forward-looking
statements, including without limitation, the following:
- -decline in demand for our merchandise,
- -the ability to obtain suitable sites for new stores at acceptable costs,
- -the hiring and training of qualified personnel,
- -the integration of new stores into existing operations,
- -the expansion of buying and inventory capabilities,
- -the availability of capital,
- -our ability to anticipate and respond to changing consumer preferences and
fashion trends in a timely manner,
- -any disaster or casualty resulting in the interruption of service for our
distribution center,
- -the effect of economic conditions, and
- -the effect of competitive pressures from other retailers.
Results actually achieved may differ materially from expected results in these
statements.
Historically, our operations have been seasonal, with a disproportionate amount
of net sales and a majority of net income occurring in the fourth fiscal
quarter, reflecting increased demand during the year-end holiday selling season
and, to a lesser extent, the third quarter, reflecting increased demand during
the back-to-school selling season. During Fiscal 1998, these periods accounted
for approximately 62% of our sales. As a result of this seasonality, any factors
negatively affecting us during the third and fourth fiscal quarters of any year,
including adverse weather or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results of operations for
the entire year. Our quarterly results of operations also may fluctuate based
upon such factors as the timing of certain holiday seasons, the number and
timing of new store openings, the amount of net sales contributed by new and
existing stores, the timing and level of markdowns, store closings,
refurbishments and relocations, competitive factors, weather and general
economic conditions.
13
14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 Amended Office/Distribution Center Lease dated September
10, 1999 between the Registrant and Linmar Realty Company
II.
Exhibit 10.4 Employment Agreement between the Registrant and Roger S.
Markfield dated September 9, 1999.
Exhibit 15 Acknowledgement of Ernst & Young LLP
Exhibit 27 Financial Data Schedule
(b) None.
14
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.
Dated November 23, 1999
American Eagle Outfitters, Inc.
(Registrant)
/s/ Laura A. Weil
--------------------------------
Laura A. Weil
Executive Vice President and Chief Financial Officer
/s/ Dale E. Clifton
--------------------------------
Dale E. Clifton
Vice President, Controller and Chief Accounting Officer
15