-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AMIdRNfNwscJo0Lfm8wn18flwVErY0J1p09BwQH9k17uc2ToX/yt4zU5XMgzlo/r L9F8p8uhsaRijbJSkbflBw== 0000950123-04-004611.txt : 20040414 0000950123-04-004611.hdr.sgml : 20040414 20040414165354 ACCESSION NUMBER: 0000950123-04-004611 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20040131 FILED AS OF DATE: 20040414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEROPOSTALE INC CENTRAL INDEX KEY: 0001168213 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-APPAREL & ACCESSORY STORES [5600] IRS NUMBER: 311443880 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31314 FILM NUMBER: 04733600 BUSINESS ADDRESS: STREET 1: 1371 BROADWAY STREET 2: 8TH FL. CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2126464885 MAIL ADDRESS: STREET 1: 1371 BROADWAY STREET 2: 8TH FL. CITY: NEW YORK STATE: NY ZIP: 10018 10-K 1 y94783e10vk.txt AEROPOSTALE, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-0001 --------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-31314 --------------------- AEROPOSTALE, INC. (Exact name of registrant as specified in its charter) DELAWARE NO. 31-1443880 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 112 WEST 34TH STREET, 22ND FLOOR, 10120 NEW YORK, NY (Zip Code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (646) 485-5398 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, without par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of August 2, 2003 was $782.4 million. 37,189,022 shares of Common Stock were outstanding at April 1, 2004. DOCUMENTS INCORPORATED BY REFERENCE Part III -- Aeropostale, Inc. Proxy Statement for 2004 Annual Meeting of Stockholders, in part, as indicated. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AEROPOSTALE, INC. TABLE OF CONTENTS
PAGE NUMBER ------ PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 7 Item 3. Legal Proceedings........................................... 8 Item 4. Submission of Matters to a Vote of Security Holders......... 8 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................... 9 Item 6. Selected Consolidated Financial Data........................ 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 26 Item 8. Financial Statements and Supplementary Data................. 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 50 Item 9A. Controls and Procedures..................................... 50 PART III Item 10. Directors and Executive Officers of the Registrant.......... 50 Item 11. Executive Compensation...................................... 50 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 50 Item 13. Certain Relationships and Related Transactions.............. 50 Item 14. Principal Accountant Fees and Services...................... 50 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 51 Signatures.................................................................. 55 Certification of Chief Executive Officer.................................... Certification of Chief Financial Officer....................................
1 PART I ITEM 1. BUSINESS OVERVIEW Aeropostale, Inc. (together with its wholly-owned subsidiary, Aeropostale West, Inc., collectively the "Company" or "Aeropostale") is a mall-based specialty retailer of casual apparel and accessories that targets both young women and young men aged 11 to 20. We provide our customers with a focused selection of high-quality, active-oriented, fashion basic merchandise at compelling values. We maintain complete control over our proprietary brand by designing and sourcing all of our merchandise. Our products can be purchased only at our stores, or organized sales events at college campuses. We strive to create a fun and high energy shopping experience through the use of creative visual merchandising, colorful in-store signage, bright lighting, popular music and an enthusiastic, well-trained sales force. Our average store size of approximately 3,500 square feet is generally smaller than that of our mall-based competitors and we believe that this enables us to achieve higher sales productivity and project a sense of activity and excitement. As of January 31, 2004, we operated 459 stores in 41 states. The Aeropostale brand was established by R.H. Macy & Co., Inc. as a department store private label initiative in the early 1980's targeting men in their twenties. As a result of the label's initial success, Macy's opened the first mall-based Aeropostale specialty store in 1987. Over the next decade, Macy's and then its current parent company, Federated Department Stores, Inc., continued new store expansion and opened over 100 stores. In August 1998, Federated sold its specialty store division to our management team and Bear Stearns Merchant Banking. On February 3, 2002, Aeropostale 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 organization. We elected to change our 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 2, 2002. For tax purposes, we have retained our July year-end. As used herein, "Fiscal 2003" and "Fiscal 2002" refers to the fiscal years ended January 31, 2004 and February 1, 2003. "Fiscal 2001" refers to the fiscal year ended August 4, 2001 and "Transition 2001" refers to the six month period from August 5, 2001 to February 2, 2002. Similarly, "Transition 2000" refers to the six month period from July 30, 2000 to February 3, 2001. All references to amounts related to the six months ended February 3, 2001 and the fifty-two weeks ended February 2, 2002 are unaudited. Transition 2001 has twenty-six weeks while Transition 2000 has twenty-seven weeks. GROWTH STRATEGY Open new stores. We believe that our merchandise and stores have broad national appeal that provides substantial new store expansion opportunities. In the last three years, we expanded our store base, opening 74 in Fiscal 2001, 93 new stores in Fiscal 2002 and 95 new stores in Fiscal 2003. We plan to open approximately 95 new stores in fiscal 2004, and continue to open new stores at a comparable pace in future years. We plan to open stores both in markets in which we currently operate and in new markets. The four states that have the largest teenage populations in the United States are California, Florida, New York and Texas according to data derived from information published by the U.S. Census Bureau. New York is the only one of these four states in which we currently have a major presence. Enhance and expand our brand. We intend to capitalize on the success of our brand and continue to enhance our brand recognition through external marketing and in store marketing efforts. We believe that as our brand gains increased familiarity and national recognition, our stores will continue to be preferred shopping destinations. Continue high levels of store productivity. We seek to continue to produce comparable store sales growth and average sales per square foot by maintaining consistent store-level execution. We intend to continue employing our promotional pricing strategies to maintain high levels of customer traffic. We will also 2 continue testing products so that we can identify developing trends and evolve with the changing tastes of our customers. PRICING We believe that a key component of our success is our ability to understand what our customers want and can afford. Our merchandise, which we believe is of comparable quality to that of our primary competitors, is generally priced lower than their merchandise, with most of our products falling within a price range of approximately $10.00 to $39.50 per item and an average sales price of approximately $13.00 during Fiscal 2003. We use a demand-driven promotional pricing strategy to emphasize the value we offer relative to our competitors and to encourage our customers to keep returning to our stores. We offer promotions throughout the year and approximately 75% of the merchandise selection in our stores is on promotion at any given time. Each promotion typically lasts for two to four weeks, depending on the demand for the product. DESIGN AND MERCHANDISING Our coordinated design and merchandising teams focus on designing merchandise that meets the demands of our core customers' lifestyles. We maintain a separate dedicated design and merchandising group for each of the young women's, young men's and accessories product lines. Each group is overseen by a merchandising manager to ensure consistency with the desires of our customers. Design. We offer a focused collection of fashion basic apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, outerwear and accessories. Our "design-driven, merchant-modified" philosophy, in which our designers' vision is refined by our merchants' understanding of the current market for our products, ensures that our merchandise styles both reflect the latest trends and are not too fashion forward for our customers. Much of our merchandise features our "Aeropostale" or "Aero" logo. We believe that our logo apparel appeals to our young customers and reinforces our brand image. Our design process is highly disciplined and carefully supervised, enabling us to develop exclusive merchandise and offer a consistent assortment within a season. About nine months prior to a selling season, the product development process begins with our designers, merchandisers and senior management working together to review the prior season's results and new trends and to discuss the classifications and styles that we should develop for the upcoming season. We continuously test our products in our stores. Our design group supplements this analysis with market research from focus groups, travel, retail shopping, trade shows and input from a design consultant. Our merchandising planning process determines the quantities of units needed for each product category. We then consider sourcing options and establish price targets. Once approved, we place production orders with the appropriate vendors. This occurs approximately four months after the initial review meeting. We typically receive initial orders within three to five months after order placement. We then allocate merchandise to individual stores based upon recent selling trends and current inventory levels. By monitoring sales of each style and color and employing our flexible sourcing capabilities, we are able to adjust our merchandise on order for later in the season and future seasons. Merchandising. Our merchandise mix has evolved with the demands of our target customers. Over the past three years, we have increased the percentage of our merchandise for female customers as our young women's line has grown increasingly popular and we have added more accessories to complement our apparel offering. In addition, we have developed a narrower and deeper merchandise assortment in response to our customers' preferences. 3 The following chart provides a historical breakdown of our merchandise mix as a percentage of sales:
FISCAL 52 WEEKS ENDED ----------- FEBRUARY 2, 2002 2002 2003 ---------------- ---- ---- Young Women's............................................. 55% 58% 60% Young Men's............................................... 33 30 27 Accessories............................................... 12 12 13
SOURCING We employ a sourcing strategy that maximizes our speed to market and allows us to respond quickly to our customers' preferences. We believe that we have developed strong relationships with our vendors, some of whom rely upon us for a significant portion of their business. The majority of our vendors can refill orders within 45 to 90 days, enabling quick inventory replenishment. We ensure the quality of our vendors' products by inspecting pre-production samples, making periodic site visits to our vendors' foreign production factories and by selectively inspecting inbound shipments at our distribution center. During Fiscal 2003, Federated Merchandising Group, or FMG, a wholly owned subsidiary of our former parent company Federated Department Stores, Inc., acted as our agent in sourcing 21% of our merchandise. We directly source all other production not covered by our arrangement with FMG. We sourced 34% of our merchandise from our top three vendors and 71% of our merchandise was directly sourced from our top ten vendors during Fiscal 2003. Three vendors supplied 12%, 11% and 11%, respectively, of our total merchandise during that period. Most of our vendors maintain sourcing offices in the United States with the majority of their production factories located in Europe, Asia and Central America. All payments are made in U.S. dollars to minimize currency risk. STORE GROWTH Existing stores. As of January 31, 2004, we operated 459 stores in 41 states. Our stores are typically located in regional shopping malls in areas with high concentrations of our target customers. NUMBER OF AEROPOSTALE STORES AS OF JANUARY 31, 2004
NUMBER OF STATE STORES - ----- ------ Alabama....................................... 12 Arkansas...................................... 2 Arizona....................................... 6 California.................................... 9 Colorado...................................... 4 Connecticut................................... 9 Delaware...................................... 4 Florida....................................... 15 Georgia....................................... 12 Illinois...................................... 21 Indiana....................................... 15 Iowa.......................................... 9 Kansas........................................ 5 Kentucky...................................... 8 Louisiana..................................... 4 Massachusetts................................. 18 Maryland...................................... 9 Maine......................................... 2 Michigan...................................... 23 Minnesota..................................... 11 Missouri...................................... 10 North Carolina................................ 16 North Dakota.................................. 4 Nebraska...................................... 4 New Hampshire................................. 6 New Jersey.................................... 22 New York...................................... 38 Ohio.......................................... 32 Oklahoma...................................... 3 Oregon........................................ 2 Pennsylvania.................................. 40 Rhode Island.................................. 1 South Carolina................................ 8 South Dakota.................................. 2 Tennessee..................................... 15 Texas......................................... 17 Virginia...................................... 16 Vermont....................................... 2 Washington.................................... 6 Wisconsin..................................... 12 West Virginia................................. 5 ------ Total......................................... 459 ======
4 The following table highlights the number of stores opened and closed since the beginning of Fiscal 2001:
TOTAL NUMBER OF STORES STORES STORES AT END OPENED CLOSED OF PERIOD ------ ------ ------------- Fiscal 2001................................................. 74 0 252 Transition 2001............................................. 34 8(1) 278 Fiscal 2002................................................. 93 4 367 Fiscal 2003................................................. 95 3 459
- --------------- (1) Includes the closing of seven aero kids stores. Store design and environment. We design our stores to create an energetic shopping environment, featuring powerful in-store promotional signage, creative visuals, bright lighting and popular music. The enthusiasm of our associates is integral to our store environment. Our stores feature display windows which provide high visibility for mall traffic. The front of the store features the newest and most desirable merchandise to draw shoppers into the store. We keep our merchandise assortments fresh and exciting by updating our floor sets approximately 11 times per year. Visual merchandising directives are initiated at the corporate level to maintain consistency throughout all of our stores. We generally locate our stores in central mall locations near popular teen gathering spots, including food courts, music stores and other teen-oriented retailers. In addition, we generally implement broad-scale renovations at every store lease expiry. Our stores generally range in size from 2,500 to 6,000 square feet, with an average square footage of approximately 3,500. We believe that by keeping our store size generally smaller than that of many of our competitors, we are able to achieve a high level of productivity and reinforce the sense of activity and energy that we want our stores to project. Store management and training. Our stores are organized into regions and districts. Each of our 5 regions is managed by a regional manager and encompasses approximately 10 districts; each district is managed by a district manager and encompasses approximately 7 to 10 individual stores. We usually staff each store with one store manager, two assistant managers and 10 to 15 part-time sales associates, the number of which generally increases during our peak selling seasons. Store managers are primarily responsible for hiring and training store level associates, while our merchandise assortments, store layout, inventory management and in-store visuals are directed by our corporate headquarters. We seek to instill enthusiasm and dedication in all our employees. To promote this strategy, we compensate our district and store managers with a base salary plus incentive bonus payments based on store sales performance and loss prevention. We designed our "Career Development Program" to provide managers with training to improve both operational expertise and supervisory skills. Training programs are completed in modules which allow managers to customize the program to meet their individual needs. Our sales associates are a critical element to achieving our marketing and customer satisfaction goals. We strive to hire employees who possess high energy levels and excitement for our brand. All sales associates receive customer service and product information training which enables them to assist customers in a friendly, helpful manner. Sales associates receive hourly wages and the potential for additional compensation through various contests and motivational programs. We believe that our continued success is dependent on our ability to attract, retain and motivate quality employees. Expansion opportunities and site selection. Over the past three years, we have opened new stores to fully penetrate existing markets and enter into new markets. We plan to increase our store base in fiscal 2004 by opening approximately 95 stores and to continue a similar pace of new store openings in future years. We have identified mall locations in both existing and new markets for potential new store opportunities. In selecting a specific site, we target high traffic, prime real estate locations in malls with suitable demographics and favorable lease economics. As a result, we generally locate our stores in malls in which 5 comparable teen-oriented retailers have performed well. Primary site evaluation criteria includes average sales per square foot, co-tenancies, traffic patterns and occupancy costs. Historically, we have been able to locate and open stores profitably in a wide variety of mall classifications by negotiating lease terms that we believe are favorable, based on our expectations for store activity and a store size of approximately 3,500 square feet. After our real estate committee approves a site, approximately 23 weeks are required to finalize the lease, design the layout, build out the property, hire and train associates and equip and stock the store before opening. We have successfully and consistently implemented our store format across a wide variety of mall classifications and geographic locations. Our average net investment to open a new store has been $235,000, which includes capital expenditures adjusted for landlord contributions and initial inventory at cost net of payables. Our stores which were opened during the fifty-two weeks ended February 2, 2002 and Fiscal 2002 have achieved average net sales of $1.4 million during their first twelve months of operations, sales per selling foot of $429, store-level operating cash flow of $322,000 and an average pretax cash return on investment of 137%. These amounts exclude aero kids stores and certain select outlet locations which are not considered profit centers and are utilized primarily to sell end of season merchandise. MARKETING AND ADVERTISING We employ numerous initiatives to maximize the impact of our marketing and advertising programs. We view the enthusiasm and commitment of our store-level employees as a key element to establishing the credibility of our brand with our target customers. To reinforce our image with our customers, we seek to locate our stores in mall locations near popular teen gathering spots and utilize our window and in-store displays with colorful and brand-focused presentations. We view the use of our logo on our merchandise as an effective means for increasing brand awareness among our target customers. Over the past few years, we have developed a marketing program that allows us to gain additional exposure for our brand on college campuses. We believe that our target customers value and aspire to an active, collegiate lifestyle. Accordingly, we sponsor a number of collegiate athletic conferences by providing them with co-branded apparel and donating various scholarships. In addition, we have entered into agreements with numerous colleges and universities that enable us to sell and market our products on campuses through organized sales events. We have historically relied on these methods as effective advertising tools and have utilized traditional media advertising on a very limited basis. DISTRIBUTION The timely and efficient replenishment of current styles is key to our overall business strategy. We utilize a third party operator for merchandise processing. This third party operates a 200,000 square foot distribution facility in Carlstadt, New Jersey, where our merchandise is processed by using an automated picking and packing carousel. During Fiscal 2002, we entered into a five-year lease for a 315,000 square foot facility in South River, New Jersey, to process merchandise and warehouse inventory needed to replenish and backstock all of our stores. The building also serves all of our general warehousing needs, such as storage of new store merchandise, floor set merchandise and packaging supplies, with additional capacity for processing as our growth requires. The staffing and management of this facility is outsourced to the same third party provider that operates the distribution facility. This third party employs personnel represented by a labor union. There have been no work stoppages or disruptions since the inception of our relationship with this third party in 1991. We believe the third party's relationship with its employees to be good. In February 2004, we ceased operations at the 200,000 square foot distribution facility in Carlstadt, New Jersey and relocated all of our merchandise processing activities to our South River location. We believe that, with additional capital expenditures as appropriate, the South River facility is capable of processing merchandise for up to 850 stores. 6 MANAGEMENT INFORMATION SYSTEMS Our management information systems and electronic data processing systems provide a full range of retail, financial and merchandising applications. We utilize a combination of customized and industry standard software systems to provide various functions related to: - point-of-sales; - inventory management; - design; - planning and distribution; and - financial reporting. We communicate with each store on a daily basis to gather all information on sales, merchandise transfers and sales trends, and to transmit details regarding price changes and pending deliveries. By updating our sales information daily from each store's point-of-sale terminal, we can evaluate such information to implement merchandising decisions, pricing changes and inventory allocation. TRADEMARKS We have registered the AEROPOSTALE(R) trademark and stylized design with the U.S. Patent and Trademark Office as a trademark for clothing and for a variety of accessories, including sunglasses, belts, socks and hats, and as a service mark for retail clothing stores. We have also filed intent to use applications with the U.S. Patent and Trademark Office to register the AERO(TM) stylized design marks for clothing. Additionally, we have applied for or have obtained a registration for the AEROPOSTALE mark in over 26 foreign countries where we obtain supplies, manufacture goods or have the potential of doing so in the future. EMPLOYEES As of January 31, 2004, we employed 1,852 full-time and 4,216 part-time employees. We employ 163 of our employees at our corporate offices, and 5,905 at our store locations. The number of part-time employees fluctuates depending on our seasonal needs. None of our employees are represented by a labor union and we consider the relationship with our employees to be good. SEASONALITY Our business is subject to substantial seasonal variations. Historically, we have realized a significant portion of our net sales and net income in the third quarter, reflecting increased demand during the back-to-school selling season, and the fourth quarter, reflecting the increased demand during the holiday selling season. Our results of operations may also fluctuate significantly as a result of other factors, including the timing of new store openings. Additionally, working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the third and fourth quarters. AVAILABLE INFORMATION We maintain an internet web-site, www.aeropostale.com, through which access is available to our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments of these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, after they are filed with or furnished to the Securities and Exchange Commission. ITEM 2. PROPERTIES We lease all of our store locations. Most of our leases have an initial term of ten years with percentage rent clauses and do not contain extension options. Generally, our leases allow for termination by us after a certain period of time if sales at that site do not exceed specified levels. 7 In connection with the expiration of the lease for office space at 1372 Broadway in New York, New York in January 2004, we entered into a lease for 38,805 square feet of office space at 112 West 34th Street in New York, New York. The facility is used as our corporate headquarters and for our design, sourcing and production teams. This lease expires in August 2014. We also lease 20,000 square feet of office space at 201 Willowbrook Boulevard in Wayne, New Jersey. This facility is used as administrative offices for finance, operations and information systems personnel. This lease expires in January 2013. During Fiscal 2002, we signed a lease for a 315,000 square foot facility in South River, New Jersey for a five-year term with two five-year renewal options. We will use the facility to warehouse inventory needed to replenish and backstock all of our stores as well as serve all of our general warehousing needs. ITEM 3. LEGAL PROCEEDINGS We are subject to various claims and legal actions that arise in the ordinary course of our business. We believe that such claims and legal actions, individually and in the aggregate, will not have a material adverse effect on our business or our financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our stock is traded on the New York Stock Exchange under the symbol "ARO". The following table sets forth the range of high and low sales prices of the common stock as reported on the New York Stock Exchange for each fiscal quarter since May 16, 2002, the effective date of our initial public offering. As of March 29, 2004, there were 37 stockholders of record. However, when including others holding shares in broker accounts under street name, we estimate the shareholder base at approximately 3,500.
MARKET PRICE --------------- HIGH LOW ------ ------ FISCAL 2003 January 31, 2004............................................ $32.35 $25.25 November 1, 2003............................................ 34.70 24.30 August 2, 2003.............................................. 27.49 16.50 May 3, 2003................................................. 18.65 9.66 FISCAL 2002 February 1, 2003............................................ 15.45 9.64 November 2, 2002............................................ 20.80 5.25 August 3, 2002 (from May 16, 2002).......................... 29.50 13.80
On November 18, 2003, our Board of Directors authorized a $35.0 million share repurchase program. We have never paid cash dividends and presently anticipate that all of our future earnings will be retained for the development of our business. We do not anticipate paying cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will be based on future earnings, financial condition, capital requirements, and other relevant factors. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our financial statements and related notes and other financial information appearing elsewhere in this document. In January 2002, we changed our fiscal year end from the Saturday closest to July 31st to the Saturday closest to January 31st of each year. The statement of income data for the fiscal years ended July 31, 1999, July 29, 2000, August 4, 2001, February 1, 2003, January 31, 2004 and for the six months ended February 2, 2002 and the balance sheet data as of July 29, 2000, August 4, 2001, February 2, 2002, February 1, 2003 and January 31, 2004 are derived from audited financial statements. The fifty-two weeks ended February 2, 2002 and six months ended February 3, 2001 are unaudited and are presented for comparative purposes. 9
FISCAL YEAR ENDED(1) SIX MONTHS ENDED(2) 52 WEEKS FISCAL YEAR ENDED(1) ------------------------------- ------------------------- ENDED ------------------------- JULY 31, JULY 29, AUGUST 4, FEBRUARY 3, FEBRUARY 2, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1999 2000 2001 2001 2002 2002 2003 2004 -------- -------- --------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA) STATEMENT OF INCOME DATA: Net sales................. $152,506 $213,445 $304,767 $184,369 $284,040 $404,438 $550,904 $734,868 Cost of sales, including certain buying, occupancy and warehousing expenses.... 110,489 151,973 218,618 124,611 180,054(3) 274,061(3) 388,301(3) 505,152 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit.............. 42,017 61,472 86,149 59,758 103,986 130,377 162,603 229,716 Selling, general and administrative expenses................ 32,406 45,680 65,918 34,469 55,169(3) 86,619(3) 110,506(3) 141,520 Store closing expenses(4)............. -- -- 815 -- -- 815 -- -- Amortization of negative goodwill................ (234) (234) (234) (116) -- (117) -- -- -------- -------- -------- -------- -------- -------- -------- -------- Income from operations.... 9,845 16,026 19,650 25,405 48,817 43,060 52,097 88,196 Interest expense (income), net..................... 86 911 1,671 1,082 292 877 (56) (760) -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes................... 9,759 15,115 17,979 24,323 48,525 42,183 52,153 88,956 Provision for income taxes................... 3,529 5,749 7,065 9,629 19,888 17,326 20,863 34,702 -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations.............. 6,230 9,366 10,914 14,694 28,637 24,857 31,290 54,254 (Loss) gain on discontinued operations(5)........... (268) 2,002 405 388 -- 17 -- -- -------- -------- -------- -------- -------- -------- -------- -------- Cumulative effect of accounting change(6).... -- -- -- -- 1,632 1,632 -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income................ 5,962 11,368 11,319 15,082 30,269 26,506 31,290 54,254 Preferred dividends....... 1,235 1,040 1,048 508 574 1,113 362 -- -------- -------- -------- -------- -------- -------- -------- -------- Net income available to common stockholders..... $ 4,727 $ 10,328 $ 10,271 $ 14,574 $ 29,695 $ 25,393 $ 30,928 $ 54,254 ======== ======== ======== ======== ======== ======== ======== ======== Basic net income (loss) per common share:(7) From continuing operations(8)......... $ 0.16 $ 0.27 $ 0.32 $ 0.46 $ 0.89 $ 0.75 $ 0.90 $ 1.49 From discontinued operations............ (0.01) 0.06 0.01 0.01 -- -- -- -- From cumulative accounting change..... -- -- -- -- 0.05 0.05 -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income per share.... $ 0.15 $ 0.33 $ 0.33 $ 0.47 $ 0.94 $ 0.80 $ 0.90 $ 1.49 ======== ======== ======== ======== ======== ======== ======== ======== Diluted net income (loss) per common share:(7) From continuing operations(8)......... $ 0.15 $ 0.24 $ 0.28 $ 0.40 $ 0.78 $ 0.66 $ 0.82 $ 1.40 From discontinued operations............ (0.01) 0.06 0.01 0.01 -- -- -- -- From cumulative accounting change..... -- -- -- -- 0.05 0.05 -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income per share.... $ 0.14 $ 0.30 $ 0.29 $ 0.41 $ 0.83 $ 0.71 $ 0.82 $ 1.40 ======== ======== ======== ======== ======== ======== ======== ======== Basic weighted average number of shares outstanding............. 31,048 31,069 31,339 31,183 31,633 31,567 34,387 36,505 Diluted weighted average number of shares outstanding............. 34,497 34,693 35,465 35,177 36,000 35,879 37,854 38,858
10
FISCAL YEAR ENDED(1) SIX MONTHS ENDED(2) 52 WEEKS FISCAL YEAR ENDED(1) ------------------------------- ------------------------- ENDED ------------------------- JULY 31, JULY 29, AUGUST 4, FEBRUARY 3, FEBRUARY 2, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1999 2000 2001 2001 2002 2002 2003 2004 -------- -------- --------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA) SELECTED OPERATING DATA: Number of stores open at end of period........... 129 178 252 224 278 278 367 459 Comparable store sales increase( 9)............ 5.5% 14.5% 8.7% 14.5% 23.0% 15.5% 6.6% 6.6% Average store sales (in thousands)(10).......... $ 1,258 $ 1,372 $ 1,360 $ 872 $ 1,028 $ 1,521 $ 1,651 $ 1,728 Average square footage per store(11)............... 3,687 3,548 3,437 3,460 3,463 3,463 3,541 3,511 Sales per square foot(12)................ $ 339 $ 380 $ 392 $ 250 $ 297 $ 456 $ 471 $ 491
AS OF ------------------------------------------------------------------------- JULY 31, JULY 29, AUGUST 4, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1999 2000 2001 2002 2003 2004 -------- -------- --------- ----------- ----------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital.................................. $22,028 $ 8,186 $ 10,810 $ 38,181 $ 86,791 $140,879 Total assets..................................... 58,899 93,539 121,128 146,927 223,032 307,048 6% Series A exchangeable redeemable preferred stock.......................................... 4,885 -- -- -- -- -- 12 1/2% Series B redeemable preferred stock...... 7,070 7,995 9,043 9,617 -- -- Total debt....................................... 565 26,987 35,267 -- -- -- Total stockholders' equity....................... 5,676 16,006 26,290 60,190 127,959 185,693
- --------------- (1) Our results of operations for Fiscal 2001 included 53 weeks compared to 52 weeks for all other fiscal years presented in this document. In January 2002, we changed our fiscal year end from the Saturday closest to July 31 to the Saturday closest to January 31 of each year. (2) Our results of operations for the six months ended February 3, 2001 included 27 weeks compared to 26 weeks for our six months ended February 2, 2002. (3) On December 21, 2001, we granted options to purchase 565,997 shares of our common stock with an exercise price which was less than the fair market value of our common stock at the time of such grant. The equity based compensation expense totaled $8.4 million, of which $0.8 million and $3.1 million were recorded in cost of sales and selling, general and administrative expenses, respectively, in the six months and the fifty-two weeks ended February 2, 2002. The unamortized balance of $4.5 million associated with the immediate vesting of options upon the consummation of the initial public offering, were recorded in Fiscal 2002 of which $1.0 million and $3.5 million were recorded in cost of sales and selling, general and administrative expenses, respectively. (4) Reflects charge incurred in connection with the closing of seven aero kids concept stores. (5) On February 25, 2000, we decided to discontinue our Chelsea Cambell specialty store business and we closed all Chelsea Cambell stores by the end of December 2000. The operating results of this segment for all years have been reclassified as discontinued operations. (6) On August 5, 2001, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles. With the adoption, the remaining balance of negative goodwill was recorded as cumulative effect of accounting change. (7) All per share information reflects a 376.328-for-1 split of all of our common stock which we effected on May 10, 2002. (8) Income from continuing operations per share has been computed after deducting preferred dividends. 11 (9) Our comparable store sales percentages are based on net sales and stores are considered comparable beginning on the first day of the fiscal month following the fourteenth full fiscal month of sales. (10) Our average store sales are based on total net sales divided by the weighted average of all stores open for the entire period. (11) Our average square footage per store is based on all open stores at the end of the period. (12) Our sales per square foot consists of total net sales, divided by the weighted average of gross square footage of all stores open for the entire period. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION INTRODUCTION Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories that targets both young women and young men aged 11 to 20. We provide customers with a selection of high-quality, active-oriented, fashion basic merchandise at compelling values in a high-energy store environment. We maintain complete control over our proprietary brand by designing and sourcing all of our own merchandise. Our products can be purchased only in our stores, which sell Aeropostale merchandise exclusively, or organized sales events at college campuses. As of January 31, 2004, we operated 459 stores in 41 states. 2003 OVERVIEW We achieved total net sales of $734.9 million for Fiscal 2003, an increase of $184.0 million or 33.4% from the prior year. This growth was attributable to an increase of 24.0% in square footage growth of our store base, coupled with a 6.6% comparable store sales increase. We were able to achieve sales productivity of $491 per square foot, compared to $471 in the prior year. Our sales results reflect continued growth in our womens and accessories categories, which we believe are attributable to offering trend-right merchandise at compelling values to our customers. During the year, we opened 95 new stores and closed three stores. We ended the year with a store count of 459, an increase of 25.1% compared to the prior year. We added six new states to our store base -- Colorado, Oklahoma, Oregon, North Dakota, South Dakota and Washington State. Our gross profit margin as a percent of sales improved from 29.5% last year to 31.3%, primarily as a result of less promotional activity attributable to an improved merchandise assortment and more effective inventory management, coupled with leverage of occupancy and warehouse costs. Our selling, general and administrative expenses declined as a percent of sales due to the equity based compensation expense in Fiscal 2002 as well as lower external marketing costs in Fiscal 2003. As a result, our operating margins improved from 9.5% to 12.0%. Our net income for the year increased 73.4% to $54.3 million and our earnings per diluted share increased 70.7% to $1.40. Our cash balance at year end increased by $50.9 million to $138.4 million, and we have no debt. During Fiscal 2003 we were able to fund all of our growth and cash requirements from our cash flow from operations. In November, 2003, we announced a $35 million share repurchase program and had acquired $17.7 million in shares under this program by fiscal year end. On March 9, 2004, we announced that our Board of Directors had approved an increase in our common stock repurchase program to acquire an additional $35.0 million of our outstanding common stock. On this date, we also announced a three-for-two stock split on all shares of our common stock that will be effected in the form of a stock dividend. The stock split will entitle all shareholders of record at the close of business on April 12, 2004 to receive one additional share of common stock for every two shares of common stock held on that date. The additional shares will be distributed to shareholders on or about April 26, 2004. Cash will be paid in lieu of issuing fractional shares based on the closing price of our common stock on April 12, 2004 (as adjusted for stock split). On April 7, 2004, we announced that Thomas Johnson, Senior Vice President, Director of Stores and Marketing, has been promoted to Executive Vice President and Chief Operating Officer. Mr. Johnson will assume most of the responsibilities of John Mills, who will be retiring on July 31, 2004. In addition, Michael Cunningham, Chief Financial Officer, has been promoted to Executive Vice President, and will assume the remainder of the responsibilities associated with Mr. Mills' departure. 13 We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, including the following:
52 WEEKS SIX MONTHS ENDED(1) ENDED FISCAL YEAR ENDED ------------------------- ----------- ------------------------- FEBRUARY 3, FEBRUARY 2, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 2001 2002 2002 2003 2004 ----------- ----------- ----------- ----------- ----------- Sales................................. $184,369 $284,040 $404,438 $550,904 $734,868 Total store count..................... 224 278 278 367 459 Comparable store sales count.......... 139 203 203 272 359 Net sales growth...................... 46.9% 54.1% 48.5% 36.2% 33.4% Comparable store sales growth......... 14.5% 23.0% 15.5% 6.6% 6.6% Net sales per average square foot..... $ 250 $ 297 $ 456 $ 471 $ 491 Gross profit as a % of sales.......... 32.4% 36.6% 32.2% 29.5% 31.3% Selling, general and administrative as a % of sales........................ 18.7% 19.4% 21.4% 20.1% 19.3% Operating profit as a % of sales...... 13.8% 17.2% 10.6% 9.5% 12.0% Diluted earnings per share............ $ 0.41 $ 0.83 $ 0.71 $ 0.82 $ 1.40 Square footage growth................. 41.8% 24.2% 24.2% 35.0% 24.0% Merchandise Mix Women's as a % of sales............. 47 56 55 58 60 Men's as a % of sales............... 42 33 33 30 27 Accessories as a % of sales......... 11 11 12 12 13
14 RESULTS OF OPERATIONS The following table sets forth our results of operations expressed as a percentage of total net sales for the period indicated:
52 WEEKS SIX MONTHS ENDED(1) ENDED FISCAL YEAR ENDED ------------------------- ----------- ------------------------- FEBRUARY 3, FEBRUARY 2, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 2001 2002 2002 2003 2004 ----------- ----------- ----------- ----------- ----------- Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit.......................... 32.4 36.6 32.2 29.5 31.3 Selling, general and administrative expenses............................ 18.7 19.4 21.4 20.1 19.3 Store closing expenses................ -- -- 0.2 -- -- Amortization of negative goodwill..... (0.1) -- -- -- -- ----- ----- ----- ----- ----- Income from operations................ 13.8 17.2 10.6 9.5 12.0 Interest expense (income), net........ 0.6 0.1 0.2 -- (0.1) ----- ----- ----- ----- ----- Income before income taxes............ 13.2 17.1 10.4 9.5 12.1 Provision for income taxes............ 5.2 7.0 4.3 3.8 4.7 ----- ----- ----- ----- ----- Income from continuing operations..... 8.0 10.1 6.1 5.7 7.4 Gain on discontinued operations....... 0.2 -- -- -- -- Cumulative effect of accounting change.............................. -- 0.6 0.4 -- -- ----- ----- ----- ----- ----- Net income............................ 8.2% 10.7% 6.6% 5.7% 7.4% ===== ===== ===== ===== =====
- --------------- (1) Our results of operations for Transition 2000 included 27 weeks compared to 26 weeks for Transition 2001. FISCAL 2003 COMPARED TO FISCAL 2002. Net sales. Our net sales for Fiscal 2003 increased to $734.9 million from $550.9 million in Fiscal 2002, an increase of $184.0 million. Of this increase, comparable store sales contributed $33.2 million and non-comparable store sales contributed $150.8 million. Comparable store sales increased by 6.6% in both Fiscal 2003 and Fiscal 2002. The comparable stores sales increase was driven by an increase in units per transaction of 7.5% and an increase in the number of sales transactions of 2.9%. The average dollar unit decreased 3.6% primarily as a result of higher comparable store sales in the accessories category, which carry lower price points as compared to apparel merchandise. Comparable sales in the young women's and accessories categories increased, while comparable sales in the young men's category decreased. The increase in non-comparable store sales was primarily due to 92 more stores open at the end of Fiscal 2003, as compared to the prior period. Gross profit. Our gross profit dollars increased $67.1 million for Fiscal 2003 to $229.7 million from $162.6 million in Fiscal 2002. As a percentage of net sales, gross profit increased to 31.3% from 29.5% during these periods. The increase of 1.0% is attributable to an improvement in our merchandise margins, primarily in the young men's and accessories categories, coupled with a shift in mix to higher sales in the women's and accessories categories which carry higher merchandise margins as compared to the men's category. The remaining increase is due to 0.5% leverage of occupancy costs and 0.3% in efficiencies realized in our warehouse and distribution process. Additionally, included in cost of sales for Fiscal 2002 is a charge of $1.0 million or 0.2% related to equity based compensation. Selling, general and administrative expenses. Our selling, general and administrative expenses increased $31.0 million for Fiscal 2003 to $141.5 million from $110.5 million in Fiscal 2002. On an absolute dollar basis, this increase is primarily attributable to a $31.1 million increase in payroll and store transaction costs that resulted from new store growth. As a percentage of sales, selling, general and administrative expenses decreased to 19.3% from 20.1% during these periods. Included in selling, general and administrative expenses for Fiscal 2002 is a charge of $3.5 million or 0.6% related to equity based compensation. The remaining decrease was primarily attributable to 0.5% decrease in marketing expenses, offset by a 0.4% increase in operational and payroll related expenses. 15 Interest income. Our net interest income was $0.8 million for Fiscal 2003, compared to net interest income of $0.1 million for Fiscal 2002, primarily due to higher cash balances. Income taxes. Our effective tax rate of 39.0% for Fiscal 2003 compares to an effective tax rate of 40.0% for Fiscal 2002. This decrease was due to a reduction in our effective state tax rate. Net income. Our net income was $54.3 million for Fiscal 2003, compared to $31.3 million for the Fiscal 2002. Diluted earnings per share increased 70.7% to $1.40 in Fiscal 2003, from $0.82 per diluted share in Fiscal 2002. FISCAL 2002 COMPARED TO FIFTY-TWO WEEKS ENDED FEBRUARY 2, 2002 (UNAUDITED). Net sales. Our net sales for Fiscal 2002 increased to $550.9 million from $404.4 million in the fifty-two weeks ended February 2, 2002, an increase of $146.5 million. Of this increase, comparable store sales contributed $24.7 million and non-comparable store sales contributed $121.8 million. Comparable store sales increased by 6.6% for Fiscal 2002, compared to an increase of 15.5% in comparable store sales in the fifty-two weeks ended February 2, 2002. The comparable stores sales increase was driven by an increase in units per transaction of 1.5% and an increase in the number of sales transactions of 6.4%, offset by a decrease in average dollar unit of 1.5%. Comparable sales in the young women's and accessories categories increased, while comparable store sales in the young men's category remained essentially unchanged. The increase in non- comparable store sales was primarily due to 89 more new stores open at the end of Fiscal 2002, as compared to the prior period. Gross profit. Our gross profit increased $32.2 million for Fiscal 2002 to $162.6 million from $130.4 million in the fifty-two weeks ended February 2, 2002. As a percentage of net sales, gross profit decreased to 29.5% from 32.2% during these periods. This decrease is primarily attributable to a decrease in our merchandise margins, primarily in the young women's and men's categories of 3.3%, due to an increase in promotional markdowns. This decrease in gross profit was partially offset by lower occupancy costs of 0.9%. Included in cost of sales is a charge for equity-based compensation of $1.0 million and $0.8 million for Fiscal 2002 and the fifty-two weeks ended February 2, 2002, respectively. Selling, general and administrative expenses. Our selling, general and administrative expenses increased $23.9 million for Fiscal 2002 to $110.5 million from $86.6 million in the fifty-two weeks ended February 2, 2002. On an absolute dollar basis, this increase was due to an $18.9 million increase in payroll and store transaction costs that resulted from new store growth. In addition, marketing expense increased $3.0 million. We also incurred a charge of $3.5 and $3.1 million for equity-based compensation for Fiscal 2002 and the fifty-two weeks ended February 2, 2002, respectively. As a percentage of net sales, selling, general and administrative expenses decreased to 20.1% from 21.4%. This decrease was attributable to a reduction in incentive bonus programs and leveraging of corporate and store line expenses as compared to the prior year. Interest (income) expense. Our net interest income was $0.1 million for Fiscal 2002, compared to net interest expense of $0.9 million for the fifty-two weeks ended February 2, 2002, primarily due to lower average borrowings. Income taxes. Our effective tax rate of 40.0% for Fiscal 2002, compared to an effective tax rate of 41.1% for the fifty-two weeks ended February 2, 2002. The Company recorded an accrual in the fifty-two weeks ended February 2, 2002 for additional tax exposures. Income from continuing operations. Our income from continuing operations increased $6.4 million for Fiscal 2002 to $31.3 million, compared to income from continuing operations of $24.9 million for the fifty-two weeks ended February 2, 2002. This increase was primarily due to increased sales and gross profit, partially offset by an increase in selling, general and administrative expenses related to new store growth. Gain on discontinued operations. All Chelsea Cambell stores were closed by the end of December 2000. Therefore, no activity occurred during Fiscal 2002. For the fifty-two weeks ended February 2, 2002, our Chelsea Cambell stores had net income of $17,000. Net income. Our net income was $31.3 million for Fiscal 2002, compared to $26.5 million for the fifty-two weeks ended February 2, 2002. On August 5, 2001, we adopted SFAS No. 142, Goodwill and Other 16 Intangibles, which require companies to no longer amortize negative goodwill. The cumulative effect of this change in accounting principle resulted in a gain of $1.6 million in the fifty-two weeks ended February 2, 2002. Diluted earnings per share increased 15.5% to $0.82 in Fiscal 2003, from $0.71 in the fifty-two weeks ended February 2, 2002. TRANSITION 2001 COMPARED TO TRANSITION 2000 (UNAUDITED). Net sales. Our net sales for Transition 2001, increased to $284.0 million from $184.4 million for Transition 2000, an increase of $99.6 million. Of this increase, comparable store sales contributed $37.4 million and non-comparable store sales contributed $62.2 million. Of the net sales for Transition 2001, $2.7 million were generated during the extra week included in that period. Comparable store sales increased by 23.0% for Transition 2001, compared to an increase of 14.5% in comparable store sales in Transition 2000. The comparable store sales increase was driven by an increase in units per transactions of 3.6%, an increase in the number of transactions of 20.2%, partially offset by a decrease in average dollar units by 1.2%. Comparable sales in the young women's and accessories categories increased, while comparable store sales in the young men's category remained essentially unchanged. The increase in non-comparable store sales was primarily due to 54 more stores open at the end of Transition 2001 as compared to the prior period. Gross profit. Our gross profit dollars increased $44.2 million for Transition 2001 to $104.0 million from $59.8 million for Transition 2000. As a percentage of net sales, gross profit increased to 36.6% from 32.4% during these periods. This increase is primarily attributable to an approximate 2.8% increase in merchandise margins due to a shift in our merchandise mix as we sold a greater percentage of young women's apparel, which has higher margins than young men's merchandise. Furthermore, occupancy and payroll costs, which are relatively fixed, were lower as a percentage of net sales than in the prior period which caused margins to increase. Included in cost of sales during Transition 2001 is a $0.8 million charge for equity based compensation. Selling, general and administrative expenses. Our selling, general and administrative expenses increased $20.7 million for Transition 2001 to $55.2 million from $34.5 million for Transition 2000. On an absolute dollar basis, this increase was partially due to a $11.7 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 $3.1 million charge for equity based compensation during Transition 2001. As a percent of net sales, selling, general and administrative expenses increased to 19.4% from 18.7%. This increase as a percentage of sales volume was due to the charge for equity based compensation, offset by an increased leverage of store payroll. Interest expense. Our interest expense decreased $0.8 million, from $1.1 million for Transition 2001 to $0.3 million for Transition 2000, primarily due to lower average borrowings. Income taxes. Our effective tax rate of 41.0% for Transition 2001 compares to an effective tax rate of 39.6% for the Transition 2000. 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. Gain from continuing operations. Our income from continuing operations increased $13.9 million for Transition 2001 to $28.6 million from $14.7 million for Transition 2000. This increase was primarily due to increased sales and gross profit, partially offset by an equity based compensation expense incurred in this period. Income from discontinued operations. All Chelsea Cambell stores were closed by the end of December 2000; therefore, no activity occurred during Transition 2001. During Transition 2000, our Chelsea Cambell stores had net sales of $2.9 million and expenses of $2.5 million. Net income. Our net income increased by $15.2 million, to $30.3 million in Transition 2001 from $15.1 million in Transition 2000. As a percentage of net sales, net income increased to 10.7% from 8.2% during these periods. 17 QUARTERLY RESULTS The following table sets forth our historical unaudited quarterly consolidated statements of operations data for each of the eight fiscal quarters ended January 31, 2004, and such information expressed as a percentage of our revenue. The per share amounts are calculated independently for each thirteen-week period presented. The sum of the thirteen weeks may not equal the full year per share amounts.
FISCAL 2002 FISCAL 2003 ----------------------------------------------- ------------------------------------------------ THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED ----------------------------------------------- ------------------------------------------------ MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1, MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31, 2002 2002 2002 2003 2003 2003 2003 2004 ------- --------- ----------- ----------- -------- --------- ----------- ----------- STATEMENT OF INCOME DATA: Net sales.................... $85,130(1) $ 90,141(1) $169,210 $206,423 $112,211 $129,944 $220,071 $272,642 Gross profit................. 24,149(1) 24,094(1) 50,902 63,458 30,250 35,582 73,922 89,962 Income (loss) from continuing operations.................. 592(1) (1,978)(1) 15,001 17,675 2,112 2,742 21,878 27,522 Net income (loss)............ $ 592 $ (1,978) $ 15,001 $ 17,675 $ 2,112 $ 2,742 $ 21,878 $ 27,522
FISCAL 2002 FISCAL 2003 ----------------------------------------------- ------------------------------------------------ THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED ----------------------------------------------- ------------------------------------------------ MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1, MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31, 2002 2002 2002 2003 2003 2003 2003 2004 ------- --------- ----------- ----------- -------- --------- ----------- ----------- STATEMENT OF INCOME DATA: AS A PERCENTAGE OF NET SALES: Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit................. 28.4 26.7 30.1 30.7 27.0 27.4 33.6 33.0 Income (loss) from continuing operations.................. 0.7 (2.2) 8.9 8.6 1.9 2.1 9.9 10.1 Net income (loss)............ 0.7% (2.2)% 8.9% 8.6% 1.9% 2.1% 9.9% 10.1% DILUTED INCOME (LOSS) PER SHARE: From continuing operations... $ 0.01 $ (0.06) $ 0.39 $ 0.46 $ 0.05 $ 0.07 $ 0.56 $ 0.71 From cumulative accounting change...................... -- -- -- -- -- -- -- -- ------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)............ $ 0.01 $ (0.06) $ 0.39 $ 0.46 $ 0.05 $ 0.07 $ 0.56 $ 0.71 ------- -------- -------- -------- -------- -------- -------- -------- SELECTED OPERATING DATA: Comparable store sales increase (decrease)......... 22.0% 11.2% 5.0% 0.3% 1.8% 9.2% 5.2% 8.5%
- --------------- (1) On December 21, 2001, we granted options to purchase 565,997 shares of our common stock with an exercise price which was less than the fair market value of our common stock at the time of such grant. The equity based compensation expense totaled $8.4 million, of which $0.8 million and $3.1 million were recorded in cost of sales and selling, general and administrative expenses, respectively, in the thirteen weeks ended February 2, 2002. In addition, the company recorded amortization of $0.6 million, of which $0.1 million and $0.5 million were recorded in cost of sales and selling, general and administrative expenses, respectively, in the thirteen weeks ended May 4, 2002. The unamortized balance of $3.9 million of which $0.8 million and $3.0 million were recorded in cost of sales and selling, general and administrative expenses, respectively, in the thirteen weeks ended August 3, 2002 here associated with the immediate vesting of options upon the consummation of the initial public offering. INFLATION The Company does not believe that its operating results have been materially affected by inflation during the past year. There can be no assurance, however, that the Company's operating results will not be affected by inflation in the future. LIQUIDITY AND CAPITAL RESOURCES Our cash requirements are primarily for working capital, the construction of new stores, the remodeling of existing stores, and the investment in our information systems. Historically, these cash requirements have been 18 met through cash flow from operations and borrowings under our credit facility with Fleet Retail Finance, Inc. At January 31, 2004, we had working capital of $140.9 million. The following table sets forth our cash flows for the period indicated:
SIX MONTHS ENDED FOR THE FISCAL YEAR ENDED ------------------------- ------------------------- FEBRUARY 3, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 2001 2002 2003 2004 ----------- ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS) Net cash provided by operating activities....... $ 38,280 $ 82,878 $ 52,520 $103,500 Net cash used in investing activities........... (10,977) (9,392) (29,718) (35,926) Net cash (used in) provided by financing activities.................................... (25,271) (35,034) 19,715 (16,693) Net cash used in discontinued operations........ (958) -- -- -- Net increase in cash and cash equivalents....... $ 1,074 $ 38,452 $ 42,517 $ 50,881
Operating activities -- In Fiscal 2003, we had a net increase in cash and cash equivalents of $50.9 million. Our cash provided by operations for Fiscal 2003 was $103.5 million, generated primarily by our net earnings, tax benefits related to the exercise of non-qualified stock options and an increase in our current and non-current liabilities. Investing activities -- Our cash used in investing activities for Fiscal 2003 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 $35.9 million for Fiscal 2003. Our future capital requirements will depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. Projected capital expenditures for Fiscal 2004 are approximately $43.9 million, to be used primarily to fund new store openings, the remodeling of existing stores and technology investments. Historically, we have financed such capital expenditures with cash from operations and borrowings under our credit facility. We opened 95 new stores in Fiscal 2003 and expect to open approximately 95 stores in fiscal 2004. Financing activities -- On November 18, 2003, our Board of Directors authorized a $35.0 million share repurchase program. We repurchased 0.6 million shares at a cost of $17.7 million during Fiscal 2003. Furthermore, on March 9, 2004, our Board of Directors authorized an additional $35.0 million increase in the share repurchase program. We believe that we will finance our capital expenditures and share repurchase programs primarily from cash from operations during fiscal 2004. As of January 31, 2004, we had $138.4 million in cash available to fund operations and future store growth. In addition, we had $25.0 million available for borrowings under our credit facility as of January 31, 2004. We believe that cash flows from operations, our current cash balance and funds available under our revolving credit facility will be sufficient to meet our working capital needs and planned capital expenditures for fiscal 2004. Our secured revolving credit facility with Fleet provides us with up to $25 million (the "Credit Facility"). Borrowings bear interest at our option at either (i) 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 1.25% to 1.75% or (ii) the base rate announced from time to time by Fleet. As of January 31, 2004, there were no amounts outstanding under the Credit Facility. The Credit Facility contains certain negative covenants, including but not limited to, limitations on the Company's ability to incur other indebtedness, encumber its assets or undergo a change of control. Additionally, the Company is required to keep a ratio of 2:1 of the value of the Company's inventory to the amounts outstanding at any time under the Credit Facility. The Credit Facility has a termination date of September 2005. There are fees for early termination. 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, breaches of covenants, misrepresentation, default of leases or other indebtedness, excess uninsured casualty loss, excess uninsured judgment or restraint of business, business failure or application for bankruptcy, indictment of or institution of any legal process or proceeding under federal, state, municipal or civil statutes, legal challenges to loan documents, and a change 19 in control. 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 thereunder and requiring that all such amounts be immediately paid in full as well as possession and sale of all assets that have been used as collateral. We have not issued any letters of credit for the purchase of merchandise inventory or any capital expenditures. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following tables summarize our contractual obligations and commercial commitments as of January 31, 2004:
PAYMENTS DUE IN PERIOD --------------------------------------------- LESS THAN MORE THAN TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS -------- --------- --------- --------- --------- (IN THOUSANDS OF DOLLARS) Contractual Obligations: Employment contracts............. $ 950 $ 950 $ -- $ -- $ -- Operating leases................. 298,046 43,099 75,027 70,645 109,275 -------- ------- ------- ------- -------- Total contractual obligations.... $298,996 $44,049 $75,027 $70,645 $109,275 ======== ======= ======= ======= ========
There were no commercial commitments outstanding as of January 31, 2004. Subsequent to Fiscal 2003, the Company entered into 6 employment contracts which provide for payments of $2.4 million in the aggregate in Fiscal 2004 and $4.3 million in the aggregate for periods subsequent to Fiscal 2004. OFF-BALANCE SHEET ARRANGEMENTS Other than operating lease commitments set forth in the table above, the Company is not party to any material off-balance sheet financing arrangements. CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES 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. On December 21, 2001, we granted options to purchase 565,997 shares of our common stock with an exercise price which was less than the fair market value of our common stock at the time of such grant. The equity based compensation expense totaled $8.4 million, of which $1.8 million was recorded in cost of sales. We recorded equity based compensation expense of $0.8 million in cost of sales for Transition 2001 and the fifty-two weeks ended February 2, 2002. We incurred additional amortization for equity based compensation of $1.0 million in Fiscal 2002, as a result of the acceleration of the unamortized balance of such equity based compensation associated with the immediate vesting of options upon the consummation of the initial public offering. 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. On December 21, 2001, we granted options to purchase 565,997 shares of our common 20 stock with an exercise price which was less than the fair market value of our common stock at the time of such grant. The equity based compensation expense totaled $8.4 million, of which $6.6 million was recorded in selling, general and administrative expenses. We recorded equity based compensation expense of $3.1 million in selling, general and administrative expenses for Transition 2001 and the fifty-two weeks ended February 2, 2002. We incurred additional amortization for equity based compensation of $3.5 million in Fiscal 2002, as a result of the acceleration of the unamortized balance of such equity based compensation associated with the immediate vesting of options upon the consummation of the initial public offering. Interest income. Interest income, net of interest expense, includes interest relating to our cash balances. Discontinued operations. On February 25, 2000, we decided to discontinue our Chelsea Cambell specialty store business and we closed all Chelsea Cambell stores by the end of December 2000. The operating results of this segment for all years have been reclassified as discontinued operations. Cumulative effect of accounting change. On August 5, 2001, we adopted Statement of Financial Accounting Standards "SFAS" No. 142, Goodwill and Other Intangible Assets, which requires companies to no longer amortize negative goodwill. The cumulative effect of this change resulted in a gain of $1.6 million in Transition 2001. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 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 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 except for the change in estimated useful lives in Fiscal 2001 described in Note 2 to the consolidated financial statements. Our accounting policies are more fully described in Note 2 to the consolidated financial statements, located elsewhere in this document. We have identified certain critical accounting policies which require significant management estimates and are described below. Merchandise inventory. Inventory consists of finished goods and is valued utilizing the cost method at lower of cost or market on a first-in, first-out basis. In order to assess that our inventory is recorded properly at the lower of cost or market, we make certain assumptions regarding future demand and net realizable selling price. These assumptions are based on historical experience and current information and can have a significant impact on current and future operating results and financial position. Finite-lived assets. In evaluating the fair value and future benefits of finite-lived assets, we perform an analysis of the anticipated undiscounted future net cash flows of the related finite-lived assets and reduce their carrying value by the excess, if any, of the result of such calculation. This analysis includes factors such as future sales and projected profit margins. We believe at this time that the finite-lived assets' carrying values and useful lives continues to be appropriate. NEW ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. This 21 statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the financial position or results of operations of the Company. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement will be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the period of adoption. The adoption of SFAS No. 150 did not have a material impact on the Company's results of operations, financial position or cash flows. In December 2003, the FASB issued FAS No. 132 (Revised) ("FAS 132-R"), Employer's Disclosure about Pensions and Other Postretirement Benefits. FAS 132-R retains disclosure requirements of the original FAS 132 and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefit cost. FAS 132-R is effective for fiscal years ending after December 15, 2003, except that certain disclosures are effective for fiscal years ending after June 15, 2004. Interim period disclosures are effective for interim periods beginning after December 15, 2003. The adoption of the disclosure provisions of FAS 132-R did not have a material effect on the Company's consolidated financial statements. In January 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Regardless of whether a sponsor elects that deferral, FSP FAS 106-1 requires certain disclosures pending further consideration of the underlying accounting issues. The guidance in FSP FAS 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The Company believes the adoption of this statement will not have a material impact on its consolidated financial statements. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS This report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve certain risks and uncertainties, including statements regarding the company's strategic direction, prospects and future results. Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements. All forward looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after such statements are made. Such uncertainties include, among others, the following factors: OUR GROWTH STRATEGY RELIES ON THE CONTINUED ADDITION OF A SIGNIFICANT NUMBER OF NEW STORES EACH YEAR, WHICH COULD STRAIN OUR RESOURCES AND CAUSE THE PERFORMANCE OF OUR EXISTING STORES TO SUFFER. Our growth will largely depend on our ability to open and operate new stores successfully. We opened 95 stores in Fiscal 2003, 93 in Fiscal 2002, and 74 stores in Fiscal 2001. We plan to open approximately 95 stores in fiscal 2004, an increase of 21% over our store base as of the end of Fiscal 2003. We intend to continue to open a significant number of new stores in future years while remodeling a portion of our existing store base annually. Our proposed expansion will place increased demands on our operational, managerial and administrative resources. These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our individual stores. In addition, to the extent that our new store openings are in existing markets, we may experience reduced net sales volumes in existing stores in those markets. 22 OUR EXPANSION PLAN IS DEPENDENT ON A NUMBER OF FACTORS, WHICH COULD DELAY OR PREVENT THE SUCCESSFUL OPENING OF NEW STORES AND SUBSEQUENT PENETRATION INTO NEW MARKETS. We will be unable to open and operate new stores successfully and our growth will be limited unless we can: - identify suitable markets and sites for store locations; - negotiate acceptable lease terms; - hire, train and retain competent store personnel; - maintain a proportion of new stores to mature stores that does not harm existing sales; - foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume of merchandise; - manage inventory effectively to meet the needs of new and existing stores on a timely basis; - expand our infrastructure to accommodate growth; and - generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund our expansion plans. In addition, we will open new stores in regions of the United States in which we currently have few or no stores. Our experience in these markets is limited and we cannot assure you that we will be able to develop our brand in these markets or adapt to competitive, merchandising and distribution challenges that may be different from those in our existing markets. Our inability to open new stores successfully and/or penetrate new markets would have a material adverse effect on our revenue and earnings growth. OUR NET SALES AND INVENTORY LEVELS FLUCTUATE ON A SEASONAL BASIS, LEAVING OUR OPERATING RESULTS PARTICULARLY SUSCEPTIBLE TO CHANGES IN BACK-TO-SCHOOL AND HOLIDAY SHOPPING PATTERNS. Our net sales and net income are disproportionately higher from August through January each year due to increased sales from back-to-school and holiday shopping. Sales during this period cannot be used as an accurate indicator of annual results. Our net sales and net income from February through July are typically lower due, in part, to the traditional retail slowdown immediately following the winter holiday season. Any significant decrease in sales during the back-to-school and winter holiday seasons would have a material adverse effect on our financial condition and results of operations. In addition, in order to prepare for the back-to-school and holiday shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other parts of the year. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross margins and negatively impact our profitability. FLUCTUATIONS IN COMPARABLE STORE SALES AND QUARTERLY RESULTS OF OPERATIONS COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE SUBSTANTIALLY. Our comparable store sales and quarterly results have fluctuated in the past and are expected to continue to fluctuate in the future. In addition, we cannot assure you that we will be able to maintain the recent levels of comparable store sales as we expand our business. Our comparable store sales and quarterly results of operations are affected by a variety of factors, including: - fashion trends; - calendar shifts of holiday or seasonal periods; - the effectiveness of our inventory management; - changes in our merchandise mix; - the timing of promotional events; 23 - weather conditions; - changes in general economic conditions and consumer spending patterns; and - actions of competitors or mall anchor tenants. If our future comparable store sales fail to meet the expectations of research analysts, then the market price of our common stock could decline substantially. You should refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information. IF WE ARE UNABLE TO IDENTIFY AND RESPOND TO CONSUMERS' FASHION PREFERENCES IN A TIMELY MANNER, OUR PROFITABILITY WOULD DECLINE. We may be unable to keep pace with the rapidly changing fashion trends and consumer tastes inherent in the apparel industry. Our current design philosophy is based on the belief that our target customers prefer clothing that suits the demands of their active lifestyles and that they like to identify with a logo. Accordingly, we produce casual, comfortable apparel, a majority of which displays either the "Aeropostale" or "Aero" logo. We cannot assure you that fashion trends will not move away from casual clothing or that we will not have to alter our design strategy to reflect a consumer change in logo preference. If we fail to anticipate, identify or react appropriately to changes in styles, trends, desired images or brand preferences, we may need to incur higher markdowns to reduce excess inventory. Utilizing such markdowns would negatively impact our profitability. OUR CONCENTRATION OF STORES IN THE EASTERN UNITED STATES MAKES SUSCEPTIBLE TO ADVERSE CONDITIONS IN THIS REGION. The majority of our stores are located in the eastern half of the United States. As a result, our operations are more susceptible to regional factors than the operations of more geographically diversified competitors. These factors include, among others, economic and weather conditions, as well as demographic and population changes. WE RELY ON THIRD PARTIES TO MANAGE THE WAREHOUSING AND DISTRIBUTION ASPECTS OF OUR BUSINESS. IF THESE THIRD PARTIES DO NOT ADEQUATELY PERFORM THESE FUNCTIONS, OUR BUSINESS WOULD BE DISRUPTED. The efficient operation of our stores is dependent on our ability to distribute merchandise to locations throughout the United States in a timely manner. Our distribution and warehouse facility in South River, New Jersey is operated by an independent third party. We depend on this third party to receive, sort, pack and distribute substantially all of our merchandise. This third party employs personnel represented by a labor union. Although there have been no work stoppages or disruptions since the inception of our relationship with this third party provider in 1991, we cannot assure you that there will be no disruptions in the future. We also use a separate third party transportation company to deliver our merchandise from our warehouses to our stores. Any failure by either of these third parties to respond adequately to our warehousing and distribution needs would disrupt our operations and negatively impact our profitability. WE RELY ON A SMALL NUMBER OF VENDORS TO SUPPLY A SIGNIFICANT AMOUNT OF OUR MERCHANDISE, AND OUR FAILURE TO MAINTAIN GOOD RELATIONSHIPS WITH ONE OR MORE OF THEM COULD HARM OUR ABILITY TO SOURCE OUR PRODUCTS. In Fiscal 2003, we sourced 34% of our merchandise from our top three vendors. MFM Mias Fashion Mfg. Co, Inc. supplied 12%, and Niteks USA, Inc. and South Bay Apparel, Inc. each supplied 11% of our products. In addition, Federated Merchandising Group, or FMG, a wholly owned subsidiary of Federated Department Stores, Inc., acted as our agent with respect to the sourcing of 21% of our merchandise. Our relationships with our vendors generally are not on a contractual basis and do not assure adequate supply, quality or acceptable pricing on a long-term basis. Most of our vendors could discontinue selling to us at any time. If one or more of our significant vendors were to sever their relationship with us, we could be unable to obtain replacement products in a timely manner, which could cause our sales to decrease. 24 MOST OF OUR MERCHANDISE IS MANUFACTURED BY FOREIGN SUPPLIERS, THEREFORE THE AVAILABILITY AND COSTS OF THESE PRODUCTS MAY BE NEGATIVELY AFFECTED BY RISKS ASSOCIATED WITH INTERNATIONAL TRADE. Trade restrictions such as increased tariffs or quotas, or both, could affect the importation of apparel generally and increase the cost and reduce the supply of merchandise available to us. Much of our merchandise is sourced directly from foreign vendors in Europe, Asia and Central America. In addition, many of our domestic vendors maintain production facilities overseas. Some of these facilities are also located in regions which may be affected by political instability which could cause a disruption in trade. Any reduction in merchandise available to us or any increase in its cost due to tariffs, quotas or local political issues could have a material adverse effect on our results of operations. THE DEPARTURE OF CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT TEAM COULD ADVERSELY AFFECT OUR BUSINESS. The success of our business is dependent upon our senior management closely supervising all aspects of our business, in particular the operation of our stores and the designing of our merchandise. If we were to lose the benefit of this involvement, and in particular if we were to lose the services of Julian R. Geiger, our Chairman and Chief Executive Officer, and Christopher L. Finazzo, our Executive Vice President-Chief Merchandising Officer, our business could be adversely affected. In addition, Mr. Geiger and Mr. Finazzo maintain many of our vendor relationships, and the loss of either of them could negatively impact present vendor relationships. You should refer to the section entitled "Management" for more information. OUR FAILURE TO PROTECT OUR TRADEMARKS AEROPOSTALE(R) AND, TO A LESSER EXTENT, AERO(TM) ADEQUATELY COULD HAVE A NEGATIVE IMPACT ON OUR BRAND IMAGE AND LIMIT OUR ABILITY TO PENETRATE NEW MARKETS. We believe that our trademarks AEROPOSTALE(R) and/or to a lesser extent, AERO(TM) are integral to our logo-driven design strategy. We have obtained a federal registration of the AEROPOSTALE(R) trademark in the United States and have applied for or obtained registrations in most foreign countries in which our vendors are located. We use the term "AERO" in many constantly changing designs and logos even though we have not applied to register the every variation or combinations thereof for adult clothing. We cannot assure you that the registrations we obtained will prevent the imitation of our products or infringement of our intellectual property rights by others. If any third party imitates our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially adversely affected. Because we have not yet obtained federal registration for the AERO(TM) mark and have not registered the "AEROPOSTALE" mark in all categories or in all foreign countries in which we now or may in the future source or offer our merchandise, international expansion and our merchandising of non-apparel products using these marks could be limited. In addition, we cannot assure you that others will not try to block the manufacture, export or sale of our products as violative of their trademarks or other proprietary rights. Other entities may have rights to trademarks that contain the word "AERO" or may have registered similar or competing marks for apparel and accessories in foreign countries in which our vendors are located. Our applications for international registration of the AEROPOSTALE(R) mark have been rejected in a few countries in which our products are manufactured because third parties have already registered the mark for clothing in those countries. There may be other prior registrations in other foreign countries of which we are not aware. In all such countries, it may be possible for any third party owner of the national trademark registration for "AEROPOSTALE" to enjoin the manufacture, sale or exportation of Aeropostale branded goods to the United States. If we were unable to reach a licensing arrangement with these parties, our vendors may be unable to manufacture our products in those countries. Our inability to register our trademarks or purchase or license the right to use our trademarks or logos in these jurisdictions could limit our ability to obtain supplies from or manufacture in less costly markets or penetrate new markets should our business plan change to include selling our merchandise in those jurisdictions outside the United States. 25 OUR ABILITY TO ATTRACT CUSTOMERS TO OUR STORES DEPENDS HEAVILY ON THE SUCCESS OF THE SHOPPING MALLS IN WHICH WE ARE LOCATED. In order to generate customer traffic we must locate our stores in prominent locations within successful shopping malls. We cannot control the development of new shopping malls, the availability or cost of appropriate locations within existing or new shopping malls, or the success of individual shopping malls. Furthermore, factors beyond our control impact mall traffic, such as general economic conditions and consumer spending levels. A continued slowdown in the United States economy could negatively affect consumer spending and reduce mall traffic. A significant decrease in shopping mall traffic would have a material adverse effect on our results of operations. THE EFFECTS OF WAR OR ACTS OF TERRORISM COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS AND FINANCIAL CONDITION. The continued threat of terrorism, heightened security measures and military action in response to an act of terrorism has disrupted commerce and has intensified the uncertainty of the U.S. economy. Any further acts of terrorism or a future war may disrupt commerce and undermine consumer confidence, which could negatively impact our sales revenue by causing consumer spending and/or mall traffic to decline. Furthermore, an act of terrorism or war, or the threat thereof, could negatively impact our business by interfering with our ability to obtain merchandise from foreign vendors. Inability to obtain merchandise from our foreign vendors or substitute suppliers at similar costs in a timely manner could adversely affect our operating results and financial condition. OUR MARKET SHARE MAY BE ADVERSELY IMPACTED AT ANY TIME BY A SIGNIFICANT NUMBER OF COMPETITORS. The teen apparel market is highly competitive and is characterized by low barriers to entry. We compete against a diverse group of retailers, including national and local specialty retail stores, mass merchandisers, regional retail chains, traditional department stores and mail-order retailers. Many of our competitors are already established in markets that we have not penetrated. In addition, many of our competitors have many more stores in operation than us, and therefore greater national recognition than we do. Our market share and results of operations may be adversely impacted by this significant number of competitors. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rates. The Company, in the normal course of doing business, is theoretically exposed to interest rate change market risk. As borrowing patterns are seasonal, the Company is not dependent on borrowing for the entire year. Therefore, a sudden increase in interest rates (which under the Loan Agreement is dependent on the prime rate) may, during peak borrowing, have a negative impact on short-term results. 26 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AEROPOSTALE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ 28 Consolidated Balance Sheets as of February 1, 2003 and January 31, 2004.......................................... 29 Consolidated Statements of Income for the fiscal year ended August 4, 2001, the six months ended February 3, 2001 (unaudited) and February 2, 2002 and for the fiscal years ended February 1, 2003 and January 31, 2004............... 30 Consolidated Statements of Comprehensive Income for the fiscal year ended August 4, 2001, the six months ended February 3, 2001 (unaudited) and February 2, 2002 and for the fiscal years ended February 1, 2003 and January 31, 2004...................................................... 30 Consolidated Statements of Stockholders' Equity for the fiscal year ended August 4, 2001, for the six months ended February 2, 2002 and for the fiscal years ended February 1, 2003 and January 31, 2004.............................. 31 Consolidated Statements of Cash Flows for the fiscal year ended August 4, 2001, for the six months ended February 3, 2001 (unaudited) and February 2, 2002 and for the fiscal years ended February 1, 2003 and January 31, 2004......... 32 Notes to Consolidated Financial Statements.................. 33
27 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Aeropostale, Inc. We have audited the accompanying consolidated balance sheets of Aeropostale, Inc. and subsidiaries (the "Company") as of January 31, 2004 and February 1, 2003, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the fiscal years ended January 31, 2004, February 1, 2003 and August 4, 2001 and for the six months ended February 2, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2004 and February 1, 2003, and the results of its operations and its cash flows for the fiscal years ended January 31, 2004, February 1, 2003 and August 4, 2001 and for the six months ended February 2, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets as of August 5, 2001 to conform to Financial Accounting Standards Board Statement No. 142. /s/ DELOITTE & TOUCHE LLP New York, New York April 14, 2004 28 AEROPOSTALE, INC. CONSOLIDATED BALANCE SHEETS
FEBRUARY 1, JANUARY 31, 2003 2004 ----------- ----------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 87,475 $138,356 Merchandise inventory..................................... 46,645 61,807 Other current assets...................................... 10,669 12,284 -------- -------- Total current assets................................... 144,789 212,447 Fixtures, equipment and improvements -- Net................. 69,448 92,578 Deferred income taxes....................................... 8,468 968 Other assets................................................ 327 1,055 -------- -------- Total assets......................................... $223,032 $307,048 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 17,954 $ 30,477 Accrued expenses.......................................... 40,044 41,091 -------- -------- Total current liabilities.............................. 57,998 71,568 Other noncurrent liabilities................................ 37,075 49,787 Commitment and contingencies Stockholders' equity: Common stock -- par value, $0.01 per share; 200,000 shares authorized, 35,306 and 37,863 shares issued and outstanding............................................ 353 379 Treasury Stock at cost (630 shares)....................... -- (17,695) Additional paid-in capital................................ 41,657 63,478 Other comprehensive loss.................................. -- (672) Retained earnings......................................... 85,949 140,203 -------- -------- Total stockholders' equity............................. 127,959 185,693 -------- -------- Total liabilities and stockholders' equity............. $223,032 $307,048 ======== ========
See notes to consolidated financial statements. 29 AEROPOSTALE, INC. CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL FOR THE FISCAL YEAR ENDED SIX MONTHS ENDED YEAR ENDED --------------- ------------------------- ------------------------- AUGUST 4, FEBRUARY 3, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 2001 2001 2002 2003 2004 --------------- ----------- ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NET SALES................................. $304,767 $184,369 $284,040 $550,904 $734,868 COST OF SALES............................. 218,618 124,611 180,054 388,301 505,152 -------- -------- -------- -------- -------- Gross profit.......................... 86,149 59,758 103,986 162,603 229,716 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Selling, general and administrative expenses.............................. 65,918 34,469 55,169 110,506 141,520 Store closing expenses.................. 815 -- -- -- -- Amortization of negative goodwill....... (234) (116) -- -- -- -------- -------- -------- -------- -------- Total costs and expenses.............. 66,499 34,353 55,169 110,506 141,520 -------- -------- -------- -------- -------- INCOME FROM OPERATIONS.................... 19,650 25,405 48,817 52,097 88,196 INTEREST EXPENSE (INCOME) -- Net of interest income of $197, $21, $105, $399 and $1,047.............................. 1,671 1,082 292 (56) (760) -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES................ 17,979 24,323 48,525 52,153 88,956 PROVISION FOR INCOME TAXES................ 7,065 9,629 19,888 20,863 34,702 -------- -------- -------- -------- -------- INCOME FROM CONTINUING OPERATIONS......... 10,914 14,694 28,637 31,290 54,254 DISCONTINUED OPERATIONS: Gain on disposal of discontinued operations net of tax expense of $257 and $248.............................. 405 388 -- -- -- -------- -------- -------- -------- -------- Gain on discontinued operations......... 405 388 -- -- -- CUMULATIVE EFFECT OF ACCOUNTING CHANGE.... -- -- 1,632 -- -- -------- -------- -------- -------- -------- NET INCOME................................ $ 11,319 $ 15,082 $ 30,269 $ 31,290 $ 54,254 ======== ======== ======== ======== ======== BASIC NET INCOME PER COMMON SHARE: From continuing operations.............. $ 0.32 $ 0.46 $ 0.89 $ 0.90 $ 1.49 From discontinued operations............ 0.01 0.01 -- -- -- From cumulative accounting change....... -- -- 0.05 -- -- -------- -------- -------- -------- -------- Net income per share.................... $ 0.33 $ 0.47 $ 0.94 $ 0. 90 $ 1.49 ======== ======== ======== ======== ======== DILUTED NET INCOME PER COMMON SHARE: From continuing operations.............. $ 0.28 $ 0.40 $ 0.78 $ 0.82 $ 1.40 From discontinued operations............ 0.01 0.01 -- -- -- From cumulative accounting change....... -- -- 0.05 -- -- -------- -------- -------- -------- -------- Net income per share.................... $ 0.29 $ 0.41 $ 0.83 $ 0.82 $ 1.40 ======== ======== ======== ======== ======== Basic weighted average number of shares outstanding............................. 31,339 31,183 31,633 34,387 36,505 Diluted weighted average number of shares outstanding............................. 35,465 35,177 36,000 37,854 38,858
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE FISCAL FOR THE FISCAL YEAR ENDED SIX MONTHS ENDED YEAR ENDED --------------- ------------------------- -------------------------------- AUGUST 4, FEBRUARY 3, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 2001 2001 2002 2003 2004 --------------- ----------- ----------- --------------- -------------- (UNAUDITED) (IN THOUSANDS) Net income........................... $11,319 $15,082 $30,269 $31,290 $54,254 Other comprehensive loss, net of tax Minimum pension liability.......... -- -- -- -- (672) ------- ------- ------- ------- ------- Comprehensive income................. $11,319 $15,082 $30,269 $31,290 $53,582 ======= ======= ======= ======= =======
See notes to consolidated financial statements. 30 AEROPOSTALE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK, COMMON STOCK NONVOTING ADDITIONAL AT COST --------------- --------------- PAID-IN DEFERRED ----------------- SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHARES AMOUNT ------ ------ ------ ------ ---------- ------------ ------ -------- (IN THOUSANDS) BALANCE, JULY 29, 2000:............ 31,047 $310 66 $ 1 $ 640 $ -- -- $ -- Net income....................... -- -- -- -- -- -- -- -- Stock options exercised.......... -- -- 424 4 9 -- -- -- Accrued dividend -- Series B redeemable preferred stock..... -- -- -- -- -- -- -- -- ------ ---- ------ ---- ------- ------- ----- -------- BALANCE, AUGUST 4, 2001:........... 31,047 310 490 5 649 -- -- -- Net income....................... -- -- -- -- -- -- -- -- Stock options exercised.......... -- -- 628 6 227 -- -- -- Equity based compensation........ -- -- -- -- 8,445 (8,445) -- -- Amortization of equity based compensation................... -- -- -- -- -- 3,972 -- -- Accrued dividend -- Series B redeemable preferred stock..... -- -- -- -- -- -- -- -- ------ ---- ------ ---- ------- ------- ----- -------- BALANCE, FEBRUARY 2, 2002:......... 31,047 310 1,118 11 9,321 (4,473) -- -- Net income....................... -- -- -- -- -- -- -- -- Stock options exercised.......... 533 5 733 8 274 -- -- -- Tax benefit related to exercise of stock options............... -- -- -- -- 2,674 -- -- -- Deferred offering costs.......... -- -- -- -- (1,981) -- -- -- Initial public offering.......... 1,875 19 -- -- 31,369 -- -- -- Amortization of equity based compensation................... -- -- -- -- -- 4,473 -- -- Conversion of common stock nonvoting to common stock...... 1,851 19 (1,851) (19) -- -- -- -- Accrued dividend -- Series B redeemable preferred stock..... -- -- -- -- -- -- -- -- ------ ---- ------ ---- ------- ------- ----- -------- BALANCE, FEBRUARY 1, 2003:......... 35,306 353 -- -- 41,657 -- -- -- Net income....................... -- -- -- -- -- -- -- -- Stock options exercised.......... 2,557 26 -- -- 1,039 -- -- -- Tax benefit related to exercise of stock options............... -- -- -- -- 20,782 -- -- -- Repurchase of common stock....... -- -- -- -- -- -- (630) (17,695) Other comprehensive loss......... -- -- -- -- -- -- -- -- ------ ---- ------ ---- ------- ------- ----- -------- BALANCE, JANUARY 31, 2004:......... 37,863 $379 -- $ -- $63,478 $ -- (630) $(17,695) ====== ==== ====== ==== ======= ======= ===== ======== OTHER COMPREHENSIVE RETAINED (LOSS) EARNINGS TOTAL ------------- -------- -------- (IN THOUSANDS) BALANCE, JULY 29, 2000:............ -- $ 15,055 $ 16,006 Net income....................... -- 11,319 11,319 Stock options exercised.......... -- -- 13 Accrued dividend -- Series B redeemable preferred stock..... -- (1,048) (1,048) -------- -------- -------- BALANCE, AUGUST 4, 2001:........... -- 25,326 26,290 Net income....................... -- 30,269 30,269 Stock options exercised.......... -- -- 233 Equity based compensation........ -- -- -- Amortization of equity based compensation................... -- -- 3,972 Accrued dividend -- Series B redeemable preferred stock..... -- (574) (574) -------- -------- -------- BALANCE, FEBRUARY 2, 2002:......... -- 55,021 60,190 Net income....................... -- 31,290 31,290 Stock options exercised.......... -- -- 287 Tax benefit related to exercise of stock options............... -- -- 2,674 Deferred offering costs.......... -- -- (1,981) Initial public offering.......... -- -- 31,388 Amortization of equity based compensation................... -- -- 4,473 Conversion of common stock nonvoting to common stock...... -- -- -- Accrued dividend -- Series B redeemable preferred stock..... -- (362) (362) -------- -------- -------- BALANCE, FEBRUARY 1, 2003:......... -- 85,949 127,959 Net income....................... -- 54,254 54,254 Stock options exercised.......... -- -- 1,065 Tax benefit related to exercise of stock options............... -- -- 20,782 Repurchase of common stock....... -- -- (17,695) Other comprehensive loss......... (672) -- (672) -------- -------- -------- BALANCE, JANUARY 31, 2004:......... $ (672) $140,203 $185,693 ======== ======== ========
31 AEROPOSTALE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL FOR THE FISCAL YEAR ENDED SIX MONTHS ENDED YEAR ENDED --------------- ------------------------- ------------------------- AUGUST 4, FEBRUARY 3, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 2001 2001 2002 2003 2004 --------------- ----------- ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................... $ 11,319 $ 15,082 $ 30,269 $ 31,290 $ 54,254 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 3,938 1,698 3,124 8,212 12,518 Amortization of tenant allowances and above market leases.................................. (1,917) (869) (1,315) (3,350) (4,624) Impairment charge................................ 815 -- -- 781 400 Amortization of negative goodwill................ (234) (116) -- -- -- Equity based compensation charge................. -- -- 3,972 4,473 -- (Loss) gain on discontinued operations........... (662) (636) -- -- -- Deferred rent, net............................... 1,132 540 406 2,265 1,927 Pension expense.................................. 247 125 133 241 558 Tax effect of non qualified stock options........ -- -- -- 2,674 20,782 Deferred income taxes............................ 2,843 (292) (2,168) (1,202) 6,404 Cumulative effect of accounting change........... -- -- (1,632) -- -- Changes in operating assets and liabilities: Merchandise inventory.......................... (10,713) 14,282 20,700 (8,666) (15,162) Other current assets........................... 2,432 1,570 389 (3,169) (2,297) Other assets................................... 21 (22) -- 174 (787) Accounts payable............................... (2,501) (7,653) 684 3,959 12,523 Accrued expenses and other noncurrent liabilities.................................. 12,844 14,571 28,316 14,838 17,004 -------- -------- -------- -------- -------- Net cash provided by operating activities.... 19,564 38,280 82,878 52,520 103,500 -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixtures, equipment and improvements..................................... (23,916) (10,977) (9,392) (29,718) (35,926) -------- -------- -------- -------- -------- Net cash used in investing activities............ (23,916) (10,977) (9,392) (29,718) (35,926) -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Stock options exercised............................ 13 4 233 287 1,065 Net proceeds from initial public offering.......... -- -- -- 31,388 -- Offering costs related to initial public offering......................................... -- -- -- (1,981) -- Net borrowings under revolving credit facility..... 8,280 (25,275) (35,267) -- -- Payment of deferred finance costs.................. (220) -- -- -- (63) Payment and redemption of dividends................ -- -- -- (9,979) -- Purchase of treasury stock......................... -- -- -- -- (17,695) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities..................................... 8,073 (25,271) (35,034) 19,715 (16,693) -------- -------- -------- -------- -------- Net cash used in discontinued operations......... (932) (958) -- -- -- -------- -------- -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS............ 2,789 1,074 38,452 42,517 50,881 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 3,717 3,717 6,506 44,958 87,475 -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 6,506 $ 4,791 $ 44,958 $ 87,475 $138,356 ======== ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income taxes paid.................................. $ 1,953 $ 1,883 $ 10,699 $ 19,649 $ 13,839 ======== ======== ======== ======== ======== Interest paid...................................... $ 1,724 $ 1,026 $ 391 $ 298 $ 234 ======== ======== ======== ======== ======== SIGNIFICANT NONCASH INVESTING AND FINANCING TRANSACTIONS: Accrued dividends -- Series B redeemable preferred stock............................................ $ 1,048 $ 508 $ 574 $ 362 $ -- ======== ======== ======== ======== ========
See notes to consolidated financial statements. 32 AEROPOSTALE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND STORE DATA) 1. BUSINESS Description of Business -- Aeropostale, Inc. (together with its wholly-owned subsidiary, Aeropostale West, Inc., collectively the "Company" or "Aeropostale") is a mall-based specialty retailer of casual apparel and accessories for young women and young men. On February 3, 2002, Aeropostale 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 Company provides customers with a focused selection of high-quality, active-oriented, fashion basic merchandise at compelling values. Aeropostale maintains complete control over its proprietary brand by designing and sourcing all of its merchandise. The Company's products can be purchased only in our stores, which sell Aeropostale merchandise exclusively. The Company's stores creates a fun and high energy shopping experience through the use of creative visual merchandising, colorful in-store signage, bright lighting, popular music and an enthusiastic, well-trained sales force. The average store size of approximately 3,500 square feet is generally smaller than that of its mall-based competitors and the Company believes that this enables it to achieve higher sales productivity and project a sense of activity and excitement. As of January 31, 2004, the Company operated 459 stores in 41 states. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year -- 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 2, 2002. For tax purposes, the Company has retained its July year-end. As used herein, "Fiscal 2003" refers to the fiscal year ended January 31, 2004, "Fiscal 2002" refers to the fiscal year ended February 1, 2003, "Fiscal 2001" refers to the fiscal year ended August 4, 2001, and "Transition 2001" refers to the six month period from August 5, 2001 to February 2, 2002. Similarly, "Transition 2000" refers to the six month period from July 30, 2000 to February 3, 2001. All references to amounts related to the six months ended February 3, 2001 are unaudited. Transition 2001 has twenty-six weeks while Transition 2000 has twenty-seven weeks. Cash Equivalents -- The Company considers credit card receivables and all short-term investments with an original maturity of three months or less as cash equivalents. Merchandise Inventory -- Inventory consists of finished goods and is valued utilizing the cost method at the lower of cost or market determined on a first-in, first-out basis. Merchandise inventory includes warehousing, freight, merchandise and design costs as an inventory product cost. Fixtures, Equipment and Improvements -- Fixtures, equipment and improvements are stated at cost. Depreciation and amortization are provided for by the straight-line method over the following estimated useful lives: Store fixtures and equipment............. 10 years Lesser of life of the asset or life of Leasehold improvements................... lease Computer equipment and software.......... 5 years
Effective the first quarter of 2001, the Company adjusted the estimated useful lives for store fixtures and equipment from 7 to 10 years and computer equipment and software from 3 to 5 years. The Company examined and reviewed its accounting policies and practices and determined that revised useful lives reflect a more accurate timing of the economic benefits to be received from such assets. The change in estimate had a $0.6 million (net of tax benefit of $0.4 million) impact on the Fiscal 2001 results. 33 Impairment of Long-lived Assets -- The Company evaluates Long-lived assets in accordance with Statement of Financial Accounting Standards ("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. Long-lived assets are evaluated for recoverability in accordance with SFAS No. 144 whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flows expected to result from the use of the asset and eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset is recognized. In Fiscal 2001, the Company recorded store closing expenses of $0.8 million to reflect the write-down of leasehold improvements and stores fixtures and equipment to their net realizable value, in seven stores closed by October 2001. The Company did not incur any other costs associated with such store closings. Income Taxes -- Income taxes are recognized during the year in which transactions enter into the determination of financial statement income, with deferred taxes being provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by the tax laws. Pre-Operating Expenses -- The Company expenses new store operating costs as incurred. Deferred Financing Costs -- Deferred financing costs are amortized over the life of the debt using the straight-line method. Net deferred financing charges were $0.2 million, $0.1 million, $0.2 million, $0.1 million and $0.1 million net of accumulated amortization of $12,000, $0.4 million, $46,000, $0.1 million and $10,000 at the end of Fiscal 2001, Transition 2000 (unaudited), Transition 2001, Fiscal 2002 and Fiscal 2003, respectively. These amounts are included in other assets in the balance sheets. Deferred Rent -- Rent expense under operating leases provides for tenant allowances and fixed non-contingent escalations and is recognized on a straight-line basis over the term of each individual underlying lease. Revenue Recognition -- Revenue is recognized at the "point of sale." Allowances for sales returns are recorded as a component of net sales in the periods in which the related sales are recognized. Reserve for Returns -- The Company provides a reserve equal to the gross profit on projected merchandise returns based upon its prior returns experience. 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. 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. 34 Marketing -- Marketing costs, which includes internet, television, print, radio and other media advertising and collegiate athlete conference sponsorships, are expensed as incurred and were $2.2 million, $1.3 million, $1.8 million, $5.7 million and $4.1 million for Fiscal 2001, Transition 2000(unaudited), Transition 2001, Fiscal 2002 and Fiscal 2003, respectively. Net Income Per Share -- The Company calculates net income per share in accordance with SFAS No. 128, Earnings Per Share. Basic net income per share is computed by dividing net income after preferred dividends by the weighted average number of common shares outstanding for the period. Diluted net income per share also includes the dilutive effect of potential common shares outstanding during the period. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock option grants. Accordingly, no compensation cost has been recognized for employee stock options. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following assumptions for grants in the respective periods:
FISCAL TRANSITION FISCAL --------- ----------------------- --------------------- 2001 2000 2001 2002 2003 --------- ----------- --------- --------- --------- (UNAUDITED) Expected volatility............ 0 0 0 70% 70% Expected life.................. 5.0 years 5.0 years 5.0 years 4.0 years 4.7 years Risk-free interest rate........ 5.41% 5.44% 4.25% 3.29% 2.81% Expected dividend yield........ 0% 0% 0% 0% 0%
Set forth below are the Company's income from continuing operations, net income, income from continuing operations per share and net income per share presented "as reported" and pro forma as if compensation cost had been recognized in accordance with the provisions of SFAS No. 123:
FISCAL TRANSITION FISCAL ------- --------------------- ----------------- 2001 2000 2001 2002 2003 ------- ----------- ------- ------- ------- (UNAUDITED) Income from continuing operations: As reported...................... $10,914 $14,694 $28,637 $31,290 $54,254 Deduct: total stockbased compensation expense determined under the fair value method, net of taxes.... (23) (9) (41) (45) (375) ------- ------- ------- ------- ------- Pro-forma........................ $10,891 $14,685 $28,596 $31,245 $53,879 ======= ======= ======= ======= ======= Net income: As reported...................... $11,319 $15,082 $30,269 $31,290 $54,254 Deduct: total stockbased compensation expense determined under the fair value method, net of taxes.... (23) (9) (41) (45) (375) ------- ------- ------- ------- ------- Pro-forma........................ $11,296 $15,073 $30,228 $31,245 $53,879 ======= ======= ======= ======= ======= Basic income from continuing operations per share: As reported...................... $ 0.32 $ 0.46 $ 0.89 $ 0.90 $ 1.49 Deduct: total stockbased compensation expense determined under the fair value method, net of taxes.... (0.01) -- -- -- (0.01) ------- ------- ------- ------- ------- Pro-forma........................ $ 0.31 $ 0.46 $ 0.89 $ 0.90 $ 1.48 ======= ======= ======= ======= =======
35
FISCAL TRANSITION FISCAL ------- --------------------- ----------------- 2001 2000 2001 2002 2003 ------- ----------- ------- ------- ------- (UNAUDITED) Basic net income per share: As reported...................... $ 0.33 $ 0.47 $ 0.94 $ 0.90 $ 1.49 Deduct: total stockbased compensation expense determined under the fair value method, net of taxes.... -- -- -- -- (0.01) ------- ------- ------- ------- ------- Pro-forma........................ $ 0.33 $ 0.47 $ 0.94 $ 0.90 $ 1.48 ======= ======= ======= ======= ======= Diluted income from continuing operations per share: As reported...................... $ 0.28 $ 0.40 $ 0.78 $ 0.82 $ 1.40 Deduct: total stockbased compensation expense determined under the fair value method, net of taxes.... -- -- -- -- (0.01) ------- ------- ------- ------- ------- Pro-forma........................ $ 0.28 $ 0.40 $ 0.78 $ 0.82 $ 1.39 ======= ======= ======= ======= ======= Diluted net income per share: As reported...................... $ 0.29 $ 0.41 $ 0.83 $ 0.82 $ 1.40 Deduct: total stockbased compensation expense determined under the fair value method, net of taxes.... -- -- (0.01) -- (0.01) ------- ------- ------- ------- ------- Pro-forma........................ $ 0.29 $ 0.41 $ 0.82 $ 0.82 $ 1.39 ======= ======= ======= ======= =======
The following table summarizes stock option transactions for common stock (shares in thousands):
FISCAL 2001 TRANSITION 2001 FISCAL 2002 FISCAL 2003 ----------------- ----------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ -------- ------ -------- ------ -------- Outstanding, beginning of period......................... 4,633 $0.11 5,208 $0.19 5,420 $ 0.27 4,156 $ 0.36 Granted........................ 1,227 0.43 848 0.85 20 15.55 496 13.57 Exercised...................... (425) 0.03 (628) 0.37 (1,265) 0.23 (2,557) 0.42 Forfeited...................... (227) 0.23 (8) 0.47 (19) 0.30 (34) 8.07 ----- ----- ----- ----- ------ ------ ------ ------ Outstanding, end of period....... 5,208 $0.19 5,420 $0.27 4,156 $ 0.36 2,061 $ 3.34 ===== ===== ===== ===== ====== ====== ====== ====== Options exercisable at period-end..................... 973 $0.19 1,048 $0.18 4,136 $ 0.29 1,636 $ 0.62 ===== ===== ===== ===== ====== ====== ====== ====== Weighted average fair value of options granted during the year........................... $0.10 $0.16 $ 8.56 $ 7.92 ===== ===== ====== ======
36 The following table summarizes information concerning currently outstanding options at January 31, 2004:
AVERAGE NUMBER NUMBER REMAINING EXERCISABLE OUTSTANDING CONTRACTUAL AT AT JANUARY 31, LIFE JANUARY 31, EXERCISE PRICES 2004 (YEARS) 2004 - --------------- -------------- ----------- ----------- $ 0.03 708 -- 708 0.39 483 1.6 483 0.51 97 2.0 97 0.85 309 2.8 309 11.44 29 2.2 29 13.13 20 4.2 -- 13.41 385 4.2 -- 15.55 10 2.6 10 17.70 10 3.3 -- 27.85 10 2.6 -- ----- ----- 2,061 1,636 ===== =====
Fair Value of Financial Instruments -- The following disclosure is made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The carrying amounts of cash and cash equivalents and accounts payable approximate their fair value due to the short-term maturities of such items. The carrying amount of the revolving credit facility approximates its fair value due to the variable interest rate it carries. Estimated fair value disclosures have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and estimation methodologies may have a material effect on the estimated fair value amounts. Derivatives -- SFAS No. 133 and 138, Accounting for Derivative Instruments and Hedging Activities, established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities requiring all companies to recognize derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 138 is an amendment to SFAS No. 133, which amended or modified certain issues discussed in SFAS No. 133. The Company has no derivative transactions. Reclassifications -- Certain reclassifications have been made to the consolidated financial statements in prior periods to conform to the current period presentation. Segment Reporting -- SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information establishes standards for reporting information about a company's operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates in a single operating segment -- the operation of mall-based specialty retail 37 stores. Revenues from external customers are derived from merchandise sales. The Company's net sales mix by merchandise category were as follows:
FISCAL TRANSITION FISCAL ------ ------------------ --------------- MERCHANDISE CATEGORIES 2001 2000 2001 2002 2003 - ---------------------- ------ ----------- ---- ------ ------ (UNAUDITED) Young Women's................................. 49% 47% 56% 58% 60% Young Men's................................... 39 42 33 30 27 Accessories................................... 12 11 11 12 13 --- --- --- --- --- Total Merchandise Sales....................... 100% 100% 100% 100% 100% === === === === ===
The Company does not rely on any major customers as a source of revenue. New Accounting Standards -- In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the financial position or results of operations of the Company. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement will be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the period of adoption. The adoption of SFAS No. 150 did not have a material impact on the Company's results of operations, financial position or cash flows. In December 2003, the FASB issued FAS No. 132 (Revised) ("FAS 132-R"), Employer's Disclosure about Pensions and Other Postretirement Benefits. FAS 132-R retains disclosure requirements of the original FAS 132 and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefit cost. FAS 132-R is effective for fiscal years ending after December 15, 2003, except that certain disclosures are effective for fiscal years ending after June 15, 2004. Interim period disclosures are effective for interim periods beginning after December 15, 2003. The adoption of the disclosure provisions of FAS 132-R did not have a material effect on the Company's consolidated financial statements. In January 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Regardless of whether a sponsor elects that deferral, FSP FAS 106-1 requires certain disclosures pending further consideration of the underlying accounting issues. The guidance in FSP FAS 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The Company believes the adoption of this statement will not have a material impact on its consolidated financial statements. 3. SIGNIFICANT RISKS AND UNCERTAINTIES Use of Estimates -- The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 38 and expenses during the reporting period. Actual results could differ from those estimates. The accounts requiring the use of significant estimates included inventory, income tax and certain reserves. Certain Risks Concentration -- The Company had three suppliers who in the aggregate constituted 36%, 30%, 41%, 37% and 34% of the Company's purchases for Fiscal 2001, Transition 2000 (unaudited), Transition 2001, Fiscal 2002 and Fiscal 2003, respectively. The loss of any of these suppliers could adversely affect the Company's operations. 4. CUMULATIVE EFFECT OF ACCOUNTING CHANGE In connection with the purchase 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 ("Acquisition"), 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, 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, $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 allocated to Aeropostale continued to be amortized over its estimated life of ten years. Net negative goodwill was $1.9 million and $1.6 million at the end of Fiscal 2000 and Fiscal 2001, respectively. The Company adopted SFAS No. 142, Goodwill and Intangibles, which changed the accounting for goodwill from an amortization method to an impairment approach on August 5, 2001. With the adoption of SFAS No. 142, the remaining negative goodwill was recorded as income from a cumulative effect of accounting change. Net income and income from continuing operations for Transition 2000 (unaudited) and Transition 2001 and the two previous fiscal years had been adjusted to reflect net income and income from continuing operations as though no negative goodwill amortization and the cumulative accounting change was recorded.
FISCAL TRANSITION FISCAL ------- ----------------- ----------------- 2001 2000 2001 2002 2003 ------- ------- ------- ------- ------- (UNAUDITED) Income from continuing operations.... $10,914 $14,694 $28,637 $31,290 $54,254 Adjusted income from continuing operations......................... 10,680 14,578 28,637 31,290 54,254 Net income........................... 11,319 15,082 30,269 31,290 54,254 Adjusted net income.................. 11,085 14,966 28,637 31,290 54,254 Diluted income from continuing operations per share............... $ 0.28 $ 0.40 $ 0.78 $ 0.82 $ 1.40 Adjusted diluted income from continuing operations per share.... 0.27 0.40 0.78 0.82 1.40 Diluted net income per share......... 0.29 0.41 0.83 0.82 1.40 Adjusted net income per share........ 0.28 0.41 0.78 0.82 1.40
39 5. OTHER CURRENT ASSETS Other current assets consist of the following:
FEBRUARY 1, 2003 JANUARY 31, 2004 ---------------- ---------------- Prepaid expenses....................................... $ 1,544 $ 2,681 Prepaid rent........................................... 4,857 6,148 Deferred taxes......................................... 682 -- Other receivables...................................... 3,586 3,455 ------- ------- $10,669 $12,284 ======= =======
6. FIXTURES, EQUIPMENT AND IMPROVEMENTS -- NET Fixtures, equipment and improvements -- net, consist of the following:
FEBRUARY 1, 2003 JANUARY 31, 2004 ---------------- ---------------- Leasehold improvements................................. $49,766 $ 68,143 Store fixtures and equipment........................... 26,457 35,175 Computer equipment and software........................ 6,886 9,346 Construction in progress............................... 2,622 7,428 ------- -------- 85,731 120,092 Less accumulated depreciation and amortization......... 16,283 27,514 ------- -------- $69,448 $ 92,578 ======= ========
Depreciation and amortization expense from continuing operations amounted to $3.8 million, $1.6 million, $3.1 million, $8.9 million and $12.8 million for Fiscal 2001, Transition 2000 (unaudited), Transition 2001, Fiscal 2002 and Fiscal 2003, respectively. 7. ACCRUED EXPENSES Accrued expenses consist of the following:
FEBRUARY 1, 2003 JANUARY 31, 2004 ---------------- ---------------- Accrued compensation................................... $ 7,838 $11,165 Sales and use tax...................................... 1,158 1,718 Accrued rent........................................... 4,950 6,925 Accrued gift certificates and credits.................. 6,761 8,492 Income tax payable..................................... 14,248 4,825 Deferred tax liability................................. -- 895 Other.................................................. 5,089 7,071 ------- ------- $40,044 $41,091 ======= =======
40 8. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following:
FEBRUARY 1, 2003 JANUARY 31, 2004 ---------------- ---------------- Deferred rent.......................................... $33,301 $44,997 Above market rental liability.......................... 1,231 588 Unfunded pension liability............................. 2,543 4,202 ------- ------- $37,075 $49,787 ======= =======
In connection with the Acquisition, the Company recorded a liability to reflect leases that were at above-market rental rates. This liability will be amortized as a reduction of future rental expenses over the respective lease lives. The amortization was $0.8 million for Fiscal 2001, $0.4 million for Transition 2000 (unaudited) and Transition 2001, $0.7 million for Fiscal 2002 and $0.6 million for Fiscal 2003. 9. REVOLVING CREDIT FACILITY During Fiscal 2003, the Company amended its loan and security agreement with Fleet Retail Finance Inc. Under the Amended and Restated Loan and Security agreement, the Company may borrow or obtain letters of credit up to an aggregate of $25 million (the "Credit Facility") with letters of credit having a sub- limit of $15 million. The Facility matures on September 30, 2005. The maximum borrowing availability under the Credit Facility of $25 million is a reduction of $30 million from amounts previously available under the Credit Facility. The company elected to reduce its Credit Facility by $30 million based upon it's current cash balances and projections for its future cash flows. Under the Credit Facility, the Company will realize cost savings due to lower loan commitment fees. 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 1.25% to 1.75%, dependant upon the Company's financial performance. Additionally, the Company must pay commitment fees on any unused portion of the Credit Facility at an annualized rate of 0.375% on the difference between the loan aggregate of $25 million and the 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 $0.1 million, which is being amortized over the term of the Credit Facility. Such amount is recorded as additional interest expense. There are no covenants in the Credit Facility requiring the Company to achieve certain earnings levels and there are no capital spending limitations. There are certain negative covenants under the Credit Facility, including but not limited to, limitations on the Company's ability to incur other indebtedness, encumber its assets, or undergo a change of control. Additionally, the Company is required to maintain a ratio of 2:1 for the value of the Company's inventory to the amount of the loans under the Credit Facility. As of January 31, 2004, the Company was in compliance with all covenants under the Credit Facility. On January 31, 2003 and February 1, 2003, the Company had $0 in borrowings outstanding under the amended Credit Facility and the prior Credit Facility, respectively, and no stand-by or commercial letters of credit had been issued under the facilities. The average amount of borrowings outstanding during Fiscal 2001, Transition 2001, Fiscal 2002 and Fiscal 2003 were $18.5 million, $10.0 million, $1.6 million and $0 at a weighted average interest rate of 7.70%, 5.57%, 5.99% and 0% excluding an unused line fee of $0.1 million, $0.1 million, $0.2 million and $0.2 million, respectively. 10. NET INCOME PER SHARE In accordance with SFAS No. 128, Earnings Per Share, basic earnings per share has 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. 41 Net income per common share has been computed as follows:
FISCAL 2001 ----------------- BASIC DILUTED ------- ------- Income from continuing operations........................... $10,914 $10,914 Preferred stock dividends................................... (1,048) (1,048) ------- ------- Income from continuing operations available for per-share calculation............................................... 9,866 9,866 Income from discontinued operations......................... 405 405 ------- ------- Net income available for per-share calculation.............. $10,271 $10,271 ======= ======= Average shares of common stock outstanding.................. 31,339 31,339 Stock options............................................... -- 4,126 ------- ------- Total average equivalent shares............................. 31,339 35,465 ======= ======= Per Common Share: Income from continuing operations........................... $ 0.32 $ 0.28 Income from discontinued operations......................... 0.01 0.01 ------- ------- Net income.................................................. $ 0.33 $ 0.29 ======= =======
TRANSITION ------------------------------------- 2001 2002 ----------------- ----------------- BASIC DILUTED BASIC DILUTED ------- ------- ------- ------- (UNAUDITED) Income from continuing operations.............. $14,694 $14,694 $28,637 $28,637 Preferred stock dividends...................... (508) (508) (574) (574) ------- ------- ------- ------- Income from continuing operations available for per-share calculation........................ 14,186 14,186 28,063 28,063 Income from discontinued operations............ 388 388 -- -- Cumulative effect of accounting change......... -- -- 1,632 1,632 ------- ------- ------- ------- Net income available for per-share calculation.................................. $14,574 $14,574 $29,695 $29,695 ======= ======= ======= ======= Average shares of common stock outstanding..... 31,183 31,183 31,633 31,633 Stock options.................................. -- 3,994 -- 4,367 ------- ------- ------- ------- Total average equivalent shares................ 31,183 35,177 31,633 36,000 ======= ======= ======= ======= Per Common Share: Income from continuing operations.............. $ 0.46 $ 0.40 $ 0.89 $ 0.78 Income from discontinued operations............ 0.01 0.01 -- -- Cumulative effect of accounting change......... -- -- 0.05 0.05 ------- ------- ------- ------- Net income..................................... $ 0.47 $ 0.41 $ 0.94 $ 0.83 ======= ======= ======= =======
42
FISCAL 2002 FISCAL 2003 ----------------- ----------------- BASIC DILUTED BASIC DILUTED ------- ------- ------- ------- Net income..................................... $31,290 $31,290 $54,254 $54,254 Preferred stock dividends...................... (362) (362) -- -- ------- ------- ------- ------- Net income available for per-share calculation.................................. $30,928 $30,928 $54,254 $54,254 ======= ======= ======= ======= Average shares of common stock outstanding..... 34,387 34,387 36,505 36,505 Stock options.................................. -- 3,467(1) -- 2,353 ------- ------- ------- ------- Total average equivalent shares................ 34,387 37,854 36,505 38,858 ======= ======= ======= ======= Per Common Share: Income from continuing operations.............. $ 0.90 $ 0.82 $ 1.49 $ 1.40 Net income..................................... $ 0.90 $ 0.82 $ 1.49 $ 1.40 ======= ======= ======= =======
- --------------- (1) Options to purchase 20 shares were not included in the computation of dilutive shares because to do so would have been anti-dilutive. 11. STOCKHOLDERS' EQUITY 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 per share amounts and conversion ratios included in the condensed consolidated financial statements reflect the stock split for all periods presented. During 1998, the Company sold a total of 31,047,060 shares of voting common stock $0.01 par value for proceeds of $1.0 million in connection with the Acquisition. The common stock is entitled to one vote per share. Bear Stearns Merchant Banking owned 65.7% of the Company's outstanding shares of common stock and had the right to designate a majority of the members of the Board of Directors. Bear Stearns Merchant Banking elected five persons out of nine persons designated by the Company's by-laws to be directors. 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 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 1,851,000 shares of common stock. $10.0 million of the $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 (Note 12). The remainder of the proceeds were used for working capital, general corporate purposes and new store openings. The Company also incurred a $0.1 million compensation charge for a bonus for certain management stockholders in connection with the completion of the initial public offering. On August 1, 2003, certain stockholders of the Company completed a secondary offering of 8,222,500 shares of common stock, at a price to the public of $25.00. The Company did not receive any proceeds from the sale of shares of the common stock sold by the selling stockholders. The Company incurred $0.6 million in offering expenses related to the secondary offering. Stock Option Plans -- During 1998, the Company adopted a stock option plan under which it may grant non-qualified and qualified stock options to purchase up to 6,585,740 shares of the Company's Common Stock $0.01 par value (which may be voting or nonvoting) to executives, consultants, directors, or other key employees (the "Stock Option Plan"). Options may have a maximum term of up to eight years and qualified stock options may not be granted at less than the fair market value at the date of grant. Vesting provisions of the options will be determined by the Board of Directors at the date of option grants; however, all outstanding 43 options will immediately vest upon an initial public offering of the Company's Common Stock or a sale of the Company. 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 fair market value of $15.77 per share. The equity based compensation expense totaled $8.4 million, of which $0.8 million and $3.1 million were recorded in cost of sales and selling, general and administrative expenses, respectively, in the six months and the fifty-two weeks ended February 2, 2002. The unamortized balance of $4.5 million associated with the immediate vesting of options upon the consummation of the initial public offering, were recorded in the fiscal year ended February 1, 2003 of which $1.0 million and $3.5 million were recorded in cost of sales and selling, general and administrative expenses, respectively. 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 for issuance under the plan. Under the plan, the compensation committee or the board may award grants of incentive stock options and other, non-qualified stock options. The compensation committee also has the authority to grant options that will become fully vested and exercisable automatically upon a change in control. The compensation committee may not, however, award to any one person in any calendar year options to purchase common stock equal to more than 10% of the total number of shares authorized under the plan, and it may not award incentive options first exercisable in any calendar year whose underlying shares have a fair market value greater than $100,000 determined at the time of grant. The compensation committee will determine the exercise price and term of any option in its discretion. The exercise price of an incentive option, however, may not be less than 100% of the fair market value of a share of common stock on the date of grant and the option must be exercised within 10 years of the date of grant. The exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of our voting power may not be less than 110% of such fair market value on such date and the option must be exercised within five years of the date of grant. 12. REDEEMABLE PREFERRED STOCK Series B Redeemable Preferred Stock -- The Company issued 6,250 shares of its Series B redeemable preferred stock $0.01 par value ("Series B Preferred Stock") for proceeds of $6.25 million in connection with the Acquisition. The Series B Preferred Stock has no voting rights. Dividends accrue at 12.5 percent per annum at a liquidation value of $1,000 per share and are cumulative. The shares are mandatory redeemable at the liquidation value at the earliest of an initial public offering of the Company's stock, a sale of the Company or 10 years from the date of issue or at any time at the Company's option. Cumulative dividends on the Series B Preferred Stock are payable at the rate of 12.5 percent per annum, quarterly on the first day of November, February, May, and August, based on face value. Dividends not declared and paid will also accrue dividends at the same annual rate. Unpaid dividends on a quarterly basis are then payable in Series B preferred stock. As of February 2, 2002, the Company had accrued $3.4 million in dividends which is recorded as Redeemable Preferred Stock which upon the liquidation, rank senior to all classes of common stock. In connection with the Company's offering, all of the Company's outstanding shares of 12 1/2% Series B redeemable preferred stock were redeemed and all accrued and unpaid dividends payed thereon. 13. EMPLOYEE BENEFIT PLANS The Company has a retirement plan with a 401(k) salary deferral feature that covers substantially all of its employees who meet certain requirements. Under the terms of the plan, employees may contribute up to 14 percent of gross earnings and the Company will provide a matching contribution of 50 percent of the first 5 percent of gross earnings contributed by the participants. The Company may, at its option, make additional contributions. The terms of the plan provide for vesting in the Company's matching contributions to the plan over a five-year service period with 50 percent vesting after year three, an additional 25 percent vesting after year four, and participants will be fully vested after year five. The Company expensed contributions for the retirement plan of $0.3 million, $0.1 million, $0.2 million, $0.3 million, and $0.4 million for Fiscal 2001, Transition 2000 (unaudited), Transition 2001, Fiscal 2002, and Fiscal 2003, respectively. 44 The Company maintains a supplemental executive retirement plan ("SERP"), which is an unfunded defined benefit plan for certain executives. The benefits are based on years of service and the employee's highest average pay during any five years within the ten-year period prior to retirement. The following information on the Company's pension plan is provided:
FEBRUARY 1, JANUARY 31, 2003 2004 ----------- ----------- CHANGE IN BENEFIT OBLIGATION: Net benefit obligation at beginning of period............. $ 2,588 $ 2,997 Service cost.............................................. 101 184 Interest cost............................................. 182 315 Actuarial loss............................................ 170 2,338 Gross benefits paid....................................... (44) (81) ------- ------- Net benefit obligation at end of period................... $ 2,997 $ 5,753 ======= ======= Accumulated benefit obligation............................ $ 1,648 $ 4,202 ======= ======= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of period.......... $ -- $ -- Employer contributions.................................... 44 81 Gross benefits paid....................................... (44) (81) Actual return on plan assets.............................. -- -- ------- ------- Fair value of plan assets at end of period................ $ -- $ -- ======= ======= Funded status at end of period............................ $(2,997) $(5,753) Unrecognized net actuarial gain........................... 424 2,652 Prior service and cost.................................... 30 -- Unrecognized transition amount............................ -- -- ------- ------- Accrued benefit cost...................................... $(2,543) $(3,101) Additional minimum liability.............................. -- (1,101) ------- ------- Net amount recognized..................................... $(2,543) $(4,202) ======= =======
Pension expenses includes the following components:
FISCAL TRANSITION FISCAL ------ ------------------ --------------- 2001 2000 2001 2002 2003 ------ ----------- ---- ------ ------ (UNAUDITED) COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost................................. $ 89 $ 45 $ 45 $101 $184 Interest cost................................ 155 79 86 182 315 Prior service cost........................... -- -- -- -- 30 Amortization of prior experience loss (gain)..................................... 3 1 2 2 110 ---- ---- ---- ---- ---- Net periodic benefit cost.................... $247 $125 $133 $285 $639 ==== ==== ==== ==== ==== WEIGHTED-AVERAGE ASSUMPTIONS USED: Discount rate................................ 7% 7% 7% 6.75% 6% Rate of compensation increase................ 4.5% 4.5% 4.5% 4.5% 4.5%
45 14. INCOME TAXES The provision for income taxes included within continuing operations for Fiscal 2001, Transition 2000 (unaudited), Transition 2001, Fiscal 2002 and Fiscal 2003 consists of the following:
FISCAL TRANSITION FISCAL ------ ---------------- ----------------- 2001 2000 2001 2002 2003 ------ ------ ------- ------- ------- (UNAUDITED) Federal: Current.............................. $4,730 $7,977 $18,386 $18,420 $23,966 Deferred............................. 1,074 (56) (1,896) (1,092) 5,178 ------ ------ ------- ------- ------- 5,804 7,921 16,490 17,328 29,144 ------ ------ ------- ------- ------- State and local: Current.............................. 758 1,457 3,777 3,645 4,332 Deferred............................. 503 251 (379) (110) 1,226 ------ ------ ------- ------- ------- 1,261 1,708 3,398 3,535 5,558 ------ ------ ------- ------- ------- $7,065 $9,629 $19,888 $20,863 $34,702 ====== ====== ======= ======= =======
Reconciliation of the U.S. statutory rate with the Company's effective tax rate excluding discontinued operations is summarized as follows:
FISCAL TRANSITION FISCAL ----------- ------------------------- ------------------------- 2001 2000 2001 2002 2003 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Federal statutory rate........ 34.0% 34.0% 35.0% 35.0% 35.0% Increase (decrease) in tax resulting from: State income taxes (net of federal tax benefits).... 4.6 4.6 4.6 4.6 4.1 Nondeductible goodwill amortization and write-off................ (0.5) (0.5) -- -- -- Change in federal tax rate..................... -- -- (.3) -- -- Other....................... 1.2 1.5 1.7 0.4 (0.1) ---- ---- ---- ---- -------- Effective rate................ 39.3% 39.6% 41.0% 40.0% 39.0% ==== ==== ==== ==== ========
As of February 1, 2003 and January 31, 2004, the components of the net deferred income tax assets (liability) are as follows:
FEBRUARY 1, JANUARY 31, 2003 2004 ----------- ----------- Current: Inventory................................................. $ 103 (1,694) Accrued vacation.......................................... 271 336 Other..................................................... 308 463 ------ -------- Total current............................................... $ 682 $ (895) ====== ========
46
FEBRUARY 1, JANUARY 31, 2003 2004 ----------- ----------- Noncurrent: Fixed assets.............................................. 4,030 (4,210) Acquired lease liability.................................. 511 242 Deferred rent............................................. 2,420 3,192 State income taxes........................................ (512) 39 Equity based compensation................................. 2,019 1,705 ------ -------- Total noncurrent............................................ 8,468 968 ------ -------- Net deferred income tax assets.............................. $9,150 $ 73 ====== ========
15. COMMITMENTS AND CONTINGENCIES The Company is committed under noncancelable leases for all its store and office space, expiring at various dates through July 2011. The leases generally provide for minimum rent plus additional increases in real estate taxes, certain operating expenses, etc. Certain leases also require contingent rent based on sales. As of January 31, 2004, the aggregate minimum annual rent commitments are as follows:
FISCAL YEAR TOTAL - ------ ------- 2004........................................................ 43,099 2005........................................................ 39,097 2006........................................................ 35,930 2007........................................................ 35,569 2008........................................................ 35,076 Thereafter.................................................. 109,275 ------- Total....................................................... 295,046 =======
Rental expense consists of the following:
FISCAL TRANSITION FISCAL ------- --------------------- ----------------- 2001 2000 2001 2002 2003 ------- ------- ----------- ------- ------- (UNAUDITED) Minimum rentals.................... $21,073 $10,255 $11,915 $30,233 $39,018 Contingent rentals................. 1,379 691 1,915 3,673 5,683 Office space rentals............... 777 363 439 832 1,068
Employment Agreements -- As of January 31, 2004, the Company had outstanding employment contracts expiring in fiscal 2004. The amount payable for these contracts is $1.0 million. Legal Proceedings -- Various suits and claims arising in the course of business are pending against the Company and its subsidiaries. In the opinion of management, dispositions of these matters are not expected to materially affect the Company's consolidated financial position, cash flows or results from operations. Guarantees -- The Company has not provided any financial guarantees as of January 31, 2004. 16. RELATED PARTY TRANSACTIONS Sponsor Fee -- The Company had a Management Services Agreement with the holder of the Series B Preferred Stock and the majority shareholder of the Company's voting common stock. The services consist of formulating and implementing business strategies, including identifying and assisting the Company in evaluating corporate opportunities, such as marketing opportunities, and financial strategies. In addition, assistance has been provided for lending, security holder and public relations matters. The agreement calls for 47 annual payments equal to the greater of $0.2 million or 3 percent of earnings before interest, income taxes, depreciation and amortization ("EBITDA," as defined) up to a maximum of $0.5 million. Such fees aggregated $0.5 million for Fiscal 2001, $0.4 million for Transition 2000 (unaudited) and Transition 2001 and $0.1 million for Fiscal 2002. The agreement was terminated upon the consummation of the initial public offering. Leases -- The Company is the lessee under operating leases where the landlord is a stockholder of the Company who is longer a related party at the end of Fiscal 2002 (Note 15). Loans to Executives -- In 1999, the Company repurchased all of its outstanding shares of Series A Preferred Stock from Federated Department Stores, Inc. This triggered a loan forgiveness provision contained in loan agreements regarding loans that Federated had previously made to Mr. Geiger and Mr. Mills. This loan forgiveness caused Messrs. Geiger and Mills to incur significant tax liability in 1999. The Company therefore extended interest free loans in the amount of $70,000 to both Mr. Geiger and Mr. Mills to cover this tax liability. Mr. Geiger and Mr. Mills each repaid the full amount of the loan in February 2002 and currently do not have any outstanding indebtedness to the Company. Employment Contracts: The Company has employment agreements with certain members of the Company's senior management (Note 15). 17. DISCONTINUED OPERATIONS During February 2000, the Company's Board of Directors decided to discontinue the Chelsea Cambell specialty store business at its meeting on February 25, 2000 (the measurement date) and the Company closed all Chelsea Cambell stores by the end of December 2000. Accordingly, operating results of this segment have been reclassified as income from discontinued operations for all periods presented. Operating results of discontinued operations are as follows:
FISCAL TRANSITION TRANSITION 2000 2000 2001 ------- ----------- ---------- (UNAUDITED) Net sales............................................. $35,117 $2,854 $2,854 ======= ====== ====== Income (loss) from discontinued operations: Before income taxes................................. $(9,531) $ -- $ -- Estimated net gain on disposal...................... 6,749 662 636 Income tax benefit (expense)........................ 4,784 (257) (248) ------- ------ ------ Net gain.............................................. $ 2,002 $ 405 $ 388 ======= ====== ======
During Fiscal 2001, the Company was able to negotiate settlements on future lease obligations and incurred better than expected profitability on the closing of the Chelsea Cambell stores and therefore realized a reversal of the estimated loss on disposal of $0.7 million The July 29, 2000 loss from discontinued operations before income taxes includes ($24.5 million) in cost of goods sold, ($6.2 million) in payroll expense, ($14.1 million) in nonpayroll expenses, $0.6 million in amortization of negative goodwill, and an estimated loss from operations during the phase-out period subsequent to July 29, 2000 of ($0.8 million), and other revenue of $0.4 million. The estimated net gain on disposal includes the write-off of negative goodwill of $8.8 million, the lease termination costs of ($2.5 million), write-offs of tenant liabilities, acquired lease liabilities, and deferred rent of $1.3 million and other expenses of ($0.9 million). 48 Included within accrued expenses and other liabilities on the accompanying balance sheet is an accrual for the costs associated with the disposal of the Chelsea Cambell business. The major components of the accrual and the activity through August 4, 2001 were as follows:
ACCRUAL OF LEASE OPERATING BUY-OUT SEVERANCE LOSSES AND CONTRACT AND THROUGH THE TERMINATION TERMINATION DISPOSITION COSTS BENEFITS DATE OTHER TOTAL ------------ ----------- ----------- ----- ------- Provision at measurement date... $ 2,478 $ 566 $ 806 $ 316 $ 4,166 Activity........................ (1,944) (352) -- (281) (2,577) ------- ----- ----- ----- ------- Balance, at July 29, 2000....... 534 214 806 35 1,589 ------- ----- ----- ----- ------- Activity........................ (534) (214) (806) (35) (1,589) ------- ----- ----- ----- ------- Balance, at August 4, 2001...... $ -- $ -- $ -- $ -- $ -- ======= ===== ===== ===== =======
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THIRTEEN WEEKS ENDED ----------------------------------------------- MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1, 2002 2002 2002 2003 ------- --------- ----------- ----------- FISCAL 2002 Net sales........................................ $85,130 $90,141 $169,210 $206,423 Gross profit..................................... 24,149 24,094 50,902 63,458 Net income (loss)................................ 592 (1,978) 15,001 17,675 Basic net income (loss) per share............. 0.01 (0.06) 0.43 0.50 Diluted net income (loss) per share........... 0.01 (0.06) 0.39 0.46
THIRTEEN WEEKS ENDED ------------------------------------------------ MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31, 2003 2003 2003 2004 -------- --------- ----------- ----------- FISCAL 2003 Net sales...................................... $112,211 $129,944 $220,071 $272,642 Gross profit................................... 30,250 35,582 73,922 89,962 Net income..................................... 2,112 2,742 21,878 27,522 Basic net income per share.................. 0.06 0.08 0.59 0.74 Diluted net income per share................ 0.05 0.07 0.56 0.71
The per share amounts are calculated independently for each thirteen-week period presented. The sum of the thirteen weeks may not equal the full year per share amounts. 19. SUBSEQUENT EVENTS On March 9, 2004, the Company announced a three-for-two stock split on all shares of its common stock that will be effected in the form of a stock dividend. The stock split will entitle all shareholders of record at the close of business on April 12, 2004 to receive one additional share of common stock for every two shares of common stock held on that date. The additional shares will be distributed to shareholders on or about April 26, 2004. Cash will be paid in lieu of issuing fractional shares based on the closing price of the Company's common stock on April 12, 2004 (as adjusted for the stock split). During November 2003, the Board of Directors authorized a share repurchase program of its outstanding common stock in the amount of $35.0 million. As of the end of Fiscal 2003, the Company had repurchased $17.7 million of its common stock under this authorization. On March 9, 2004, the Board of Directors approved an increase of $35.0 million in addition to the amount previously authorized under the share repurchase program. In addition, we recently entered into employment agreements with 6 of our executives, copies of which have been filed as exhibits to the Company's annual report on Form 10-K for Fiscal 2003 in which these financial statements are included. 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES Pursuant to Exchange Act Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our management carried out an evaluation, under the supervision and with the participation of our Chairman and Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls (as defined in Rule 13a-15(e) of the Exchange Act) and procedures. Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that as of the end of our fiscal year ended January 31, 2004, our disclosure controls and procedures (1) are effective in timely alerting them to material information relating to our company (including its consolidated subsidiaries) required to be included in our periodic SEC filings and (2) are adequate to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed and summarized and reported within the time periods specified in the SEC's rules and forms. There have been no significant changes in our internal controls or in other factors during the Company's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company's internal controls over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to this item is incorporated by reference from the Registrant's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the Registrant's fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item is incorporated by reference from the Registrant's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the Registrant's fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item is incorporated by reference from the Registrant's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the Registrant's fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item is incorporated by reference from the Registrant's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the Registrant's fiscal year. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information with respect to this item is incorporated by reference from the Registrant's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the Registrant's fiscal year. 50 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The consolidated financial statements set forth in Part II, Item 8. 2. Financial Statement Schedule II Valuation and Qualifying Accounts 3. Exhibits included or incorporated herein: 51 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 3.1 Form of Amended and Restated Certificate of Incorporation.+ 3.2 Form of Amended and Restated By-Laws.+ 4.1 Specimen Common Stock Certificate.+ 4.2 Stockholders' Agreement, dated as of August 3,1998, by and among MSS-Delaware, Inc., MSS Acquisition Corp. II, Federated Specialty Stores, Inc., Julian R. Geiger, David R. Geltzer and John S. Mills.+ 10.1 Aeropostale, Inc. 1998 Stock Option Plan.+ 10.2 Aeropostale, Inc. 2002 Long-Term Incentive Plan.+ 10.3 Management Services Agreement, dated as of July 31, 1998, between MSS-Delaware, Inc. and MSS Acquisition Corp. II.+ 10.4 Loan and Security Agreement, dated July 31, 1998 between Bank Boston Retail Finance Inc., as agent for the lenders party thereto (the "Lenders"), the Lenders and MSS-Delaware, Inc.+ 10.5 First Amendment to Loan and Security Agreement, dated November 8, 1999, by and between Bank Boston Retail Finance Inc., as agent for the Lenders, the Lenders and MSS-Delaware, Inc.+ 10.6 Second Amendment to Loan and Security Agreement, dated May 2, 2002, by and between Fleet Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as agent for the Lenders, the Lenders and Aeropostale, Inc. (f/k/a MSS-Delaware, Inc.).+ 10.7 Third Amendment to Loan and Security Agreement, dated June 13, 2001, by and between Fleet Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as agent for the Lenders, the Lenders and Aeropostale, Inc. (f/k/a MSS-Delaware, Inc.).+ 10.8 Fourth Amendment to Loan and Security Agreement, dated February 2, 2002, by and between Fleet Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as agent for the Lenders, the Lenders and Aeropostale, Inc. (f/k/a MSS-Delaware, Inc.).+ 10.9 Sublease Agreement, dated February 5, 2002, between the United States Postal Services and Aeropostale, Inc.+ 10.10 Merchandise Servicing Agreement, dated March 1, 1999, between American Consolidation, Inc. and MSS Delaware, Inc.+ 10.11 Interim Merchandise Servicing Agreement, dated as of February 11, 2002, by and between American Consolidation Inc. and Aeropostale, Inc.+ 10.12 Sourcing Agreement, dated July 22, 2002, by and among Federated Department Stores, Inc., Specialty Acquisition Corporation and Aeropostale, Inc.++ 10.13 Fifth Amendment to Loan and Security Agreement, dated April 15, 2002, by and between Fleet Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as agent for the Lenders, the Lenders and Aeropostale, Inc. (f/k/a MSS-Delaware, Inc.).+ 10.14 Amendment No. 1 to Stockholders' Agreement, dated April 23, 2002, by and among Aeropostale, Inc., Bear Stearns MB 1998-1999 Pre-Fund, LLC and Julian R. Geiger.+ 10.15 Employment Agreement, dated as of February 1, 2002, between Aeropostale, Inc. and Julian R. Geiger.+ 10.16 Employment Agreement, dated February 1, 2002, between Aeropostale, Inc. and Christopher L. Finazzo.++ 10.17 Employment Agreement, dated February 1, 2002, between Aeropostale, Inc. and John S. Mills.++ 10.18 Fifth Amendment to Loan and Security Agreement, dated October 7, 2003, by and between Fleet Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as agent for the Lenders, the Lenders and Aeropostale, Inc. (f/k/a MSS-Delaware, Inc). +++ 10.19 Employment agreement, dated as of February 1, 2004, between Aeropostale, Inc. and Julian R. Geiger. 10.20 Employment agreement, dated as of February 1, 2004, between Aeropostale, Inc. and Christopher L. Finazzo. 10.21 Employment agreement, dated as of February 1, 2004, between Aeropostale, Inc. and John S. Mills. 10.22 Employment agreement, dated as of February 1, 2004, between Aeropostale, Inc. and Michael J. Cunningham.
52
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.23 Employment agreement, dated as of February 1, 2004, between Aeropostale, Inc. and Thomas P. Johnson. 10.24 Employment agreement, dated as of February 1, 2004, between Aeropostale, Inc. and Olivera Lezic-Zangas. 21.1 List of subsidiaries of Aeropostale, Inc.+ 23.1 Consent of Deloitte & Touche LLP. 31.1 Certification by Julian R. Geiger, Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by Michael J. Cunningham, Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by Julian R. Geiger pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by Michael J. Cunningham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------- * Filed herewith. + Incorporated by reference to the Registration Statement on Form S-1, originally filed by Aeropostale, Inc. on March 8, 2002 (Registration No. 333-84056). ++ Incorporated by reference to the Registrant's Annual Report on 10-Q, for the fiscal year ended February 1, 2003 (File No. 001-31314). +++ Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, for the quarterly period ended November 1, 2003 (File No. 001-31314). (b) Reports on Form 8-K: 1. The Registrants Current Report on Form 8-K, dated April 10, 2003, related to monthly historical net sales. 2. The Registrant's Current Report on Form 8-K, dated May 7, 2003, related to monthly historical net sales. 3. The Registrant's Current Report on Form 8-K, dated May 22, 2003, related to second quarter earnings. 4. The Registrant's Current Report on Form 8-K, dated June 4, 2003, related to monthly historical net sales. 5. The Registrant's Current Report on Form 8-K, dated July 9, 2003, related to monthly historical net sales. 6. The Registrant's Current Report on Form 8-K, dated August 6, 2003, related to monthly historical net sales. 7. The Registrant's Current Report on Form 8-K, dated August 21, 2003, related to quarterly earnings monthly historical net sales. 8. The Registrant's Current Report on Form 8-K, dated September 3, 2003, related to monthly historical net sales. 9. The Registrant's Current Report on Form 8-K, dated September 30, 2003, related to the resignation of one of the members on Company's Board of Directors. 10. The Registrant's Current Report on Form 8-K, dated October 8, 2003, related to monthly historical net sales. 11. The Registrant's Current Report on Form 8-K, dated November 3, 2003, related to monthly historical net sales. 53 12. The Registrant's Current Report on Form 8-K, dated November 20, 2003, related to quarterly earnings. 13. The Registrant's Current Report on Form 8-K, dated December 4, 2003, related to monthly historical net sales. 14. The Registrant's Current Report on Form 8-K, dated January 7, 2004, related to monthly historical net sales. 54 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. AEROPOSTALE, INC. Date: April 14, 2004 By: /s/ JULIAN R. GEIGER ------------------------------------ Julian R. Geiger Chairman, Chief Executive Officer, and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant, and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JULIAN R. GEIGER Julian R. Geiger April 14, 2004 - -------------------------------------- Chairman, Chief Executive Officer, Julian R. Geiger and Director (Principal Executive Officer) /s/ JOHN S. MILLS President, Chief Operating Officer, April 14, 2004 - -------------------------------------- and Director John S. Mills /s/ MICHAEL J. CUNNINGHAM Executive Vice President and Chief April 14, 2004 - -------------------------------------- Financial Officer Michael J. Cunningham (Principal Financial Officer) /s/ ALAN C. SIEBELS Vice President -- Controller April 14, 2004 - -------------------------------------- (Principal Accounting Officer) Alan C. Siebels /s/ BODIL ARLANDER Director April 14, 2004 - -------------------------------------- Bodil Arlander /s/ RONALD BEEGLE Director April 14, 2004 - -------------------------------------- Ronald Beegle /s/ MARY ELIZABETH BURTON Director April 14, 2004 - -------------------------------------- Mary Elizabeth Burton /s/ DAVID EDWAB Director April 14, 2004 - -------------------------------------- David Edwab /s/ JOHN D. HOWARD Director April 14, 2004 - -------------------------------------- John D. Howard /s/ DAVID B. VERMYLEN Director April 14, 2004 - -------------------------------------- David B. Vermylen
55 AEROPOSTALE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE BEGINNING AMOUNTS CHARGED TO WRITE-OFFS AGAINST BALANCE END OF RESERVE FOR RETURNS: OF PERIOD NET INCOME RESERVE PERIOD -------------------- ----------------- ------------------ ------------------ -------------- Year Ended January 31, 2004... $418 $22,878 $22,624 $672 Year Ended February 1, 2003... 299 18,561 18,442 418 Six months Ended February 2, 2002........................ 213 10,464 10,378 299 Year Ended August 4, 2001..... 221 10,404 10,412 213
56 EX-10.19 3 y94783exv10w19.txt EMPLOYMENT AGREEMENT: GEIGER EXHIBIT 10.19 EMPLOYMENT AGREEMENT PARTIES This Employment Agreement (this "Agreement") dated and effective as of February 1, 2004 (the "Effective Date"), is entered into by and between Aeropostale, Inc., a Delaware corporation (the "Company"), and Julian R. Geiger ("Executive"). TERMS OF AGREEMENT In consideration of the mutual covenants in this Agreement, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the terms listed below shall be defined as indicated. Affiliate: A domestic or foreign business entity controlled by, controlling or under common control with the Company. Annual Bonus: See Section 3.2. Base Salary: See Section 3.1. Board: The Board of Directors of the Company. Cause: See Section 5.1. Change of Control: A Change of Control" shall mean (i) the acquisition by any person or entity of, directly or indirectly, Beneficial Ownership (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities of the Company representing 33-1/3% (or more) of the total voting power of all of the Company's then outstanding voting securities, (ii) a merger or consolidation of the Company in which the Company's voting securities immediately prior to the merger or consolidation do not represent, or are not converted into securities (owned by stockholders in substantially the same proportions as their ownership immediately prior to such merger or consolidation) that represent, a majority of the voting power of all of the voting securities of the surviving entity immediately after the merger or consolidation, (iii) a sale of substantially all of the assets of the Company or a liquidation or dissolution of the Company, or (iv) individuals, who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the Effective Date whose election or nomination for election by the Company's stockholders was approved by the vote of at least a majority of the directors then in office shall be deemed a member of the Incumbent Board. Common Stock: The $.01 par value common stock of the Company. Confidential Information: All secret proprietary information of the Company and its Subsidiaries, not otherwise publicly disclosed (except if disclosed by the Executive in violation of this Agreement), whether or not discovered or developed by Executive, known by Executive as a consequence of Executive's employment with the Company at any time (including prior to the commencement of this Agreement) as an employee or agent. Without limiting the generality of the foregoing, such proprietary information shall include (a) customer lists; (b) acquisition, expansion, marketing, financial and other business information and plans; (c) research and development; (d) computer programs; (e) sources of supply; (f) identity of specialized consultants and contractors and confidential information developed by them for the Company and its Subsidiaries; (g) purchasing, operating and other cost data; (h) special customer needs, cost and pricing data; (i) manufacturing methods; (j) quality control information; (k) inventory techniques; (l) employee information; any of which information is not generally known in the industries in which the Company and its Subsidiaries are conducting business or shall at any time during Executive's Employment conduct business including (without limitation) the apparel retailing industry. Confidential Information also includes the overall business, financial, expansion and acquisition plans of the Company and its Subsidiaries, and includes information contained in manuals, memoranda, projections, minutes, plans, drawings, designs, formula books, specifications, computer programs and records, whether or not legended or otherwise identified by the Company and its Subsidiaries as Confidential Information, as well as information which is the subject of meetings and discussions and not so recorded. Consolidated Net Income: For any period the net income (or loss) of the Company for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that (i) there shall be excluded therefrom (to the extent included and without duplication) (A) all extraordinary gains and extraordinary losses (as defined by generally accepted accounting principles) and (B) any effect that any change (after the Effective Date) in any law or in generally accepted accounting principles relating to the Company's recognition of compensation expense for employee stock options has on the net income (or loss) of the Company determined on a consolidated basis in accordance with generally accepted accounting principles; and (ii) that neither Annual Bonus nor any annual bonus based upon Percentage Increase in Consolidated Net Income payable to any employee (other than Executive) of the Company shall be considered in the computation thereof. Disability: The absence of the Executive from the Executive's duties to the Company on a full-time basis for a total of 120 days during any 12-month period as a result of incapacity due to mental or physical illness which is determined to be permanent by a physician selected by the Company and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). 2 Employment Period: Unless earlier terminated as provided in Section 5 hereof, the Employment Period shall be the period commencing on the Effective Date and terminating on the last day of the 2006 Fiscal Year. Fiscal Year: The 52 or 53 week period ending on the Saturday closest to January 31 of each calendar year. Fiscal Years shall be referred to herein on the basis of the calendar year which contains 11 months of such Fiscal Year. (For example, "2003 Fiscal Year" means the twelve-month period ending January 31, 2004). Inventions: Those discoveries, developments, concepts and ideas, whether or not patentable, relating to the present, future and prospective activities and Products and Services of the Company and its Subsidiaries, which such activities and Products and Services are known to Executive by virtue of Executive's employment with the Company and its Subsidiaries. Percentage Increase in Consolidated Net Income: Percentage Increase in Consolidated Net Income shall mean, with respect to any Fiscal Year of the Company, the percentage increase, if any, in Consolidated Net Income of the Company in such Fiscal Year over the Consolidated Net Income of the Company in the immediately preceding Fiscal Year. By way of example, in the event that the Consolidated Net Income of the Company in the 2001 Fiscal Year is $20 million and the Consolidated Net Income of the Company in the 2002 Fiscal Year is $26.5 million, the Percentage Increase in Consolidated Net Income in the 2002 Fiscal Year shall be equal to 32.5%. Prior Employment Agreement: shall mean that certain Employment Agreement, effective as of February 1, 2002, between the Company and Executive. Products and Services: All products or services sold, rented, leased, rendered or otherwise made available to its customers by the Company and its Subsidiaries, or otherwise the subject of the business of the Company and its Subsidiaries. Restricted Period: The period beginning on the Effective Date and ending on the later of the termination of Executive's employment or the date all payments to Executive under Section 6.1(a) shall have been required to have been made. Stock Option Plan: The 1998 Stock Option Plan of MSS - Delaware, Inc. Stockholders Agreement: shall mean that certain "Stockholders Agreement" dated August 3, 1998, to which the Company, MSS Acquisition Corp. II, FSS and the Executive Group are parties. Subsidiary: Any entity of which the Company owns, directly or indirectly, 50% or more of the aggregate voting power of the voting securities. 2. Employment. (a) Subject to the terms and conditions of this Agreement, the Company hereby agrees to employ and the Executive hereby accepts employment in the 3 position of Chief Executive Officer and Chairman of the Board of the Company and agrees during the Employment Period to perform to the best of Executive's ability, experience and talent those acts and duties and to furnish those services to the Company and its Subsidiaries in connection with and related to such positions as the Board shall from time to time direct, provided such acts and directives are consistent with the duties of Chief Executive Officer and Chairman of the Board. Executive shall, during the Employment Period, use Executive's best efforts to promote the interests of the Company and its Subsidiaries. (b) During the Employment Period, subject to Section 5.2(c) hereof, Executive's principal place of employment shall be located at one of the Company's principal places of business or principal executive office, wherever located as designated from time to time by the Board, and Executive shall be provided with secretarial services, an office and similar support services and facilities as appropriate to Executive's position and responsibilities and of at least substantially the same quality as provided to Executive on the Effective Date. (c) During the Employment Period, Executive shall devote his full business time and best efforts to the business affairs of the Company; however, the Executive may devote reasonable time and attention to: (i) serving as a director of, or member of a committee of the directors of, any not-for-profit organization or engaging in other charitable or community activities; and (ii) serving as a director of, or member of a committee of the directors of, the corporations or organizations for which the Executive presently serves in such capacity, and such other corporations and organizations that the Board may from time to time approve in the future, (iii) seeking alternative employment commencing October 1, 2006 so long as such time and attention do not unreasonably detract from his duties hereunder if this Agreement shall not have been extended by the parties on or prior to October 1, 2006, and (iv) the ownership and management of a family-owned inn in Massachusetts and related or comparable properties and enterprises, provided that, except as specified above, the Executive may not accept employment with any other individual or other entity, or engage in any other venture which is indirectly or directly in conflict or competition with the then existing business of the Company. 3. Compensation and Benefits; Disability. 3.1. Base Salary. The Company shall pay Executive a Base Salary in the amount of $800,000 for the 2004 Fiscal Year, and an amount of not less than $800,000 for each of the 2005 and 4 2006 Fiscal Years. The Base Salary shall be reviewed annually by the Compensation Committee of the Board for increase, based upon merit or upon increases in the cost of living, and shall be payable in equal installments pursuant to the Company's customary payroll policies in force at the time of payment (but in no event less frequently than monthly), less required payroll deductions. 3.2. Annual Bonus. (a) Subject to Section 11.10 hereof, in addition to Executive's Base Salary, during the Employment Period the Company shall pay Executive, as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year, an Annual Bonus in cash for each Fiscal Year commencing with the 2004 Fiscal Year which is the product of (A) Percentage Increase in Consolidated Net Income for such Fiscal Year times 100; (B) 7 1/2%; and (C) Executive's Base Salary. By way of example, in the event that the Percentage Increase in Consolidated Net Income of the Company in the 2004 Fiscal Year is 32.5%, Executive shall be entitled to an Annual Bonus in an amount equal to $1,950,000 (i.e., 32.5 x .075 x $800,000). In the event that there is no Percentage Increase in Consolidated Net Income (either by reason of the Consolidated Net Income declining or remaining unchanged between successive Fiscal Years), Executive shall not be entitled to an Annual Bonus pursuant to this Section 3.2(a). (b) Intentionally Omitted. (c) Notwithstanding anything to the contrary in this Section 3.2, in no event shall Executive be entitled to receive an Annual Bonus in excess of three (3) times his then applicable Base Salary in respect of any Fiscal Year. However, if, for any Fiscal Year, the Annual Bonus computed under subsection (a) of this Section (or the corresponding section of the Prior Employment Agreement) exceeds the amount permitted by this subsection (c) and there is a Percentage Increase in Consolidated Net Income for the succeeding Fiscal Year, then the amount of such excess shall be added to and payable with the Annual Bonus for such succeeding Fiscal Year, subject to the first sentence of this subsection (c). (d) With respect to the 2003 Fiscal Year, notwithstanding that this Agreement supersedes the Prior Employment Agreement, the Company shall pay to Executive the Annual Bonus (as defined in the Prior Employment Agreement) which he would have received under the terms of the Prior Employment Agreement in accordance with the terms thereof. 5 3.3. Intentionally Omitted. 3.4. Other Benefits. Executive shall be entitled, during the Employment Period, to participate, on the same basis and to the same extent as other executive employees of the Company, in any pension, life insurance, health insurance, short-term disability and hospital plans and other fringe benefits or benefit plans presently in effect and hereafter maintained or created by the Company. In addition, Executive shall receive an automobile allowance in the amount of $8,500 per year, payable monthly and reimbursement for actual housing expenses incurred by Executive up to $3,000 per month, payable monthly. During the Employment Period, Company agrees not to reduce the benefits provided to Executive. Service with the Company, any Subsidiary, or Federated Department Stores, Inc. ("Federated") or any affiliate of Federated shall be recognized for vesting purposes under any benefit plan of the Company. 3.5. Vacation. Executive may take such vacation period or periods during each year as shall be consonant with Executive's responsibilities and (in the Company's judgment) with the Company's vacation schedule and policies for senior officers, which vacation shall be at least four weeks per calendar year. 3.6. Expenses. Pursuant to the Company's customary policies in force at the time of payment, Executive shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorized expenses properly incurred by Executive on the Company's behalf in the performance of Executive's duties hereunder. 3.7. Exclusive Compensation. In respect of services rendered to the Company, Executive shall receive only the compensation set forth in this Section 3 and Sections 5 and 6. 4. Termination of Employment Period. The Employment Period shall continue as described in Section 1 unless earlier terminated by reason of (a) Executive's discharge for Cause pursuant to Section 5.1, (b) Executive's discharge without Cause pursuant to Section 5.4, (c) Executive's death or Disability pursuant to Section 5.3 or (d) termination of this Agreement by Executive pursuant to Section 5.2. In all events, the post employment provisions of Section 7 shall survive termination of the Employment Period for the periods provided therein. 6 5. Termination. 5.1. By Company for Cause. The Company may discharge Executive and terminate the Employment Period for Cause. As used in this Section 5.1, "Cause" shall mean any one or more than one of the following: (a) Gross negligence or gross or willful misconduct of Executive in the performance of his duties hereunder during the Employment Period, (b) Executive's conviction of a fraud, felony or crime of moral turpitude during the Employment Period; (c) Willful failure to follow instructions of the Board which instructions are material, legal and not inconsistent with the duties assigned to Executive hereunder and which failure is not cured within 5 business days after written notice of such is delivered to Executive by the Board with respect to failures which are curable; or (d) Any breach of any of the material terms of this Agreement by Executive which is not cured within 5 business days after written notice of breach is delivered to Executive by the Board with respect to breaches which are curable. Upon discharge of Executive for Cause, the Company shall be relieved and discharged of all obligations to make payments to Executive which would otherwise be due under this Agreement except as to salary, benefits and bonuses earned for actual services rendered prior to the date of termination, any payment under Section 3.3 and otherwise reimbursable expenses under Section 3.6. 5.2. By Executive for Good Reason. Executive may terminate the Employment Period upon the occurrence of any of the following: (a) any breach of any of the material terms of this Agreement by the Company; (b) without the consent of Executive, a material reduction in the authorities, powers, functions and/or duties attached to Executive's position; (c) without the consent of Executive, the Company relocates the principal location of Executive's employment to a location more than 25 miles from its current location, unless such relocation is proposed by the Chief Executive Officer; or (d) Executive is removed or not re-elected to the Board or the offices of Chairman of the Board and Chief Executive Officer of the Company. 7 5.3. On Executive's Death or Disability. The Employment Period shall terminate, and the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date of the death or Disability of Executive, except as to salary earned for actual services rendered prior to the date of the death or Disability of Executive, reimbursement of expenses, payments under Section 3.3, and a pro-rata portion of Executive's Annual Bonus for the full applicable Fiscal Year calculated following such year and pro-rated for the number of days Executive was actually employed in such Fiscal Year. 5.4. By Company Without Cause. The Company may, on 30 days' written notice to Executive, terminate the Employment Period without Cause at any time during the Employment Period. 5.5. By Executive Without Good Reason. The Executive may terminate the Employment Period (a) in connection with a Change of Control, or (b) at any other time, upon at least ten days prior written notice to the Company. In the event of a termination by Executive pursuant to Section 5.5(b), the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date as of which the Employment Period terminates, except as to salary earned for actual services rendered prior such date, payment of any Annual Bonus under Section 3.2 with respect to any Fiscal Year ending prior to such date, reimbursement of expenses and payments under Section 3.3. All amounts payable pursuant to Section 5.5(b) shall be paid to Executive in a single lump sum in cash not later than ten (10) days after the date of termination or with respect to the Annual Bonus, within ten (10) days of its determination in accordance with the terms hereof. 6. Severance. 6.1. Severance. Upon termination of employment pursuant to Sections 5.2, 5.4 or, 5.5(a) (so long as Executive's employment is terminated by Executive within six months of the occurrence of such Change of Control) (but in any event not upon termination of the Employment Period pursuant to Sections 5.1, 5.3, 5.5(b) or upon expiration of the Employment Period or otherwise), and so long as the Executive executes a release in the Company's customary form and the Executive has not breached any of his representations set forth in Section 8, the Company shall pay to Executive (a) an amount equal to the greater of (x) the amount of Base Salary due and owing Executive through the expiration of the Employment Period (such amount 8 to be calculated based upon his then current Base Salary), and (y) one (1) times his then applicable Base Salary, and (b) an amount equal to a pro rata portion (based upon the portion of the Fiscal Year elapsed to the date of such termination) of the Annual Bonus which would have been payable to the Executive had Executive been employed by the Company under this Agreement for the entire Fiscal Year in which such termination occurs. All amounts payable pursuant to Section 6.1(a) shall be paid to Executive in a single lump sum in cash not later than five (5) days after the date of termination. Any amount due and payable to Executive under Section 6.1(b) shall be paid within ten (10) days of its determination in accordance with the terms hereof. 6.2. Restricted Period. In the event that Executive's employment shall be terminated pursuant to Sections 5.2, 5.4 or 5.5(a) (x) prior to the end of the 2005 Fiscal Year, then the definition of Restricted Period shall be deemed amended to provide that the Restricted Period shall terminate on the first anniversary of the termination date, and (y) during the 2006 Fiscal Year, then the definition of Restricted Period shall be deemed amended to provide that the Restricted Period shall terminate on the earlier of (I) the first anniversary of the termination date, and (II) July 31, 2007. 7. Inventions, Confidential Information and Related Matters. 7.1. Assignment of Inventions. All Inventions which are at any time made by Executive, acting alone or in conjunction with others, (a) during the Employment Period, or (b) if based on or related to any Confidential Information on, made by Executive within one year after the termination of the Employment Period, shall be the property of the Company. Executive agrees that Executive shall, at the cost and expense of the Company, execute formal application for U.S. and other patents, and also do all other acts and things (including, among others, the execution and delivery of instruments of further assurance or confirmation) deemed by the Company to be necessary or desirable at any time to perfect the full assignment to the Company of Executive's right and title (if any) to such Invention. 7.2. Restrictions on Use and Disclosure. Except as required by Executive's duties hereunder, Executive shall never, directly or indirectly, use, publish, disseminate or otherwise disclose any Confidential Information or Inventions which are the subject of Section 7.1 without the prior written consent of the Board, except as required by law. Nothing in this Section shall prevent 9 disclosure of information which has been completely disclosed in a published patent or other integrated publication of general circulation, nor shall this Section govern the right to use Inventions for which a patent may have been issued. 7.3. Return of Documents and Materials. Upon termination of the Employment Period, Executive shall forthwith deliver to the Company all procedural manuals, guides, specifications, formulas, plans, drawing, designs and similar materials, records, notebooks and similar repositories of or containing Confidential Information and Inventions which are the subject of Section 7.1, including all copies, then in Executive's possession or control, whether prepared by Executive or others, as well as all other Company property in Executive's possession or control. 7.4. Competitive Activities. During the Restricted Period, Executive shall not, without the prior written approval of the Board, directly or indirectly, within the United States, become an employee or consultant or otherwise render services to, lend funds to, serve on the board of, invest in (other than as a 1% or less shareholder of a publicly-traded corporation) or guarantee the debts of, any business organization that competes with the Company in those retail businesses in which the Company and its Subsidiaries are engaged on the date the Employment Period is terminated. The Company may in its sole discretion give Executive written approval to engage in such activities or render such services after termination of the Employment Period if Executive and such prospective firm or business organization gives the Company written assurances, satisfactory to the Board in its sole discretion, that the integrity of the Confidential Information, the Inventions and the good will of the Company and its Subsidiaries will not be jeopardized by such employment. Executive shall, during the Restricted Period, notify the Company of any change in address and identify each subsequent employment or business activity in which Executive shall engage during such Restricted Period, stating the name and address of the employer or business organization and the nature of Executive's position. 7.5. Solicitation of Employees. During the Restricted Period and for a period of 12 months thereafter, Executive shall not, without the prior written approval of the Board, directly or indirectly, (i) solicit, raid, entice or induce any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its Subsidiaries to become employed by any other person, firm or corporation in any retail business in competition with the Company or (ii) employ in any person, firm or corporation engaged in any retail business in competition with the Company, any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its subsidiaries. 10 8. No Other Contracts. Executive represents and warrants that neither the execution and delivery of this Agreement by Executive nor the performance by Executive of Executive's obligations hereunder, shall constitute a default under or a breach of the terms of any other agreement, indenture or contract to which Executive is a party or by which Executive is bound, nor shall the execution and delivery of this Agreement by Executive or the performance of Executive's duties and obligations hereunder give rise to any claim or charge against either Executive or the Company based upon any other contract, indenture or agreement to which Executive is a party or by which Executive is bound. 9. Notices. Any notices or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid at the following addresses: If to the Company: 112 West 34th Street 22nd Floor New York, NY 10120 If to the Executive: Julian R. Geiger 7 Chowning Drive Malvern, PA 19355 Mailed notices shall be deemed given when received. Any person entitled to receive notice may designate in writing, by notice to the others, such other address to which notices to such party shall thereafter be sent. 10. Indemnification and Insurance; Legal Expenses. The Company shall indemnify the Executive to the fullest extent permitted by the laws of the State of Delaware, as in effect at the time of the subject act or omission, and shall advance to the Executive reasonable attorney's fees and expenses as such fees and expenses are incurred (subject to an undertaking from the Executive to repay such advances if it shall be finally determined by a judicial decision which is not subject to further appeal that the Executive was not entitled to the reimbursement of such fees and expenses) and he will be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (Directors and Officers Insurance) against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by reason of his being or having been a director, officer or employee of the Company or any of its Subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of the Company (other than any dispute, claim or 11 controversy arising under or relating to this Agreement or to the extent a result of a breach by Executive of his representations in Section 8). The Company covenants to maintain during the Employment Period for the benefit of the Executive (in his capacity as an officer and director of the Company) Directors and Officers Insurance providing customary benefits to the Executive. 11. Miscellaneous. 11.1. Entire Agreement. This Agreement contains the entire understanding of the parties in respect of its subject matter and supersedes the Prior Employment Agreement (except as otherwise specifically set forth herein) all prior oral and written agreements and understandings between the parties with respect to such subject matter. Nothing contained herein shall be deemed to amend or modify the Stockholders Agreement or the Stock Option Plan (or any options issued pursuant to the Prior Employment Agreement or the Employment Agreement, effective as of August 3, 1998, between the Company and Executive). 11.2. Amendment; Waiver. This Agreement may not be amended, supplemented, canceled or discharged, except by written instrument executed by the Executive and the Company. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any preceding breach of this Agreement shall operate as a waiver of a succeeding breach of this Agreement. 11.3. Binding Effect; Assignment. The rights and obligations of this Agreement shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation, or any assignee of all or substantially all of the Company's business and properties; Executive's rights or obligations under this Agreement may not be assigned by Executive. 11.4. Headings. The headings contained in this Agreement (except those in Section 1) are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 11.5. Governing Law; Interpretation. This Agreement shall be construed in accordance with and governed for all purposes by the laws and public policy of the State of New York applicable to contracts executed and to be wholly performed within such State. Service of process in any dispute shall be effective (a) upon the Company, if served on any senior officer of the Company (other than Executive); (b) upon Executive, if served at Executive's residence 12 last known to the Company. Executive acknowledges that breach of Sections 7.1 through 7.5 would entail irreparable injury and that, in addition to the Company's other express and implied remedies, the Company shall be entitled to injunctive and other equitable relief to prevent any actual, intended or likely such breach. 11.6. Dispute Resolution. All controversies, claims and disputes arising out of or relating to this Agreement, including without limitation any alleged violation of its terms, shall be resolved by final and binding arbitration before a single arbitrator in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitration shall be commenced by filing a demand for arbitration with the AAA within sixty days after the filing party has given notice of such breach to the other party. The subject matter of the arbitration shall be limited to the conduct of the parties hereto and their employees. Each party shall bear its own costs and expenses, including costs and expenses of counsel and experts, in any such arbitration. 11.7. Further Assurances. Each party agrees at any time, and from time-to-time, to execute, acknowledge, deliver and perform, and/or cause to be executed, acknowledged, delivered and performed, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and/or assurances as may be necessary, and/or proper to carry out the provisions and/or intent of this Agreement. 11.8. Gender; Singular/Plural. In this Agreement, the use of one genders (e.g., "he", "she" and "it") shall mean each other gender; and the singular shall mean the plural, and vice versa, all as the context may require. 11.9. Severability. The parties acknowledge that the terms of this Agreement are fair and reasonable at the date signed by them. However, in light of the possibility of a change of conditions or differing interpretations by a court of what is fair and reasonable, the parties stipulate as follows: if any one or more of the terms, provisions, covenants and restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; further, if any one or more of the provisions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed, by limiting or reducing it, so as to be enforceable to the extent compatible with then applicable law. 13 11.10. Executive Incentive Bonus Plan. Notwithstanding anything to the contrary contained in this Agreement, Executive and the Company agree that (i) the Annual Bonus contemplated by this Agreement shall be payable to Executive only pursuant to the terms of an Executive Incentive Bonus Plan (the "Incentive Plan"), incorporating all applicable terms and conditions of the Annual Bonus contained in this Agreement, (ii) the Incentive Plan, and any Annual Bonus to be payable thereunder, is subject to the approval of the stockholders of the Company, and (iii) in the event that the Incentive Plan is not approved by the Company's stockholders at the Company's 2004 Annual Meeting, then (x) Executive shall not be entitled to receive the Annual Bonus contemplated by this Agreement and shall have no rights or claims against the Company arising from such failure of the Company's stockholders to approve the Incentive Plan, and (y) this Agreement shall remain in full force and effect except that all references in this Agreement to the Annual Bonus shall be deemed to be deleted from this Agreement and of no further force or effect. The Company agrees that the Incentive Plan shall be submitted for approval by the Company's stockholders at the Company's 2004 Annual Meeting of Stockholders. 11.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original. 14 EXECUTION IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year above first written. _______________/s/ Julian R. Geiger____ Julian R. Geiger AEROPOSTALE, INC. a Delaware Corporation By:__/s/ Bestsy Burton__________ TABLE OF CONTENTS
Page ---- 1. Definitions.................................................................................... 1 2. Employment..................................................................................... 3 3. Compensation and Benefits; Disability.......................................................... 4 3.1. Base Salary........................................................................... 4 3.2. Annual Bonus.......................................................................... 5 3.3. Intentionally Omitted................................................................. 5 3.4. Other Benefits........................................................................ 6 3.5. Vacation.............................................................................. 6 3.6. Expenses.............................................................................. 6 3.7. Exclusive Compensation................................................................ 6 4. Termination of Employment Period............................................................... 6 5. Termination.................................................................................... 7 5.1. By Company for Cause.................................................................. 7 5.2. By Executive for Good Reason.......................................................... 7 5.3. On Executive's Death or Disability.................................................... 8 5.4. By Company Without Cause.............................................................. 8 5.5. By Executive Without Good Reason...................................................... 8 6. Severance...................................................................................... 8 6.1. Severance............................................................................. 8 6.2. Restricted Period..................................................................... 9 7. Inventions, Confidential Information and Related Matters....................................... 9 7.1. Assignment of Inventions.............................................................. 9 7.2. Restrictions on Use and Disclosure.................................................... 9 7.3. Return of Documents and Materials..................................................... 10 7.4. Competitive Activities................................................................ 10 7.5. Solicitation of Employees............................................................. 10 8. No Other Contracts............................................................................. 11 9. Notices........................................................................................ 11 10. Indemnification and Insurance; Legal Expenses.................................................. 11 11. Miscellaneous.................................................................................. 12 11.1. Entire Agreement...................................................................... 12 11.2. Amendment; Waiver..................................................................... 12 11.3. Binding Effect; Assignment............................................................ 12 11.4. Headings.............................................................................. 12
Page ---- 11.5. Governing Law; Interpretation......................................................... 12 11.6. Dispute Resolution.................................................................... 13 11.7. Further Assurances.................................................................... 13 11.8. Gender; Singular/Plural............................................................... 13 11.9. Severability.......................................................................... 13 11.10. Executive Incentive Bonus Plan........................................................ 14 11.11. Counterparts.......................................................................... 14
ii EX-10.20 4 y94783exv10w20.txt EMPLOYMENT AGREEMENT: FINAZZO EXHIBIT 10.20 EMPLOYMENT AGREEMENT PARTIES This Employment Agreement (this "Agreement") dated and effective as of February 1, 2004 (the "Effective Date"), is entered into by and between Aeropostale, Inc., a Delaware corporation (the "Company"), and Christopher L. Finazzo ("Executive"). TERMS OF AGREEMENT In consideration of the mutual covenants in this Agreement, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the terms listed below shall be defined as indicated. Affiliate: A domestic or foreign business entity controlled by, controlling or under common control with the Company. Annual Bonus: See Section 3.2. Base Salary: See Section 3.1. Board: The Board of Directors of the Company. Cause: See Section 5.1. Confidential Information: All secret proprietary information of the Company and its Subsidiaries, not otherwise publicly disclosed (except if disclosed by the Executive in violation of this Agreement), whether or not discovered or developed by Executive, known by Executive as a consequence of Executive's employment with the Company at any time (including prior to the commencement of this Agreement) as an employee or agent. Without limiting the generality of the foregoing, such proprietary information shall include (a) customer lists; (b) acquisition, expansion, marketing, financial and other business information and plans; (c) research and development; (d) computer programs; (e) sources of supply; (f) identity of specialized consultants and contractors and confidential information developed by them for the Company and its Subsidiaries; (g) purchasing, operating and other cost data; (h) special customer needs, cost and pricing data; (i) manufacturing methods; (j) quality control information; (k) inventory techniques; (l) employee information; any of which information is not generally known in the industries in which the Company and its Subsidiaries are conducting business or shall at any time during Executive's Employment conduct business including (without limitation) the apparel retailing industry. Confidential Information also includes the overall business, financial, expansion and acquisition plans of the Company and its Subsidiaries, and includes information contained in manuals, memoranda, projections, minutes, plans, drawings, designs, formula books, specifications, computer programs and records, whether or not legended or otherwise identified by the Company and its Subsidiaries as Confidential Information, as well as information which is the subject of meetings and discussions and not so recorded. Consolidated Net Income: For any period the net income (or loss) of the Company for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that (i) there shall be excluded therefrom (to the extent included and without duplication) (A) all extraordinary gains and extraordinary losses (as defined by generally accepted accounting principles) and (B) any effect that any change (after the Effective Date) in any law or in generally accepted accounting principles relating to the Company's recognition of compensation expense for employee stock options has on the net income (or loss) of the Company determined on a consolidated basis in accordance with generally accepted accounting principles; and (ii) that neither Annual Bonus nor any annual bonus based upon Percentage Increase in Consolidated Net Income payable to any employee (other than Executive) of the Company shall be considered in the computation thereof. Disability: The absence of the Executive from the Executive's duties to the Company on a full-time basis for a total of 120 days during any 12-month period as a result of incapacity due to mental or physical illness which is determined to be permanent by a physician selected by the Company and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). Employment Period: Unless earlier terminated as provided in Section 5 hereof, the Employment Period shall be the period commencing on the Effective Date and terminating on the last day of the 2006 Fiscal Year. Fiscal Year: The 52 or 53 week period ending on the Saturday closest to January 31 of each calendar year. Fiscal Years shall be referred to herein on the basis of the calendar year which contains 11 months of such Fiscal Year. (For example, "2002 Fiscal Year" means the twelve-month period ending February 1, 2003). Inventions: Those discoveries, developments, concepts and ideas, whether or not patentable, relating to the present, future and prospective activities and Products and Services of the Company and its Subsidiaries, which such activities and Products and Services are known to Executive by virtue of Executive's employment with the Company and its Subsidiaries. Percentage Increase in Consolidated Net Income: Percentage Increase in Consolidated Net Income shall mean, with respect to any Fiscal Year of the Company, the percentage increase, if any, in Consolidated Net Income of the Company in such Fiscal Year over the Consolidated Net Income of the Company in the immediately preceding Fiscal Year. By way of example, in the event that the Consolidated Net Income of the Company in the 2001 Fiscal Year is $20 million and the Consolidated Net 2 Income of the Company in the 2002 Fiscal Year is $26.5 million, the Percentage Increase in Consolidated Net Income in the 2002 Fiscal Year shall be equal to 32.5%. Prior Employment Agreement: That certain Employment Agreement, dated February 1, 2002, between the Company and Executive. Products and Services: All products or services sold, rented, leased, rendered or otherwise made available to its customers by the Company and its Subsidiaries, or otherwise the subject of the business of the Company and its Subsidiaries. Restricted Period: The period beginning on the Effective Date and ending on the first anniversary of the date of termination of Executive's employment; provided, however, that in the event that the termination of Executive's employment occurs during the 2006 Fiscal Year, then the Restricted Period shall terminate on the earlier of (I) the first anniversary of such termination date, and (II) July 31, 2007; provided further, however, that in the event that Executive's employment shall be terminated pursuant to Section 5.2 or 5.4 or shall terminate by reason of the expiration of the Employment Period on the last day of the 2006 Fiscal Year, and on the date of such termination Julian R. Geiger shall not be the Chairman and Chief Executive Officer of the Company and an individual other than Executive shall have been promoted to the office of Chairman and Chief Executive Officer of the Company, then the Restricted Period shall terminate on such date of termination. Subsidiary: Any entity of which the Company owns, directly or indirectly, 50% or more of the aggregate voting power of the voting securities. 2. Employment. (a) Subject to the terms and conditions of this Agreement, the Company hereby agrees to employ and the Executive hereby accepts employment in the position of Executive Vice President and Chief Merchandising Officer of the Company and agrees during the Employment Period to perform to the best of Executive's ability, experience and talent those acts and duties and to furnish those services to the Company and its Subsidiaries in connection with and related to such positions as the Chief Executive Officer or the Board shall from time to time direct, provided such acts and directives are consistent with the duties of Executive Vice President and Chief Merchandising Officer. Executive shall, during the Employment Period, use Executive's best efforts to promote the interests of the Company and its Subsidiaries. Executive agrees to devote all of his business time to the business affairs of the Company, and to perform all duties and fulfill all responsibilities incident to his employment in a manner reasonably expected of senior executives in similar positions. Executive further agrees that he will not, directly or indirectly, engage or participate in any activities at any time during such employment which conflict with the interests of the Company. (b) During the Employment Period, subject to Section 5.2(c) hereof, Executive's principal place of employment shall be located at one of the Company's principal places of business or principal executive office, wherever located as designated 3 from time to time by the Chief Executive Officer or the Board, and Executive shall be provided with an office and similar support services and facilities as appropriate to Executive's position and responsibilities and of at least substantially the same quality as provided to Executive on the Effective Date. 3. Compensation and Benefits; Disability. 3.1. Base Salary. The Company shall pay Executive a Base Salary in the amount of $400,000 for the 2004 Fiscal Year, and an amount of not less than $400,000 for each of the 2005 and 2006 Fiscal Years. The Base Salary shall be reviewed annually by the Compensation Committee of the Board for increase, based upon merit or upon increases in the cost of living, and shall be payable in equal installments pursuant to the Company's customary payroll policies in force at the time of payment (but in no event less frequently than monthly), less required payroll deductions. 3.2. Annual Bonus. (a) Subject to Section 11.10 hereof, in addition to Executive's Base Salary, during the Employment Period the Company shall pay Executive, as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year, an Annual Bonus in cash for each Fiscal Year commencing with the 2004 Fiscal Year which is the product of (A) Percentage Increase in Consolidated Net Income for such Fiscal Year times 100; (B) 5%; and (C) Executive's Base Salary in effect during such Fiscal Year. By way of example, in the event that the Percentage Increase in Consolidated Net Income of the Company in the 2004 Fiscal Year is 32.5%, Executive shall be entitled to an Annual Bonus in an amount equal to $650,000 (i.e., 32.5 x .05 x $400,000). In the event that there is no Percentage Increase in Consolidated Net Income (either by reason of the Consolidated Net Income declining or remaining unchanged between successive Fiscal Years), Executive shall not be entitled to an Annual Bonus. (b) Such bonus shall be payable in cash as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year. (c) Notwithstanding anything to the contrary in this Section 3.2, in no event shall Executive be entitled to receive an Annual Bonus in excess of two (2) times 4 his then applicable Base Salary in respect of any Fiscal Year. However, if, for any Fiscal Year, the Annual Bonus computed under subsection (a) of this Section (or the corresponding section of the Prior Employment Agreement) exceeds the amount permitted by this subsection (c) and there is a Percentage Increase in Consolidated Net Income for the succeeding Fiscal Year, then the amount of such excess shall be added to and payable with the Annual Bonus for such succeeding Fiscal Year, subject to the first sentence of this subsection (c). (d) With respect to the 2003 Fiscal Year, notwithstanding that this Agreement supersedes the Prior Employment Agreement, the Company shall pay to Executive the Annual Bonus (as defined in the Prior Employment Agreement) which he would have received under the terms of the Prior Employment Agreement in accordance with the terms thereof. 3.3. Other Benefits. Executive shall be entitled, during the Employment Period, to participate, on the same basis and to the same extent as other executive employees of the Company, in any pension, life insurance, health insurance, short-term disability and hospital plans and other fringe benefits or benefit plans presently in effect and hereafter maintained or created by the Company. In addition, Executive shall receive an automobile allowance in the amount of $8,500 per year, payable monthly. During the Employment Period, Company agrees not to reduce the benefits provided to Executive. Service with the Company, any Subsidiary, or Federated Department Stores, Inc. ("Federated") or any affiliate of Federated shall be recognized for vesting purposes under any benefit plan of the Company. 3.4. Vacation. Executive shall be entitled to four (4) weeks of paid vacation per calendar year, such vacation to be taken during period or periods during each such year as shall be consonant with Executive's responsibilities and (in the Company's judgment) with the Company's vacation schedule and policies for senior officers. 3.5. Expenses. Pursuant to the Company's customary policies in force at the time of payment, Executive shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorized expenses properly incurred by Executive on the Company's behalf in the performance of Executive's duties hereunder. 3.6. Exclusive Compensation. In respect of services rendered to the Company, Executive shall receive only the compensation set forth in this Section 3 and Sections 5 and 6. 5 4. Termination of Employment Period. The Employment Period shall continue as described in Section 1 unless earlier terminated by reason of (a) Executive's discharge for Cause pursuant to Section 5.1, (b) Executive's discharge without Cause pursuant to Section 5.4, (c) Executive's death or Disability pursuant to Section 5.3, (d) termination of this Agreement by Executive pursuant to Section 5.2, or (e) termination of this Agreement by Executive pursuant to Section 5.5. In all events, the post employment provisions of Section 7 shall survive termination of the Employment Period for the periods provided therein. 5. Termination. 5.1. By Company for Cause. The Company may discharge Executive and terminate the Employment Period for Cause. As used in this Section 5.1, "Cause" shall mean any one or more than one of the following: (a) Gross negligence or gross or willful misconduct of Executive in the performance of his duties hereunder during the Employment Period; (b) Executive's conviction of a felony, any crime of moral turpitude during the Employment Period or any act of fraud or dishonesty; (c) Willful failure to follow instructions of the Chief Executive Officer or the Board which instructions are material, legal, and not inconsistent with the duties assigned to Executive hereunder and which failure is not cured within fifteen (15) business days after written notice of such failure is delivered to Executive by the Company with respect to failures which are curable, provided, however, that if such failure is not capable of being cured within fifteen (15) business days, the Company may terminate Executive immediately; or (d) Any breach of any of the material terms of this Agreement by Executive which is not cured within fifteen (15) business days after written notice of breach is delivered to Executive by the Company with respect to breaches which are curable, provided, however, that if such breach is not capable of being cured within fifteen (15) business days, the Company may terminate Executive immediately. Upon discharge of Executive for Cause, the Company shall be relieved and discharged of all obligations to make payments to Executive which would otherwise be due under this Agreement except as to salary, benefits and bonuses earned for actual services rendered prior to the date of termination, and otherwise reimbursable expenses under Section 3.5. 5.2. By Executive for Good Reason. Executive may terminate the Employment Period for Good Reason. Good Reason shall mean the occurrence of any of the following events: 6 (a) any breach of any of the material terms of this Agreement by the Company continuing for more than fifteen (15) days after written notice thereof from Executive that such breach will be grounds for termination for Good Reason; (b) without the consent of Executive, a material reduction in the authorities, powers, functions and/or duties attached to Executive's position which reduction is not rescinded within fifteen (15) days after notice from Executive that such reduction will be grounds for termination for Good Reason; provided, however, that Executive shall deliver any such notice of such material reduction within five (5) business days of the occurrence of such material reduction; or (c) without the consent of Executive, the Company relocates the principal location of Executive's employment to a location more than 25 miles from its current location. 5.3. On Executive's Death or Disability. The Employment Period shall terminate, and the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date of the death or Disability of Executive, except as to salary earned for actual services rendered prior to the date of the death or Disability of Executive, reimbursement of expenses, and a pro-rata portion of Executive's Annual Bonus for the full applicable Fiscal Year calculated following such year and pro-rated for the number of days Executive was actually employed in such Fiscal Year. 5.4. By Company Without Cause. The Company may, on 15 days written notice to Executive, terminate the Employment Period without Cause at any time during the Employment Period. 5.5. By Executive Without Good Reason. The Executive may, on 30 days written notice to the Company, terminate the Employment Period at any time during the Employment Period. In the event of a termination by Executive pursuant to this Section 5.5, the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date as of which the Employment Period terminates, except as to salary earned for actual services rendered prior to such date, payment of any Annual Bonus under Section 3.2 with respect to any Fiscal Year ending prior to such date, and reimbursement of expenses under Section 3.5. All amounts payable pursuant to this Section 5.5 shall be paid to Executive in a single lump sum in cash not later than ten (10) days after the date of termination or with respect to the Annual Bonus, within ten (10) days of its determination in accordance with the terms hereof. 7 6. Severance. 6.1. Severance. Upon termination of employment pursuant to Sections 5.2 or 5.4 (but in any event not upon termination of the Employment Period pursuant to Sections 5.1, 5.3, 5.5 or upon expiration of the Employment Period or otherwise), and so long as the Executive executes a release in the Company's customary form and the Executive has not breached any of his representations set forth in Section 8, the Company shall pay to Executive (a) an amount equal to the greater of (x) the amount of Base Salary due and owing Executive through the expiration of the Employment Period (such amount to be calculated based upon his then current Base Salary), and (y) one (1) times his then applicable Base Salary, and (b) an amount equal to a pro rata portion (based upon the portion of the Fiscal Year elapsed to the date of such termination) of the Annual Bonus which would have been payable to the Executive had Executive been employed by the Company under this Agreement for the entire Fiscal Year in which such termination occurs. All amounts payable pursuant to Section 6.1(a) shall be paid to Executive in a single lump sum in cash not later than five (5) days after the date of termination. Any amount due and payable to Executive under Section 6.1(b) shall be paid within ten (10) days of its determination in accordance with the terms hereof. 7. Inventions, Confidential Information and Related Matters. 7.1. Assignment of Inventions. All Inventions which are at any time made by Executive, acting alone or in conjunction with others, (a) during the Employment Period, or (b) if based on or related to any Confidential Information on, made by Executive within one year after the termination of the Employment Period, shall be the property of the Company. Executive agrees that Executive shall, at the cost and expense of the Company, execute formal application for U.S. and other patents, and also do all other acts and things (including, among others, the execution and delivery of instruments of further assurance or confirmation) deemed by the Company to be necessary or desirable at any time to perfect the full assignment to the Company of Executive's right and title (if any) to such Invention. 7.2. Restrictions on Use and Disclosure. Except as required by Executive's duties hereunder, Executive shall never, directly or indirectly, use, publish, disseminate or otherwise disclose any Confidential 8 Information or Inventions which are the subject of Section 7.1 without the prior written consent of the Company, except as required by law. Nothing in this Section shall prevent disclosure of information which has been completely disclosed in a published patent or other integrated publication of general circulation, nor shall this Section govern the right to use Inventions for which a patent may have been issued. 7.3. Return of Documents and Materials. Upon termination of the Employment Period, Executive shall forthwith deliver to the Company all procedural manuals, guides, specifications, formulas, plans, drawings, designs and similar materials, records, notebooks and similar repositories of or containing Confidential Information and Inventions which are the subject of Section 7.1, including all copies, then in Executive's possession or control, whether prepared by Executive or others, as well as all other Company property in Executive's possession or control. 7.4. Competitive Activities. During the Restricted Period, Executive shall not, without the prior written approval of the Company, directly or indirectly, within the United States, become an employee or consultant or otherwise render services to, lend funds to, serve on the board of, invest in (other than as a 1% or less shareholder of a publicly-traded corporation) or guarantee the debts of, any business organization that competes with the Company in those retail businesses in which the Company and its Subsidiaries are engaged, or intends to engage in, on the date the Employment Period is terminated. The Company may in its reasonable discretion give Executive written approval to engage in such activities or render such services after termination of the Employment Period if Executive and such prospective firm or business organization gives the Company written assurances, satisfactory to the Company in its sole discretion, that the integrity of the Confidential Information, the Inventions and the good will of the Company and its Subsidiaries will not be jeopardized by such employment. Executive shall, during the Restricted Period, notify the Company of any change in address and identify each subsequent employment or business activity in which Executive shall engage during such Restricted Period, stating the name and address of the employer or business organization and the nature of Executive's position. 7.5. Solicitation of Employees. During the Restricted Period and for a period of 12 months thereafter, Executive shall not, without the prior written approval of the Company, directly or indirectly, (i) solicit, raid, entice or induce any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its Subsidiaries to become employed by any other person, firm or corporation in any retail business in competition with the Company or (ii) employ in any person, firm or corporation engaged in any retail business in competition with the Company, any person who presently is or at any time during the six 9 (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its subsidiaries. 8. No Other Contracts. Executive represents and warrants that neither the execution and delivery of this Agreement by Executive nor the performance by Executive of Executive's obligations hereunder, shall constitute a default under or a breach of the terms of any other agreement, indenture or contract to which Executive is a party or by which Executive is bound, nor shall the execution and delivery of this Agreement by Executive or the performance of Executive's duties and obligations hereunder give rise to any claim or charge against either Executive or the Company based upon any other contract, indenture or agreement to which Executive is a party or by which Executive is bound. 9. Notices. Any notices or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid at the following addresses: If to the Company: 112 West 34th Street 22nd Floor New York, NY 10120 If to the Executive: Christopher L. Finazzo 15 Earl Street Westbury, NY 11590 Mailed notices shall be deemed given when received. Any person entitled to receive notice may designate in writing, by notice to the others, such other address to which notices to such party shall thereafter be sent. 10. Indemnification and Insurance; Legal Expenses. The Company shall indemnify the Executive to the fullest extent permitted by the laws of the State of Delaware, as in effect at the time of the subject act or omission, and shall advance to the Executive reasonable attorney's fees and expenses as such fees and expenses are incurred (subject to an undertaking from the Executive to repay such advances if it shall be finally determined by a judicial decision which is not subject to further appeal that the Executive was not entitled to the reimbursement of such fees and expenses) and he will be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (Directors and Officers Insurance) against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by 10 reason of his being or having been a director, officer or employee of the Company or any of its Subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of the Company (other than any dispute, claim or controversy arising under or relating to this Agreement or to the extent a result of a breach by Executive of his representations in Section 8). The Company covenants to maintain during the Employment Period for the benefit of the Executive (in his capacity as an officer of the Company) Directors and Officers Insurance providing customary benefits to the Executive. 11. Miscellaneous. 11.1. Entire Agreement. This Agreement contains the entire understanding of the parties in respect of its subject matter hereof and supersedes the Prior Employment Agreement (except as otherwise specifically set forth herein) and all other prior oral and written agreements and understandings between the parties with respect to such subject matter. 11.2. Amendment; Waiver. This Agreement may not be amended, supplemented, canceled or discharged, except by written instrument executed by the Executive and the Company. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any preceding breach of this Agreement shall operate as a waiver of a succeeding breach of this Agreement. 11.3. Binding Effect; Assignment. The rights and obligations of this Agreement shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation, or any assignee of all or substantially all of the Company's business and properties; Executive's rights or obligations under this Agreement may not be assigned by Executive. 11.4. Headings. The headings contained in this Agreement (except those in Section 1) are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 11.5. Governing Law; Interpretation. This Agreement shall be construed in accordance with and governed for all purposes by the laws and public policy of the State of New York applicable to contracts executed and to be wholly performed within such State. Service of process in any dispute shall be effective (a) upon the Company, if served on any senior officer of the Company (other than Executive); (b) upon Executive, if served at Executive's residence last known to the Company. Executive acknowledges that breach of Sections 7.1 through 11 7.5 would entail irreparable injury and that, in addition to the Company's other express and implied remedies, the Company shall be entitled to injunctive and other equitable relief to prevent any actual, intended or likely such breach. 11.6. Dispute Resolution. All controversies, claims and disputes arising out of or relating to this Agreement, including without limitation any alleged violation of its terms, shall be resolved by final and binding arbitration before a single arbitrator in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitration shall be commenced by filing a demand for arbitration with the AAA within sixty days after the filing party has given notice of such breach to the other party. The subject matter of the arbitration shall be limited to the conduct of the parties hereto and their employees. Each party shall bear its own costs and expenses, including costs and expenses of counsel and experts, in any such arbitration. 11.7. Further Assurances. Each party agrees at any time, and from time-to-time, to execute, acknowledge, deliver and perform, and/or cause to be executed, acknowledged, delivered and performed, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and/or assurances as may be necessary, and/or proper to carry out the provisions and/or intent of this Agreement. 11.8. Gender; Singular/Plural. In this Agreement, the use of one genders (e.g., "he", "she" and "it") shall mean each other gender; and the singular shall mean the plural, and vice versa, all as the context may require. 11.9. Severability. The parties acknowledge that the terms of this Agreement are fair and reasonable at the date signed by them. However, in light of the possibility of a change of conditions or differing interpretations by a court of what is fair and reasonable, the parties stipulate as follows: if any one or more of the terms, provisions, covenants and restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; further, if any one or more of the provisions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed, by limiting or reducing it, so as to be enforceable to the extent compatible with then applicable law. 12 11.10. Executive Incentive Bonus Plan. Notwithstanding anything to the contrary contained in this Agreement, Executive and the Company agree that (i) the Annual Bonus contemplated by this Agreement shall be payable to Executive only pursuant to the terms of an Executive Incentive Bonus Plan (the "Incentive Plan"), incorporating all applicable terms and conditions of the Annual Bonus contained in this Agreement, (ii) the Incentive Plan, and any Annual Bonus to be payable thereunder, is subject to the approval of the stockholders of the Company, and (iii) in the event that the Incentive Plan is not approved by the Company's stockholders at the Company's 2004 Annual Meeting, then (x) Executive shall not be entitled to receive the Annual Bonus contemplated by this Agreement and shall have no rights or claims against the Company arising from such failure of the Company's stockholders to approve the Incentive Plan, and (y) this Agreement shall remain in full force and effect except that all references in this Agreement to the Annual Bonus shall be deemed to be deleted from this Agreement and of no further force or effect. The Company agrees that the Incentive Plan shall be submitted for approval by the Company's stockholders at the Company's 2004 Annual Meeting of Stockholders. 11.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original. 13 EXECUTION IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year above first written. _____/s/ Christopher L. Finazzo___ Christopher L. Finazzo AEROPOSTALE, INC. a Delaware Corporation By:__/s/ Julian R. Geiger_________ TABLE OF CONTENTS
Page ---- 1. Definitions.................................................................................... 1 2. Employment..................................................................................... 3 3. Compensation and Benefits; Disability.......................................................... 4 3.1. Base Salary........................................................................... 4 3.2. Annual Bonus.......................................................................... 4 3.3. Other Benefits........................................................................ 5 3.4. Vacation.............................................................................. 5 3.5. Expenses.............................................................................. 5 3.6. Exclusive Compensation................................................................ 5 4. Termination of Employment Period............................................................... 5 5. Termination.................................................................................... 6 5.1. By Company for Cause.................................................................. 6 5.2. By Executive for Good Reason.......................................................... 6 5.3. On Executive's Death or Disability.................................................... 7 5.4. By Company Without Cause.............................................................. 7 5.5. By Executive Without Good Reason...................................................... 7 6. Severance...................................................................................... 7 6.1. Severance............................................................................. 7 7. Inventions, Confidential Information and Related Matters....................................... 8 7.1. Assignment of Inventions.............................................................. 8 7.2. Restrictions on Use and Disclosure.................................................... 8 7.3. Return of Documents and Materials..................................................... 9 7.4. Competitive Activities................................................................ 9 7.5. Solicitation of Employees............................................................. 9 8. No Other Contracts............................................................................. 9 9. Notices........................................................................................ 10 10. Indemnification and Insurance; Legal Expenses.................................................. 10 11. Miscellaneous.................................................................................. 11 11.1. Entire Agreement...................................................................... 11 11.2. Amendment; Waiver..................................................................... 11 11.3. Binding Effect; Assignment............................................................ 11 11.4. Headings.............................................................................. 11 11.5. Governing Law; Interpretation......................................................... 11 11.6. Dispute Resolution.................................................................... 12
Page ---- 11.7. Further Assurances.................................................................... 12 11.8. Gender; Singular/Plural............................................................... 12 11.9. Severability.......................................................................... 12 11.10. Executive Incentive Bonus Plan........................................................ 12 11.11. Counterparts.......................................................................... 13
ii EX-10.21 5 y94783exv10w21.txt EMPLOYMENT AGREEMENT: MILLS EXHIBIT 10.21 AMENDED AND RESTATED EMPLOYMENT AGREEMENT PARTIES This Employment Agreement (this "Agreement") dated as of February 1, 2004 (the "Effective Date"), is entered into by and between Aeropostale, Inc., a Delaware corporation (the "Company"), and John S. Mills ("Executive") and amends and restates the Employment Agreement, dated and effective as of February 1, 2002, between the Company and Executive. TERMS OF AGREEMENT In consideration of the mutual covenants in this Agreement, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the terms listed below shall be defined as indicated. Affiliate: A domestic or foreign business entity controlled by, controlling, under common control with, the Company, including The Bear Stearns Companies, Inc. and its affiliates. Annual Bonus: See Section 3.2. Base Salary: See Section 3.1. Bear Entity: The Bear Stearns Companies Inc., Bear Stearns MB 1998-1999 Pre-Fund, LLC, and any and all Subsidiaries or Affiliates of any such entities. Board: The Board of Directors of the Company. Cause: See Section 5.1. Change of Control: A Change of Control" shall mean (i) the acquisition by any person or entity other than a Bear Entity of, directly or indirectly, Beneficial Ownership (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities of the Company representing 33-1/3% (or more) of the total voting power of all of the Company's then outstanding voting securities, (ii) a merger or consolidation of the Company in which the Company's voting securities immediately prior to the merger or consolidation do not represent, or are not converted into securities (owned by stockholders in substantially the same proportions as their ownership immediately prior to such merger or consolidation) that represent, a majority of the voting power of all of the voting securities of the surviving entity immediately after the merger or consolidation, (iii) a sale of substantially all of the assets of the Company or a liquidation or dissolution of the Company, or (iv) individuals, who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the Effective Date whose election or nomination for election by the Company's stockholders was approved by the vote of at least a majority of the directors then in office shall be deemed a member of the Incumbent Board. Common Stock: The $.01 par value common stock of the Company. Confidential Information: All secret proprietary information of the Company and its Subsidiaries, not otherwise publicly disclosed (except if disclosed by the Executive in violation of this Agreement), whether or not discovered or developed by Executive, known by Executive as a consequence of Executive's employment with the Company at any time (including prior to the commencement of this Agreement) as an employee or agent. Without limiting the generality of the foregoing, such proprietary information shall include (a) customer lists; (b) acquisition, expansion, marketing, financial and other business information and plans; (c) research and development; (d) computer programs; (e) sources of supply; (f) identity of specialized consultants and contractors and confidential information developed by them for the Company and its Subsidiaries; (g) purchasing, operating and other cost data; (h) special customer needs, cost and pricing data; (i) manufacturing methods; (j) quality control information; (k) inventory techniques; (l) employee information; any of which information is not generally known in the industries in which the Company and its Subsidiaries are conducting business or shall at any time during Executive's Employment conduct business including (without limitation) the apparel retailing industry. Confidential Information also includes the overall business, financial, expansion and acquisition plans of the Company and its Subsidiaries, and includes information contained in manuals, memoranda, projections, minutes, plans, drawings, designs, formula books, specifications, computer programs and records, whether or not legended or otherwise identified by the Company and its Subsidiaries as Confidential Information, as well as information which is the subject of meetings and discussions and not so recorded. Consolidated Net Income: For any period the net income (or loss) of the Company for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that (i) there shall be excluded therefrom (to the extent included and without duplication) (A) all extraordinary gains and extraordinary losses (as defined by generally accepted accounting principles) and (B) any effect that any change (after the Effective Date) in any law or in generally accepted accounting principles relating to the Company's recognition of compensation expense for employee stock options has on the net income (or loss) of the Company determined on a consolidated basis in accordance with generally accepted accounting principles; and (ii) that neither Annual Bonus nor any annual bonus based upon Percentage Increase in Consolidated Net Income payable to any employee (other than Executive) of the Company shall be considered in the computation thereof. Disability: The absence of the Executive from the Executive's duties to the Company on a full-time basis for a total of 120 days during any 12-month period as a 2 result of incapacity due to mental or physical illness which is determined to be permanent by a physician selected by the Company and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). Effective Date: February 1, 2002. Employment Period: Unless earlier terminated as provided in Section 5 hereof, the Employment Period shall be the period commencing on the Effective Date and terminating on July 31, 2004. Fiscal Year: The 52 or 53 week period ending on the Saturday closest to January 31 of each calendar year. Fiscal Years shall be referred to herein on the basis of the calendar year which contains 11 months of such Fiscal Year. (For example, "1998 Fiscal Year" means the twelve-month period ending January 30, 1999). Inventions: Those discoveries, developments, concepts and ideas, whether or not patentable, relating to the present, future and prospective activities and Products and Services of the Company and its Subsidiaries, which such activities and Products and Services are known to Executive by virtue of Executive's employment with the Company and its Subsidiaries. Percentage Increase in Consolidated Net Income: Percentage Increase in Consolidated Net Income shall mean, with respect to any Fiscal Year of the Company, the percentage increase, if any, in Consolidated Net Income of the Company in such Fiscal Year over the Consolidated Net Income of the Company in the immediately preceding Fiscal Year. By way of example, in the event that the Consolidated Net Income of the Company in the 2002 Fiscal Year is $20 million and the Consolidated Net Income of the Company in the 2003 Fiscal Year is $25 million, the Percentage Increase in Consolidated Net Income in the 2003 Fiscal Year shall be equal to 25%. Prior Employment Agreement: shall mean that certain Employment Agreement, effective as of August 3, 1998, between the Company and Executive. Products and Services: All products or services sold, rented, leased, rendered or otherwise made available to its customers by the Company and its Subsidiaries, or otherwise the subject of the business of the Company and its Subsidiaries. Restricted Period: The period beginning on the Effective Date and ending on the later of the termination of Executive's employment or the date all payments to Executive under Section 6.1(a) shall have been required to have been made. Sponsor: MSS Acquisition Corp. II, a wholly owned subsidiary of The Bear Stearns Companies Inc. Stock Option Plan: The 1998 Stock Option Plan of MSS - Delaware, Inc. 3 Stockholders Agreement: shall mean that certain "Stockholders Agreement" dated August 3, 1998, to which the Company, MSS Acquisition Corp. II, FSS and the Executive Group are parties. Subsidiary: Any entity of which the Company owns, directly or indirectly, 50% or more of the aggregate voting power of the voting securities. 2. Employment. (a) Subject to the terms and conditions of this Agreement, the Company hereby agrees to employ and the Executive hereby accepts employment in the position of President and Chief Operating Officer of the Company and agrees during the Employment Period to perform to the best of Executive's ability, experience and talent those acts and duties and to furnish those services to the Company and its Subsidiaries in connection with and related to such positions as the Board shall from time to time direct, provided such acts and directives are consistent with the duties of President and Chief Operating Officer. Executive shall, during the Employment Period, use Executive's best efforts to promote the interests of the Company and its Subsidiaries. (b) During the Employment Period, subject to Section 5.2(c) hereof, Executive's principal place of employment shall be located at one of the Company's principal places of business or principal executive office, wherever located as designated from time to time by the Board, and Executive shall be provided with secretarial services, an office and similar support services and facilities as appropriate to Executive's position and responsibilities and of at least substantially the same quality as provided to Executive on the Effective Date. (c) During the Employment Period, Executive shall devote his full business time and best efforts to the business affairs of the Company; however, the Executive may devote reasonable time and attention to: (i) serving as a director of, or member of a committee of the directors of, any not-for-profit organization or engaging in other charitable or community activities; and (ii) serving as a director of, or member of a committee of the directors of, the corporations or organizations for which the Executive presently serves in such capacity, and such other corporations and organizations that the Board may from time to time approve in the future, (iii) seeking alternative employment so long as such time and attention do not unreasonably detract from his duties hereunder, provided that, except as specified above, the Executive may not accept employment with any other individual or other entity, or engage in any other venture which is indirectly or directly in conflict or competition with the then existing business of the Company. 4 3. Compensation and Benefits; Disability. 3.1. Base Salary. During the Employment Period, the Company shall pay Executive a Base Salary for the 2002 Fiscal Year in the amount of $300,000 and a Base Salary for the 2003 Fiscal Year and the portion of 2004 Fiscal Year through the end of the Employment Period in the amount of $400,000. The Base Salary shall be payable in equal installments pursuant to the Company's customary payroll policies in force at the time of payment (but in no event less frequently than monthly), less required payroll deductions. The Base Salary shall be subject to increase from time to time, including, without limitation, for cost of living, in the sole discretion of the Board. 3.2. Annual Bonus. (a) In addition to Executive's Base Salary, during the Employment Period the Company shall pay Executive, as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year, an Annual Bonus in cash for each Fiscal Year commencing with the 2002 Fiscal Year as follows: With respect to the 2002 Fiscal Year, the Company shall pay to Executive the Annual Bonus (as defined in the Prior Employment Agreement) which he would have received under the terms of the Prior Employment Agreement had the Prior Employment Agreement not been superceded by this Agreement and all references in this Agreement to the term "Annual Bonus" that are applicable to the 2002 Fiscal Year shall, to the extent applicable to the 2002 Fiscal Year, be deemed references to the Annual Bonus as such term is defined in the Prior Employment Agreement. With respect to the 2003 and 2004 Fiscal Years, the Company shall pay to Executive an Annual Bonus which is the product of (A) Percentage Increase in Consolidated Net Income for such Fiscal Year times 100; (B) 4%; and (C) Executive's Base Salary. ; provided, however, that with respect to the 2004 Fiscal Year such product shall be based upon one-half of Executive's Base Salary. By way of example, in the event that the Percentage Increase in Consolidated Net Income of the Company in the 2003 Fiscal Year is 25%, Executive shall be entitled to an Annual Bonus in an amount equal to $400,000 (i.e., 25 x ..04 x $400,000). In the event that there is no Percentage Increase in Consolidated Net Income in the 2003 Fiscal Year (either by reason of the Consolidated Net Income declining or remaining unchanged between successive Fiscal Years), Executive shall not be entitled to an Annual Bonus pursuant to this Section 3.2(a) for such Fiscal Year. 5 (b) In the event that in the 2003 Fiscal Year Executive is not entitled to an Annual Bonus pursuant to Section 3.2(a) or the Executive's Bonus in such Fiscal Year is less than his then applicable Base Salary but the Company's Consolidated Net Income for such Fiscal Year shall be greater than $51 Million, Executive shall be entitled to an Annual Bonus equal to one (1) times his then applicable Base Salary. Such bonus shall be payable in cash as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year. (c) Notwithstanding anything to the contrary in this Section 3.2, in no event shall Executive be entitled to receive an Annual Bonus in excess of (x) one and one-quarter (1-1/4) times his then applicable Base Salary in respect of the 2003 Fiscal Year, and (y) five-eighths (5/8) times his then applicable Base Salary in respect of the 2004 Fiscal Year. 3.3. Intentionally omitted. 3.4. Other Benefits. Executive shall be entitled, during the Employment Period, to participate, on the same basis and to the same extent as other executive employees of the Company, in any pension, life insurance, health insurance, short-term disability and hospital plans and other fringe benefits or benefit plans presently in effect and hereafter maintained or created by the Company. In addition, Executive shall receive an automobile allowance at the annual rate of $8,500 per year, payable monthly which, at Executive's election, may be applied towards the Company's expense on the lease of the automobile currently being driven by Executive, for the duration of such lease, so long as Executive reimburses the Company for any costs related thereto in excess of $10,000. During the Employment Period, Company agrees not to reduce the benefits provided to Executive. Service with the Company, any Subsidiary, or Federated Department Stores, Inc. ("Federated") or any affiliate of Federated shall be recognized for vesting purposes under any benefit plan of the Company. 3.5. Vacation. Executive may take such vacation period or periods during each year as shall be consonant with Executive's responsibilities and (in the Company's judgment) with the Company's vacation schedule and policies for senior officers, which vacation shall be at least four weeks per calendar year. 3.6. Expenses. Pursuant to the Company's customary policies in force at the time of payment, Executive shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorized expenses properly incurred by Executive on the Company's behalf in the performance of Executive's duties hereunder. 6 3.7. Exclusive Compensation. In respect of services rendered to the Company, Executive shall receive only the compensation set forth in this Section 3 and Sections 5 and 6. 4. Termination of Employment Period. The Employment Period shall continue as described in Section 1 unless earlier terminated by reason of (a) Executive's discharge for Cause pursuant to Section 5.1, (b) Executive's discharge without Cause pursuant to Section 5.4, (c) Executive's death or Disability pursuant to Section 5.3 or (d) termination of this Agreement by Executive pursuant to Section 5.2. In all events, the post employment provisions of Section 7 shall survive termination of the Employment Period for the periods provided therein. 5. Termination. 5.1. By Company for Cause. The Company may discharge Executive and terminate the Employment Period for Cause. As used in this Section 5.1, "Cause" shall mean any one or more than one of the following: (a) Gross negligence or gross or willful misconduct of Executive in the performance of his duties hereunder during the Employment Period, (b) Executive's conviction of a fraud, felony or crime of moral turpitude during the Employment Period; (c) Willful failure to follow instructions of the Board which instructions are material, legal and not inconsistent with the duties assigned to Executive hereunder and which failure is not cured within 5 business days after written notice of such is delivered to Executive by the Board with respect to failures which are curable; or (d) Any breach of any of the material terms of this Agreement by Executive which is not cured within 5 business days after written notice of breach is delivered to Executive by the Board with respect to breaches which are curable. Upon discharge of Executive for Cause, the Company shall be relieved and discharged of all obligations to make payments to Executive which would otherwise be due under this Agreement except as to salary, benefits and bonuses earned for actual services rendered prior to the date of termination, any payment under Section 3.3 and otherwise reimbursable expenses under Section 3.6. 5.2. By Executive for Good Reason. Executive may terminate the Employment Period upon the occurrence of any of the following: 7 (a) any breach of any of the material terms of this Agreement by the Company; (b) without the consent of Executive, a material reduction in the authorities, powers, functions and/or duties attached to Executive's position; (c) without the consent of Executive, the Company relocates the principal location of Executive's employment to a location more than 25 miles from its current location, unless such relocation is proposed by the Chief Executive Officer; or (d) Executive is removed or not re-elected to the Board or the offices of President and Chief Operating Officer of the Company. 5.3. On Executive's Death or Disability. The Employment Period shall terminate, and the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date of the death or Disability of Executive, except as to salary earned for actual services rendered prior to the date of the death or Disability of Executive, reimbursement of expenses, payments under Section 3.3, and a pro-rata portion of Executive's Annual Bonus for the full applicable Fiscal Year calculated following such year and pro-rated for the number of days Executive was actually employed in such Fiscal Year. 5.4. By Company Without Cause. The Company may, on 30 days' written notice to Executive, terminate the Employment Period without Cause at any time during the Employment Period. 5.5. By Executive Without Good Reason. The Executive may terminate the Employment Period (a) in connection with a Change of Control, or (b) at any other time, upon at least ten days prior written notice to the Company. In the event of a termination by Executive pursuant to Section 5.5(b), the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date as of which the Employment Period terminates, except as to salary earned for actual services rendered prior such date, payment of any Annual Bonus under Section 3.2 with respect to any Fiscal Year ending prior to such date, reimbursement of expenses and payments under Section 3.3. All amounts payable pursuant to Section 5.5(b) shall be paid to Executive in a single lump sum in cash not later than ten (10) days after the date of termination or with respect to the Annual Bonus, within ten (10) days of its determination in accordance with the terms hereof. 8 6. Severance. 6.1. Severance. Upon termination of employment pursuant to Sections 5.2, 5.4 or, 5.5(a) (so long as Executive's employment is terminated by Executive within six months of the occurrence of such Change of Control) (but in any event not upon termination of the Employment Period pursuant to Sections 5.1, 5.3, 5.5(b) or upon expiration of the Employment Period or otherwise), and so long as the Executive executes a release in the Company's customary form and the Executive has not breached any of his representations set forth in Section 8, the Company shall pay to Executive (a) an amount equal to the lesser of (x) the amount of Base Salary due and owing Executive through the expiration of the Employment Period (such amount to be calculated based upon his then current Base Salary), and (y) one (1) times his then applicable Base Salary, and (b) an amount equal to a pro rata portion (based upon the portion of the Fiscal Year elapsed to the date of such termination) of the Annual Bonus which would have been payable to the Executive had Executive been employed by the Company under this Agreement through July 31, 2004. All amounts payable pursuant to Section 6.1(a) shall be paid to Executive in a single lump sum in cash not later than five (5) days after the date of termination. Any amount due and payable to Executive under Section 6.1(b) shall be paid within ten (10) days of its determination in accordance with the terms hereof. 6.2. Restricted Period. In the event that Executive's employment shall be terminated pursuant to Sections 5.2, 5.4 or 5.5(a), then the definition of Restricted Period shall be deemed amended to provide that the Restricted Period shall terminate on the date of such termination. 7. Inventions, Confidential Information and Related Matters. 7.1. Assignment of Inventions. All Inventions which are at any time made by Executive, acting alone or in conjunction with others, (a) during the Employment Period, or (b) if based on or related to any Confidential Information on, made by Executive within one year after the termination of the Employment Period, shall be the property of the Company. Executive agrees that Executive shall, at the cost and expense of the Company, execute formal application for U.S. and other patents, and also do all other acts and things (including, among others, the execution and delivery of instruments of further assurance or confirmation) deemed by the Company to be necessary or 9 desirable at any time to perfect the full assignment to the Company of Executive's right and title (if any) to such Invention. 7.2. Restrictions on Use and Disclosure. Except as required by Executive's duties hereunder, Executive shall never, directly or indirectly, use, publish, disseminate or otherwise disclose any Confidential Information or Inventions which are the subject of Section 7.1 without the prior written consent of the Board, except as required by law. Nothing in this Section shall prevent disclosure of information which has been completely disclosed in a published patent or other integrated publication of general circulation, nor shall this Section govern the right to use Inventions for which a patent may have been issued. 7.3. Return of Documents and Materials. Upon termination of the Employment Period, Executive shall forthwith deliver to the Company all procedural manuals, guides, specifications, formulas, plans, drawing, designs and similar materials, records, notebooks and similar repositories of or containing Confidential Information and Inventions which are the subject of Section 7.1, including all copies, then in Executive's possession or control, whether prepared by Executive or others, as well as all other Company property in Executive's possession or control. 7.4. Competitive Activities. During the Restricted Period, Executive shall not, without the prior written approval of the Board, directly or indirectly, within the United States, become an employee or consultant or otherwise render services to, lend funds to, serve on the board of, invest in (other than as a 1% or less shareholder of a publicly-traded corporation) or guarantee the debts of, any business organization that competes with the Company in those retail businesses in which the Company and its Subsidiaries are engaged on the date the Employment Period is terminated. The Company may in its sole discretion give Executive written approval to engage in such activities or render such services after termination of the Employment Period if Executive and such prospective firm or business organization gives the Company written assurances, satisfactory to the Board in its sole discretion, that the integrity of the Confidential Information, the Inventions and the good will of the Company and its Subsidiaries will not be jeopardized by such employment. Executive shall, during the Restricted Period, notify the Company of any change in address and identify each subsequent employment or business activity in which Executive shall engage during such Restricted Period, stating the name and address of the employer or business organization and the nature of Executive's position. 7.5. Solicitation of Employees. During the Restricted Period and for a period of 12 months thereafter, Executive shall not, without the prior written approval of the Board, directly or indirectly, (i) solicit, raid, entice or induce any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an 10 employee of the Company or any of its Subsidiaries to become employed by any other person, firm or corporation in any retail business in competition with the Company or (ii) employ in any person, firm or corporation engaged in any retail business in competition with the Company, any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its subsidiaries. 8. No Other Contracts. Executive represents and warrants that neither the execution and delivery of this Agreement by Executive nor the performance by Executive of Executive's obligations hereunder, shall constitute a default under or a breach of the terms of any other agreement, indenture or contract to which Executive is a party or by which Executive is bound, nor shall the execution and delivery of this Agreement by Executive or the performance of Executive's duties and obligations hereunder give rise to any claim or charge against either Executive or the Company based upon any other contract, indenture or agreement to which Executive is a party or by which Executive is bound. 9. Notices. Any notices or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid at the following addresses: If to the Company: 112 West 34th Street 22nd Floor New York, NY 10120 If to the Executive: John S. Mills 459 Sterling Place Ridgewood, NJ 07450 Mailed notices shall be deemed given when received. Any person entitled to receive notice may designate in writing, by notice to the others, such other address to which notices to such party shall thereafter be sent. 10. Indemnification and Insurance; Legal Expenses. The Company shall indemnify the Executive to the fullest extent permitted by the laws of the State of Delaware, as in effect at the time of the subject act or omission, and shall advance to the Executive reasonable attorney's fees and expenses as such fees and expenses are incurred (subject to an undertaking from the Executive to repay such advances if it shall be finally determined by a judicial decision which is not subject to further appeal that the Executive was not entitled to the reimbursement of such fees and 11 expenses) and he will be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (Directors and Officers Insurance) against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by reason of his being or having been a director, officer or employee of the Company or any of its Subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of the Company (other than any dispute, claim or controversy arising under or relating to this Agreement or to the extent a result of a breach by Executive of his representations in Section 8). The Company covenants to maintain during the Employment Period for the benefit of the Executive (in his capacity as an officer and director of the Company) Directors and Officers Insurance providing customary benefits to the Executive. 11. Miscellaneous. 11.1. Entire Agreement. This Agreement contains the entire understanding of the parties in respect of its subject matter and supersedes the Prior Employment Agreement (except as otherwise specifically set forth herein) all prior oral and written agreements and understandings between the parties with respect to such subject matter. Nothing contained herein shall be deemed to amend or modify the Stockholders Agreement or the Stock Option Plan (or any options issued pursuant to the Prior Employment Agreement). 11.2. Amendment; Waiver. This Agreement may not be amended, supplemented, canceled or discharged, except by written instrument executed by the Executive and the Company. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any preceding breach of this Agreement shall operate as a waiver of a succeeding breach of this Agreement. 11.3. Binding Effect; Assignment. The rights and obligations of this Agreement shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation, or any assignee of all or substantially all of the Company's business and properties; Executive's rights or obligations under this Agreement may not be assigned by Executive. 11.4. Headings. The headings contained in this Agreement (except those in Section 1) are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 12 11.5. Governing Law; Interpretation. This Agreement shall be construed in accordance with and governed for all purposes by the laws and public policy of the State of New York applicable to contracts executed and to be wholly performed within such State. Service of process in any dispute shall be effective (a) upon the Company, if served on any senior officer of the Company (other than Executive); (b) upon Executive, if served at Executive's residence last known to the Company. Executive acknowledges that breach of Sections 7.1 through 7.5 would entail irreparable injury and that, in addition to the Company's other express and implied remedies, the Company shall be entitled to injunctive and other equitable relief to prevent any actual, intended or likely such breach. 11.6. Dispute Resolution. All controversies, claims and disputes arising out of or relating to this Agreement, including without limitation any alleged violation of its terms, shall be resolved by final and binding arbitration before a single arbitrator in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitration shall be commenced by filing a demand for arbitration with the AAA within sixty (60) days after the filing party has given notice of such breach to the other party. The subject matter of the arbitration shall be limited to the conduct of the parties hereto and their employees. Each party shall bear its own costs and expenses, including costs and expenses of counsel and experts, in any such arbitration. 11.7. Further Assurances. Each party agrees at any time, and from time-to-time, to execute, acknowledge, deliver and perform, and/or cause to be executed, acknowledged, delivered and performed, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and/or assurances as may be necessary, and/or proper to carry out the provisions and/or intent of this Agreement. 11.8. Gender; Singular/Plural. In this Agreement, the use of one genders (e.g., "he", "she" and "it") shall mean each other gender; and the singular shall mean the plural, and vice versa, all as the context may require. 11.9. Severability. The parties acknowledge that the terms of this Agreement are fair and reasonable at the date signed by them. However, in light of the possibility of a change of conditions or differing interpretations by a court of what is fair and reasonable, the parties stipulate as follows: if any one or more of the terms, provisions, covenants and restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; further, if any one or more of the provisions contained 13 in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed, by limiting or reducing it, so as to be enforceable to the extent compatible with then applicable law. 11.10. Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original. 14 EXECUTION IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year above first written. /s/ John S.Mills -------------------------------------- John S. Mills AEROPOSTALE, INC., a Delaware Corporation By: /s/ Julian R. Geiger ----------------------------------- EXHIBIT A The Consolidated Net Income of the Company for the 2001 Fiscal Year, as determined in accordance with the definition of Consolidated Net Income, is $31,373,000. TABLE OF CONTENTS
Page ---- 1. Definitions.....................................................................................1 2. Employment......................................................................................4 3. Compensation and Benefits; Disability...........................................................5 3.1. Base Salary............................................................................5 3.2. Annual Bonus...........................................................................5 3.3. Intentionally omitted..................................................................6 3.4. Other Benefits.........................................................................6 3.5. Vacation...............................................................................6 3.6. Expenses...............................................................................6 3.7. Exclusive Compensation.................................................................7 4. Termination of Employment Period................................................................7 5. Termination.....................................................................................7 5.1. By Company for Cause...................................................................7 5.2. By Executive for Good Reason...........................................................7 5.3. On Executive's Death or Disability.....................................................8 5.4. By Company Without Cause...............................................................8 5.5. By Executive Without Good Reason.......................................................8 6. Severance.......................................................................................9 6.1. Severance..............................................................................9 6.2. Restricted Period......................................................................9 7. Inventions, Confidential Information and Related Matters........................................9 7.1. Assignment of Inventions...............................................................9 7.2. Restrictions on Use and Disclosure....................................................10 7.3. Return of Documents and Materials.....................................................10 7.4. Competitive Activities................................................................10 7.5. Solicitation of Employees.............................................................10 8. No Other Contracts.............................................................................11 9. Notices........................................................................................11 10. Indemnification and Insurance; Legal Expenses..................................................11 11. Miscellaneous..................................................................................12 11.1. Entire Agreement......................................................................12 11.2. Amendment; Waiver.....................................................................12 11.3. Binding Effect; Assignment............................................................12 11.4. Headings..............................................................................12
Page ---- 11.5. Governing Law; Interpretation.........................................................13 11.6. Dispute Resolution....................................................................13 11.7. Further Assurances....................................................................13 11.8. Gender; Singular/Plural...............................................................13 11.9. Severability..........................................................................13 11.10. Counterparts..........................................................................14
ii EX-10.22 6 y94783exv10w22.txt EMPLOYMENT AGREEMENT: CUNNINGHAM EXHIBIT 10.22 EMPLOYMENT AGREEMENT PARTIES This Employment Agreement (this "Agreement") dated and effective as of February 1, 2004 (the "Effective Date"), is entered into by and between Aeropostale, Inc., a Delaware corporation (the "Company"), and Michael Cunningham ("Executive"). TERMS OF AGREEMENT In consideration of the mutual covenants in this Agreement, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the terms listed below shall be defined as indicated. Affiliate: A domestic or foreign business entity controlled by, controlling or under common control with the Company. Annual Bonus: See Section 3.2. Base Salary: See Section 3.1. Board: The Board of Directors of the Company. Cause: See Section 5.1. Confidential Information: All secret proprietary information of the Company and its Subsidiaries, not otherwise publicly disclosed (except if disclosed by the Executive in violation of this Agreement), whether or not discovered or developed by Executive, known by Executive as a consequence of Executive's employment with the Company at any time (including prior to the commencement of this Agreement) as an employee or agent. Without limiting the generality of the foregoing, such proprietary information shall include (a) customer lists; (b) acquisition, expansion, marketing, financial and other business information and plans; (c) research and development; (d) computer programs; (e) sources of supply; (f) identity of specialized consultants and contractors and confidential information developed by them for the Company and its Subsidiaries; (g) purchasing, operating and other cost data; (h) special customer needs, cost and pricing data; (i) manufacturing methods; (j) quality control information; (k) inventory techniques; (l) employee information; any of which information is not generally known in the industries in which the Company and its Subsidiaries are conducting business or shall at any time during Executive's Employment conduct business including (without limitation) the apparel retailing industry. Confidential Information also includes the overall business, financial, expansion and acquisition plans of the Company and its Subsidiaries, and includes information contained in manuals, memoranda, projections, minutes, plans, drawings, designs, formula books, specifications, computer programs and records, whether or not legended or otherwise identified by the Company and its Subsidiaries as Confidential Information, as well as information which is the subject of meetings and discussions and not so recorded. Consolidated Net Income: For any period the net income (or loss) of the Company for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that (i) there shall be excluded therefrom (to the extent included and without duplication) (A) all extraordinary gains and extraordinary losses (as defined by generally accepted accounting principles) and (B) any effect that any change (after the Effective Date) in any law or in generally accepted accounting principles relating to the Company's recognition of compensation expense for employee stock options has on the net income (or loss) of the Company determined on a consolidated basis in accordance with generally accepted accounting principles; and (ii) that neither Annual Bonus nor any annual bonus based upon Percentage Increase in Consolidated Net Income payable to any employee (other than Executive) of the Company shall be considered in the computation thereof. Disability: The absence of the Executive from the Executive's duties to the Company on a full-time basis for a total of 120 days during any 12-month period as a result of incapacity due to mental or physical illness which is determined to be permanent by a physician selected by the Company and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). Employment Period: Unless earlier terminated as provided in Section 5 hereof, the Employment Period shall be the period commencing on the Effective Date and terminating on the last day of the 2006 Fiscal Year. Fiscal Year: The 52 or 53 week period ending on the Saturday closest to January 31 of each calendar year. Fiscal Years shall be referred to herein on the basis of the calendar year which contains 11 months of such Fiscal Year. (For example, "2002 Fiscal Year" means the twelve-month period ending February 1, 2003). Inventions: Those discoveries, developments, concepts and ideas, whether or not patentable, relating to the present, future and prospective activities and Products and Services of the Company and its Subsidiaries, which such activities and Products and Services are known to Executive by virtue of Executive's employment with the Company and its Subsidiaries. Percentage Increase in Consolidated Net Income: Percentage Increase in Consolidated Net Income shall mean, with respect to any Fiscal Year of the Company, the percentage increase, if any, in Consolidated Net Income of the Company in such Fiscal Year over the Consolidated Net Income of the Company in the immediately preceding Fiscal Year. By way of example, in the event that the Consolidated Net Income of the Company in the 2001 Fiscal Year is $20 million and the Consolidated Net 2 Income of the Company in the 2002 Fiscal Year is $26.5 million, the Percentage Increase in Consolidated Net Income in the 2002 Fiscal Year shall be equal to 32.5%. Products and Services: All products or services sold, rented, leased, rendered or otherwise made available to its customers by the Company and its Subsidiaries, or otherwise the subject of the business of the Company and its Subsidiaries. Restricted Period: The period beginning on the Effective Date and ending on the first anniversary of the date of termination of Executive's employment; provided, however, that in the event that the termination of Executive's employment occurs during the 2006 Fiscal Year, then the Restricted Period shall terminate on the earlier of (I) the first anniversary of such termination date, and (II) July 31, 2007. Subsidiary: Any entity of which the Company owns, directly or indirectly, 50% or more of the aggregate voting power of the voting securities. 2. Employment. (a) Subject to the terms and conditions of this Agreement, the Company hereby agrees to employ and the Executive hereby accepts employment in the position of Executive Vice President and Chief Financial Officer of the Company and agrees during the Employment Period to perform to the best of Executive's ability, experience and talent those acts and duties and to furnish those services to the Company and its Subsidiaries in connection with and related to such positions as the Chief Executive Officer, President or the Board shall from time to time direct, provided such acts and directives are consistent with the duties of Executive Vice President and Chief Financial Officer. Executive shall, during the Employment Period, use Executive's best efforts to promote the interests of the Company and its Subsidiaries. Executive agrees to devote all of his business time to the business affairs of the Company, and to perform all duties and fulfill all responsibilities incident to his employment in a manner reasonably expected of senior executives in similar positions. Executive further agrees that he will not, directly or indirectly, engage or participate in any activities at any time during such employment which conflict with the interests of the Company. (b) During the Employment Period, subject to Section 5.2(c) hereof, Executive's principal place of employment shall be located at one of the Company's principal places of business or principal executive office, wherever located as designated from time to time by the Chief Executive Officer or the Board, and Executive shall be provided with an office and similar support services and facilities as appropriate to Executive's position and responsibilities and of at least substantially the same quality as provided to Executive on the Effective Date. 3. Compensation and Benefits; Disability. 3.1. Base Salary. The Company shall pay Executive a Base Salary in the amount of $325,000 for the 2004 Fiscal Year, and an amount of not less than $325,000 for each of the 2005 and 3 2006 Fiscal Years. The Base Salary shall be reviewed annually by the Compensation Committee of the Board for increase, based upon merit or upon increases in the cost of living, and shall be payable in equal installments pursuant to the Company's customary payroll policies in force at the time of payment (but in no event less frequently than monthly), less required payroll deductions. 3.2. Annual Bonus. (a) Subject to Section 11.10 hereof, in addition to Executive's Base Salary, during the Employment Period the Company shall pay Executive, as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year, an Annual Bonus in cash for each Fiscal Year commencing with the 2004 Fiscal Year which is the product of (A) Percentage Increase in Consolidated Net Income for such Fiscal Year times 100; (B) 3.75%; and (C) Executive's Base Salary in effect during such Fiscal Year. By way of example, in the event that the Percentage Increase in Consolidated Net Income of the Company in the 2004 Fiscal Year is 32.5%, Executive shall be entitled to an Annual Bonus in an amount equal to $396,094 (i.e., 32.5 x .0375 x $325,000). In the event that there is no Percentage Increase in Consolidated Net Income (either by reason of the Consolidated Net Income declining or remaining unchanged between successive Fiscal Years), Executive shall not be entitled to an Annual Bonus. (b) Such bonus shall be payable in cash as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year. (c) Notwithstanding anything to the contrary in this Section 3.2, in no event shall Executive be entitled to receive an Annual Bonus in excess of one and one-half (1-1/2) times his then applicable Base Salary in respect of any Fiscal Year. However, if, for any Fiscal Year, the Annual Bonus computed under subsection (a) of this Section exceeds the amount permitted by this subsection (c) and there is a Percentage Increase in Consolidated Net Income for the succeeding Fiscal Year, then the amount of such excess shall be added to and payable with the Annual Bonus for such succeeding Fiscal Year, subject to the first sentence of this subsection (c). 3.3. Other Benefits. Executive shall be entitled, during the Employment Period, to participate, on the same basis and to the same extent as other executive employees of the Company, 4 in any pension, life insurance, health insurance, short-term disability and hospital plans and other fringe benefits or benefit plans presently in effect and hereafter maintained or created by the Company. In addition, Executive shall receive an automobile allowance in the amount of $8,500 per year, payable monthly. During the Employment Period, Company agrees not to reduce the benefits provided to Executive. Service with the Company, any Subsidiary, or Federated Department Stores, Inc. ("Federated") or any affiliate of Federated shall be recognized for vesting purposes under any benefit plan of the Company. 3.4. Vacation. Executive shall be entitled to four (4) weeks of paid vacation per calendar year, such vacation to be taken during period or periods during each such year as shall be consonant with Executive's responsibilities and (in the Company's judgment) with the Company's vacation schedule and policies for senior officers. 3.5. Expenses. Pursuant to the Company's customary policies in force at the time of payment, Executive shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorized expenses properly incurred by Executive on the Company's behalf in the performance of Executive's duties hereunder. 3.6. Exclusive Compensation. In respect of services rendered to the Company, Executive shall receive only the compensation set forth in this Section 3 and Sections 5 and 6. 4. Termination of Employment Period. The Employment Period shall continue as described in Section 1 unless earlier terminated by reason of (a) Executive's discharge for Cause pursuant to Section 5.1, (b) Executive's discharge without Cause pursuant to Section 5.4, (c) Executive's death or Disability pursuant to Section 5.3, (d) termination of this Agreement by Executive pursuant to Section 5.2, or (e) termination of this Agreement by Executive pursuant to Section 5.5. In all events, the post employment provisions of Section 7 shall survive termination of the Employment Period for the periods provided therein. 5. Termination. 5.1. By Company for Cause. The Company may discharge Executive and terminate the Employment Period for Cause. As used in this Section 5.1, "Cause" shall mean any one or more than one of the following: (a) Gross negligence or gross or willful misconduct of Executive in the performance of his duties hereunder during the Employment Period; 5 (b) Executive's conviction of a felony, any crime of moral turpitude during the Employment Period or any act of fraud or dishonesty; (c) Willful failure to follow instructions of the Chief Executive Officer or the Board which instructions are material, legal, and not inconsistent with the duties assigned to Executive hereunder and which failure is not cured within fifteen (15) business days after written notice of such failure is delivered to Executive by the Company with respect to failures which are curable, provided, however, that if such failure is not capable of being cured within fifteen (15) business days, the Company may terminate Executive immediately; or (d) Any breach of any of the material terms of this Agreement by Executive which is not cured within fifteen (15) business days after written notice of breach is delivered to Executive by the Company with respect to breaches which are curable, provided, however, that if such breach is not capable of being cured within fifteen (15) business days, the Company may terminate Executive immediately. Upon discharge of Executive for Cause, the Company shall be relieved and discharged of all obligations to make payments to Executive which would otherwise be due under this Agreement except as to salary, benefits and bonuses earned for actual services rendered prior to the date of termination, and otherwise reimbursable expenses under Section 3.5. 5.2. By Executive for Good Reason. Executive may terminate the Employment Period for Good Reason. Good Reason shall mean the occurrence of any of the following events: (a) any breach of any of the material terms of this Agreement by the Company continuing for more than fifteen (15) days after written notice thereof from Executive that such breach will be grounds for termination for Good Reason; (b) without the consent of Executive, a material reduction in the authorities, powers, functions and/or duties attached to Executive's position which reduction is not rescinded within fifteen (15) days after notice from Executive that such reduction will be grounds for termination for Good Reason; provided, however, that Executive shall deliver any such notice of such material reduction within five (5) business days of the occurrence of such material reduction; or (c) without the consent of Executive, the Company relocates the principal location of Executive's employment to a location more than 25 miles from its current location. 5.3. On Executive's Death or Disability. The Employment Period shall terminate, and the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date of the death or Disability of Executive, except as to salary earned for actual services rendered prior to the date of the death or Disability of Executive, reimbursement of 6 expenses, and a pro-rata portion of Executive's Annual Bonus for the full applicable Fiscal Year calculated following such year and pro-rated for the number of days Executive was actually employed in such Fiscal Year. 5.4. By Company Without Cause. The Company may, on 15 days written notice to Executive, terminate the Employment Period without Cause at any time during the Employment Period. 5.5. By Executive Without Good Reason. The Executive may, on 30 days written notice to the Company, terminate the Employment Period at any time during the Employment Period. In the event of a termination by Executive pursuant to this Section 5.5, the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date as of which the Employment Period terminates, except as to salary earned for actual services rendered prior to such date, payment of any Annual Bonus under Section 3.2 with respect to any Fiscal Year ending prior to such date, and reimbursement of expenses under Section 3.5. All amounts payable pursuant to this Section 5.5 shall be paid to Executive in a single lump sum in cash not later than ten (10) days after the date of termination or with respect to the Annual Bonus, within ten (10) days of its determination in accordance with the terms hereof. 6. Severance. 6.1. Severance. Upon termination of employment pursuant to Sections 5.2 or 5.4 (but in any event not upon termination of the Employment Period pursuant to Sections 5.1, 5.3, 5.5 or upon expiration of the Employment Period or otherwise), and so long as the Executive executes a release in the Company's customary form and the Executive has not breached any of his representations set forth in Section 8, the Company shall pay to Executive (a) an amount equal to the lesser of (x) the amount of Base Salary due and owing Executive through the expiration of the Employment Period (such amount to be calculated based upon his then current Base Salary), and (y) one (1) times his then applicable Base Salary; provided, however that in no event shall Executive be entitled to receive less than one-half (1/2) his then applicable Base Salary pursuant to this Section 6.1(a), and (b) an amount equal to a pro rata portion (based upon the portion of the Fiscal Year elapsed to the date of such termination) of the Annual Bonus which would have been payable to the Executive had Executive been employed by the Company under this Agreement for the entire Fiscal Year in which such termination occurs. All amounts payable pursuant to Section 6.1(a) shall be paid to Executive in a single lump sum in cash not later than five (5) days after the date of termination. Any amount 7 due and payable to Executive under Section 6.1(b) shall be paid within ten (10) days of its determination in accordance with the terms hereof. 7. Inventions, Confidential Information and Related Matters. 7.1. Assignment of Inventions. All Inventions which are at any time made by Executive, acting alone or in conjunction with others, (a) during the Employment Period, or (b) if based on or related to any Confidential Information on, made by Executive within one year after the termination of the Employment Period, shall be the property of the Company. Executive agrees that Executive shall, at the cost and expense of the Company, execute formal application for U.S. and other patents, and also do all other acts and things (including, among others, the execution and delivery of instruments of further assurance or confirmation) deemed by the Company to be necessary or desirable at any time to perfect the full assignment to the Company of Executive's right and title (if any) to such Invention. 7.2. Restrictions on Use and Disclosure. Except as required by Executive's duties hereunder, Executive shall never, directly or indirectly, use, publish, disseminate or otherwise disclose any Confidential Information or Inventions which are the subject of Section 7.1 without the prior written consent of the Company, except as required by law. Nothing in this Section shall prevent disclosure of information which has been completely disclosed in a published patent or other integrated publication of general circulation, nor shall this Section govern the right to use Inventions for which a patent may have been issued. 7.3. Return of Documents and Materials. Upon termination of the Employment Period, Executive shall forthwith deliver to the Company all procedural manuals, guides, specifications, formulas, plans, drawings, designs and similar materials, records, notebooks and similar repositories of or containing Confidential Information and Inventions which are the subject of Section 7.1, including all copies, then in Executive's possession or control, whether prepared by Executive or others, as well as all other Company property in Executive's possession or control. 7.4. Competitive Activities. During the Restricted Period, Executive shall not, without the prior written approval of the Company, directly or indirectly, within the United States, become an employee or consultant or otherwise render services to, lend funds to, serve on the board of, invest in (other than as a 1% or less shareholder of a publicly-traded corporation) or guarantee the debts of, any business organization that competes with the Company in 8 those retail businesses in which the Company and its Subsidiaries are engaged, or intends to engage in, on the date the Employment Period is terminated. The Company may in its reasonable discretion give Executive written approval to engage in such activities or render such services after termination of the Employment Period if Executive and such prospective firm or business organization gives the Company written assurances, satisfactory to the Company in its sole discretion, that the integrity of the Confidential Information, the Inventions and the good will of the Company and its Subsidiaries will not be jeopardized by such employment. Executive shall, during the Restricted Period, notify the Company of any change in address and identify each subsequent employment or business activity in which Executive shall engage during such Restricted Period, stating the name and address of the employer or business organization and the nature of Executive's position. 7.5. Solicitation of Employees. During the Restricted Period and for a period of 12 months thereafter, Executive shall not, without the prior written approval of the Company, directly or indirectly, (i) solicit, raid, entice or induce any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its Subsidiaries to become employed by any other person, firm or corporation in any retail business in competition with the Company or (ii) employ in any person, firm or corporation engaged in any retail business in competition with the Company, any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its subsidiaries. 8. No Other Contracts. Executive represents and warrants that neither the execution and delivery of this Agreement by Executive nor the performance by Executive of Executive's obligations hereunder, shall constitute a default under or a breach of the terms of any other agreement, indenture or contract to which Executive is a party or by which Executive is bound, nor shall the execution and delivery of this Agreement by Executive or the performance of Executive's duties and obligations hereunder give rise to any claim or charge against either Executive or the Company based upon any other contract, indenture or agreement to which Executive is a party or by which Executive is bound. 9. Notices. Any notices or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid at the following addresses: If to the Company: 112 West 34th Street 22nd Floor New York, NY 10120 9 If to the Executive: Michael Cunningham 21 Bridge Road Nanuet, NY 10954 Mailed notices shall be deemed given when received. Any person entitled to receive notice may designate in writing, by notice to the others, such other address to which notices to such party shall thereafter be sent. 10. Indemnification and Insurance; Legal Expenses. The Company shall indemnify the Executive to the fullest extent permitted by the laws of the State of Delaware, as in effect at the time of the subject act or omission, and shall advance to the Executive reasonable attorney's fees and expenses as such fees and expenses are incurred (subject to an undertaking from the Executive to repay such advances if it shall be finally determined by a judicial decision which is not subject to further appeal that the Executive was not entitled to the reimbursement of such fees and expenses) and he will be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (Directors and Officers Insurance) against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by reason of his being or having been a director, officer or employee of the Company or any of its Subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of the Company (other than any dispute, claim or controversy arising under or relating to this Agreement or to the extent a result of a breach by Executive of his representations in Section 8). The Company covenants to maintain during the Employment Period for the benefit of the Executive (in his capacity as an officer of the Company) Directors and Officers Insurance providing customary benefits to the Executive. 11. Miscellaneous. 11.1. Entire Agreement. This Agreement contains the entire understanding of the parties in respect of its subject matter hereof and supersedes all prior oral and written agreements and understandings between the parties with respect to such subject matter. 11.2. Amendment; Waiver. This Agreement may not be amended, supplemented, canceled or discharged, except by written instrument executed by the Executive and the Company. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any preceding breach of this Agreement shall operate as a waiver of a succeeding breach of this Agreement. 10 11.3. Binding Effect; Assignment. The rights and obligations of this Agreement shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation, or any assignee of all or substantially all of the Company's business and properties; Executive's rights or obligations under this Agreement may not be assigned by Executive. 11.4. Headings. The headings contained in this Agreement (except those in Section 1) are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 11.5. Governing Law; Interpretation. This Agreement shall be construed in accordance with and governed for all purposes by the laws and public policy of the State of New York applicable to contracts executed and to be wholly performed within such State. Service of process in any dispute shall be effective (a) upon the Company, if served on any senior officer of the Company (other than Executive); (b) upon Executive, if served at Executive's residence last known to the Company. Executive acknowledges that breach of Sections 7.1 through 7.5 would entail irreparable injury and that, in addition to the Company's other express and implied remedies, the Company shall be entitled to injunctive and other equitable relief to prevent any actual, intended or likely such breach. 11.6. Dispute Resolution. All controversies, claims and disputes arising out of or relating to this Agreement, including without limitation any alleged violation of its terms, shall be resolved by final and binding arbitration before a single arbitrator in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitration shall be commenced by filing a demand for arbitration with the AAA within sixty days after the filing party has given notice of such breach to the other party. The subject matter of the arbitration shall be limited to the conduct of the parties hereto and their employees. Each party shall bear its own costs and expenses, including costs and expenses of counsel and experts, in any such arbitration. 11.7. Further Assurances. Each party agrees at any time, and from time-to-time, to execute, acknowledge, deliver and perform, and/or cause to be executed, acknowledged, delivered and performed, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and/or assurances as may be necessary, and/or proper to carry out the provisions and/or intent of this Agreement. 11 11.8. Gender; Singular/Plural. In this Agreement, the use of one genders (e.g., "he", "she" and "it") shall mean each other gender; and the singular shall mean the plural, and vice versa, all as the context may require. 11.9. Severability. The parties acknowledge that the terms of this Agreement are fair and reasonable at the date signed by them. However, in light of the possibility of a change of conditions or differing interpretations by a court of what is fair and reasonable, the parties stipulate as follows: if any one or more of the terms, provisions, covenants and restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; further, if any one or more of the provisions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed, by limiting or reducing it, so as to be enforceable to the extent compatible with then applicable law. 11.10. Executive Incentive Bonus Plan. Notwithstanding anything to the contrary contained in this Agreement, Executive and the Company agree that (i) the Annual Bonus contemplated by this Agreement shall be payable to Executive only pursuant to the terms of an Executive Incentive Bonus Plan (the "Incentive Plan"), incorporating all applicable terms and conditions of the Annual Bonus contained in this Agreement, (ii) the Incentive Plan, and any Annual Bonus to be payable thereunder, is subject to the approval of the stockholders of the Company, and (iii) in the event that the Incentive Plan is not approved by the Company's stockholders at the Company's 2004 Annual Meeting, then (x) Executive shall not be entitled to receive the Annual Bonus contemplated by this Agreement and shall have no rights or claims against the Company arising from such failure of the Company's stockholders to approve the Incentive Plan, and (y) this Agreement shall remain in full force and effect except that all references in this Agreement to the Annual Bonus shall be deemed to be deleted from this Agreement and of no further force or effect. The Company agrees that the Incentive Plan shall be submitted for approval by the Company's stockholders at the Company's 2004 Annual Meeting of Stockholders. 11.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original. 12 EXECUTION IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year above first written. __________/s/ Michael J. Cunningham____ Michael J. Cunningham AEROPOSTALE, INC. a Delaware Corporation By:______/s/ Julian R. Geiger__________ TABLE OF CONTENTS
Page ---- 1. Definitions.................................................................................... 1 2. Employment..................................................................................... 3 3. Compensation and Benefits; Disability.......................................................... 3 3.1. Base Salary........................................................................... 3 3.2. Annual Bonus.......................................................................... 4 3.3. Other Benefits........................................................................ 4 3.4. Vacation.............................................................................. 5 3.5. Expenses.............................................................................. 5 3.6. Exclusive Compensation................................................................ 5 4. Termination of Employment Period............................................................... 5 5. Termination.................................................................................... 5 5.1. By Company for Cause.................................................................. 5 5.2. By Executive for Good Reason.......................................................... 6 5.3. On Executive's Death or Disability.................................................... 6 5.4. By Company Without Cause.............................................................. 7 5.5. By Executive Without Good Reason...................................................... 7 6. Severance...................................................................................... 7 6.1. Severance............................................................................. 7 7. Inventions, Confidential Information and Related Matters....................................... 8 7.1. Assignment of Inventions.............................................................. 8 7.2. Restrictions on Use and Disclosure.................................................... 8 7.3. Return of Documents and Materials..................................................... 8 7.4. Competitive Activities................................................................ 8 7.5. Solicitation of Employees............................................................. 9 8. No Other Contracts............................................................................. 9 9. Notices........................................................................................ 9 10. Indemnification and Insurance; Legal Expenses.................................................. 10 11. Miscellaneous.................................................................................. 10 11.1. Entire Agreement...................................................................... 10 11.2. Amendment; Waiver..................................................................... 10 11.3. Binding Effect; Assignment............................................................ 11 11.4. Headings.............................................................................. 11 11.5. Governing Law; Interpretation......................................................... 11
Page ---- 11.6. Dispute Resolution.................................................................... 11 11.7. Further Assurances.................................................................... 11 11.8. Gender; Singular/Plural............................................................... 12 11.9. Severability.......................................................................... 12 11.10. Counterparts.......................................................................... 12
ii EX-10.23 7 y94783exv10w23.txt EMPLOYMENT AGREEMENT: JOHNSON EXHIBIT 10.23 EMPLOYMENT AGREEMENT PARTIES This Employment Agreement (this "Agreement") dated and effective as of February 1, 2004 (the "Effective Date"), is entered into by and between Aeropostale, Inc., a Delaware corporation (the "Company"), and Thomas Johnson ("Executive"). TERMS OF AGREEMENT In consideration of the mutual covenants in this Agreement, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the terms listed below shall be defined as indicated. Affiliate: A domestic or foreign business entity controlled by, controlling or under common control with the Company. Annual Bonus: See Section 3.2. Base Salary: See Section 3.1. Board: The Board of Directors of the Company. Cause: See Section 5.1. Confidential Information: All secret proprietary information of the Company and its Subsidiaries, not otherwise publicly disclosed (except if disclosed by the Executive in violation of this Agreement), whether or not discovered or developed by Executive, known by Executive as a consequence of Executive's employment with the Company at any time (including prior to the commencement of this Agreement) as an employee or agent. Without limiting the generality of the foregoing, such proprietary information shall include (a) customer lists; (b) acquisition, expansion, marketing, financial and other business information and plans; (c) research and development; (d) computer programs; (e) sources of supply; (f) identity of specialized consultants and contractors and confidential information developed by them for the Company and its Subsidiaries; (g) purchasing, operating and other cost data; (h) special customer needs, cost and pricing data; (i) manufacturing methods; (j) quality control information; (k) inventory techniques; (l) employee information; any of which information is not generally known in the industries in which the Company and its Subsidiaries are conducting business or shall at any time during Executive's Employment conduct business including (without limitation) the apparel retailing industry. Confidential Information also includes the overall business, financial, expansion and acquisition plans of the Company and its Subsidiaries, and includes information contained in manuals, memoranda, projections, minutes, plans, drawings, designs, formula books, specifications, computer programs and records, whether or not legended or otherwise identified by the Company and its Subsidiaries as Confidential Information, as well as information which is the subject of meetings and discussions and not so recorded. Consolidated Net Income: For any period the net income (or loss) of the Company for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that (i) there shall be excluded therefrom (to the extent included and without duplication) (A) all extraordinary gains and extraordinary losses (as defined by generally accepted accounting principles) and (B) any effect that any change (after the Effective Date) in any law or in generally accepted accounting principles relating to the Company's recognition of compensation expense for employee stock options has on the net income (or loss) of the Company determined on a consolidated basis in accordance with generally accepted accounting principles; and (ii) that neither Annual Bonus nor any annual bonus based upon Percentage Increase in Consolidated Net Income payable to any employee (other than Executive) of the Company shall be considered in the computation thereof. Disability: The absence of the Executive from the Executive's duties to the Company on a full-time basis for a total of 120 days during any 12-month period as a result of incapacity due to mental or physical illness which is determined to be permanent by a physician selected by the Company and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). Employment Period: Unless earlier terminated as provided in Section 5 hereof, the Employment Period shall be the period commencing on the Effective Date and terminating on the last day of the 2006 Fiscal Year. Fiscal Year: The 52 or 53 week period ending on the Saturday closest to January 31 of each calendar year. Fiscal Years shall be referred to herein on the basis of the calendar year which contains 11 months of such Fiscal Year. (For example, "2002 Fiscal Year" means the twelve-month period ending February 1, 2003). Inventions: Those discoveries, developments, concepts and ideas, whether or not patentable, relating to the present, future and prospective activities and Products and Services of the Company and its Subsidiaries, which such activities and Products and Services are known to Executive by virtue of Executive's employment with the Company and its Subsidiaries. Percentage Increase in Consolidated Net Income: Percentage Increase in Consolidated Net Income shall mean, with respect to any Fiscal Year of the Company, the percentage increase, if any, in Consolidated Net Income of the Company in such Fiscal Year over the Consolidated Net Income of the Company in the immediately preceding Fiscal Year. By way of example, in the event that the Consolidated Net Income of the Company in the 2001 Fiscal Year is $20 million and the Consolidated Net 2 Income of the Company in the 2002 Fiscal Year is $26.5 million, the Percentage Increase in Consolidated Net Income in the 2002 Fiscal Year shall be equal to 32.5%. Products and Services: All products or services sold, rented, leased, rendered or otherwise made available to its customers by the Company and its Subsidiaries, or otherwise the subject of the business of the Company and its Subsidiaries. Restricted Period: The period beginning on the Effective Date and ending on the first anniversary of the date of termination of Executive's employment; provided, however, that in the event that the termination of Executive's employment occurs during the 2006 Fiscal Year, then the Restricted Period shall terminate on the earlier of (I) the first anniversary of such termination date, and (II) July 31, 2007. Subsidiary: Any entity of which the Company owns, directly or indirectly, 50% or more of the aggregate voting power of the voting securities. 2. Employment. (a) Subject to the terms and conditions of this Agreement, the Company hereby agrees to employ and the Executive hereby accepts employment in the position of Executive Vice President and Chief Operating Officer of the Company and agrees during the Employment Period to perform to the best of Executive's ability, experience and talent those acts and duties and to furnish those services to the Company and its Subsidiaries in connection with and related to such positions as the Chief Executive Officer or the Board shall from time to time direct, provided such acts and directives are consistent with the duties of Executive Vice President and Chief Operating Officer. Executive shall, during the Employment Period, use Executive's best efforts to promote the interests of the Company and its Subsidiaries. Executive agrees to devote all of his business time to the business affairs of the Company, and to perform all duties and fulfill all responsibilities incident to his employment in a manner reasonably expected of senior executives in similar positions. Executive further agrees that he will not, directly or indirectly, engage or participate in any activities at any time during such employment which conflict with the interests of the Company. (b) During the Employment Period, subject to Section 5.2(c) hereof, Executive's principal place of employment shall be located at one of the Company's principal places of business or principal executive office, wherever located as designated from time to time by the Chief Executive Officer or the Board, and Executive shall be provided with an office and similar support services and facilities as appropriate to Executive's position and responsibilities and of at least substantially the same quality as provided to Executive on the Effective Date. 3. Compensation and Benefits; Disability. 3.1. Base Salary. The Company shall pay Executive a Base Salary in the amount of $375,000 for the 2004 Fiscal Year, and an amount of not less than $375,000 for each of the 2005 and 3 2006 Fiscal Years. The Base Salary shall be reviewed annually by the Compensation Committee of the Board for increase, based upon merit or upon increases in the cost of living, and shall be payable in equal installments pursuant to the Company's customary payroll policies in force at the time of payment (but in no event less frequently than monthly), less required payroll deductions. 3.2. Annual Bonus. (a) Subject to Section 11.10 hereof, in addition to Executive's Base Salary, during the Employment Period the Company shall pay Executive, as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year, an Annual Bonus in cash for each Fiscal Year commencing with the 2004 Fiscal Year which is the product of (A) Percentage Increase in Consolidated Net Income for such Fiscal Year times 100; (B) 3.75%; and (C) Executive's Base Salary in effect during such Fiscal Year. By way of example, in the event that the Percentage Increase in Consolidated Net Income of the Company in the 2004 Fiscal Year is 32.5%, Executive shall be entitled to an Annual Bonus in an amount equal to $457,031 (i.e., 32.5 x .0375 x $375,000). In the event that there is no Percentage Increase in Consolidated Net Income (either by reason of the Consolidated Net Income declining or remaining unchanged between successive Fiscal Years), Executive shall not be entitled to an Annual Bonus. (b) Such bonus shall be payable in cash as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year. (c) Notwithstanding anything to the contrary in this Section 3.2, in no event shall Executive be entitled to receive an Annual Bonus in excess of one and one-half (1-1/2) times his then applicable Base Salary in respect of any Fiscal Year. However, if, for any Fiscal Year, the Annual Bonus computed under subsection (a) of this Section exceeds the amount permitted by this subsection (c) and there is a Percentage Increase in Consolidated Net Income for the succeeding Fiscal Year, then the amount of such excess shall be added to and payable with the Annual Bonus for such succeeding Fiscal Year, subject to the first sentence of this subsection (c). 3.3. Other Benefits. Executive shall be entitled, during the Employment Period, to participate, on the same basis and to the same extent as other executive employees of the Company, 4 in any pension, life insurance, health insurance, short-term disability and hospital plans and other fringe benefits or benefit plans presently in effect and hereafter maintained or created by the Company. In addition, Executive shall receive an automobile allowance in the amount of $8,500 per year, payable monthly. During the Employment Period, Company agrees not to reduce the benefits provided to Executive. Service with the Company, any Subsidiary, or Federated Department Stores, Inc. ("Federated") or any affiliate of Federated shall be recognized for vesting purposes under any benefit plan of the Company. 3.4. Vacation. Executive shall be entitled to four (4) weeks of paid vacation per calendar year, such vacation to be taken during period or periods during each such year as shall be consonant with Executive's responsibilities and (in the Company's judgment) with the Company's vacation schedule and policies for senior officers. 3.5. Expenses. Pursuant to the Company's customary policies in force at the time of payment, Executive shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorized expenses properly incurred by Executive on the Company's behalf in the performance of Executive's duties hereunder. 3.6. Exclusive Compensation. In respect of services rendered to the Company, Executive shall receive only the compensation set forth in this Section 3 and Sections 5 and 6. 4. Termination of Employment Period. The Employment Period shall continue as described in Section 1 unless earlier terminated by reason of (a) Executive's discharge for Cause pursuant to Section 5.1, (b) Executive's discharge without Cause pursuant to Section 5.4, (c) Executive's death or Disability pursuant to Section 5.3, (d) termination of this Agreement by Executive pursuant to Section 5.2, or (e) termination of this Agreement by Executive pursuant to Section 5.5. In all events, the post employment provisions of Section 7 shall survive termination of the Employment Period for the periods provided therein. 5. Termination. 5.1. By Company for Cause. The Company may discharge Executive and terminate the Employment Period for Cause. As used in this Section 5.1, "Cause" shall mean any one or more than one of the following: (a) Gross negligence or gross or willful misconduct of Executive in the performance of his duties hereunder during the Employment Period; 5 (b) Executive's conviction of a felony, any crime of moral turpitude during the Employment Period or any act of fraud or dishonesty; (c) Willful failure to follow instructions of the Chief Executive Officer or the Board which instructions are material, legal, and not inconsistent with the duties assigned to Executive hereunder and which failure is not cured within fifteen (15) business days after written notice of such failure is delivered to Executive by the Company with respect to failures which are curable, provided, however, that if such failure is not capable of being cured within fifteen (15) business days, the Company may terminate Executive immediately; or (d) Any breach of any of the material terms of this Agreement by Executive which is not cured within fifteen (15) business days after written notice of breach is delivered to Executive by the Company with respect to breaches which are curable, provided, however, that if such breach is not capable of being cured within fifteen (15) business days, the Company may terminate Executive immediately. Upon discharge of Executive for Cause, the Company shall be relieved and discharged of all obligations to make payments to Executive which would otherwise be due under this Agreement except as to salary, benefits and bonuses earned for actual services rendered prior to the date of termination, and otherwise reimbursable expenses under Section 3.5. 5.2. By Executive for Good Reason. Executive may terminate the Employment Period for Good Reason. Good Reason shall mean the occurrence of any of the following events: (a) any breach of any of the material terms of this Agreement by the Company continuing for more than fifteen (15) days after written notice thereof from Executive that such breach will be grounds for termination for Good Reason; (b) without the consent of Executive, a material reduction in the authorities, powers, functions and/or duties attached to Executive's position which reduction is not rescinded within fifteen (15) days after notice from Executive that such reduction will be grounds for termination for Good Reason; provided, however, that Executive shall deliver any such notice of such material reduction within five (5) business days of the occurrence of such material reduction; or (c) without the consent of Executive, the Company relocates the principal location of Executive's employment to a location more than 25 miles from its current location. 5.3. On Executive's Death or Disability. The Employment Period shall terminate, and the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date of the death or Disability of Executive, except as to salary earned for actual services rendered prior to the date of the death or Disability of Executive, reimbursement of 6 expenses, and a pro-rata portion of Executive's Annual Bonus for the full applicable Fiscal Year calculated following such year and pro-rated for the number of days Executive was actually employed in such Fiscal Year. 5.4. By Company Without Cause. The Company may, on 15 days written notice to Executive, terminate the Employment Period without Cause at any time during the Employment Period. 5.5. By Executive Without Good Reason. The Executive may, on 30 days written notice to the Company, terminate the Employment Period at any time during the Employment Period. In the event of a termination by Executive pursuant to this Section 5.5, the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date as of which the Employment Period terminates, except as to salary earned for actual services rendered prior to such date, payment of any Annual Bonus under Section 3.2 with respect to any Fiscal Year ending prior to such date, and reimbursement of expenses under Section 3.5. All amounts payable pursuant to this Section 5.5 shall be paid to Executive in a single lump sum in cash not later than ten (10) days after the date of termination or with respect to the Annual Bonus, within ten (10) days of its determination in accordance with the terms hereof. 6. Severance. 6.1. Severance. Upon termination of employment pursuant to Sections 5.2 or 5.4 (but in any event not upon termination of the Employment Period pursuant to Sections 5.1, 5.3, 5.5 or upon expiration of the Employment Period or otherwise), and so long as the Executive executes a release in the Company's customary form and the Executive has not breached any of his representations set forth in Section 8, the Company shall pay to Executive (a) an amount equal to the lesser of (x) the amount of Base Salary due and owing Executive through the expiration of the Employment Period (such amount to be calculated based upon his then current Base Salary), and (y) one (1) times his then applicable Base Salary; provided, however that in no event shall Executive be entitled to receive less than one-half (1/2) his then applicable Base Salary pursuant to this Section 6.1(a), and (b) an amount equal to a pro rata portion (based upon the portion of the Fiscal Year elapsed to the date of such termination) of the Annual Bonus which would have been payable to the Executive had Executive been employed by the Company under this Agreement for the entire Fiscal Year in which such termination occurs. All amounts payable pursuant to Section 6.1(a) shall be paid to Executive in a single lump sum in cash not later than five (5) days after the date of termination. Any amount 7 due and payable to Executive under Section 6.1(b) shall be paid within ten (10) days of its determination in accordance with the terms hereof. 7. Inventions, Confidential Information and Related Matters. 7.1. Assignment of Inventions. All Inventions which are at any time made by Executive, acting alone or in conjunction with others, (a) during the Employment Period, or (b) if based on or related to any Confidential Information on, made by Executive within one year after the termination of the Employment Period, shall be the property of the Company. Executive agrees that Executive shall, at the cost and expense of the Company, execute formal application for U.S. and other patents, and also do all other acts and things (including, among others, the execution and delivery of instruments of further assurance or confirmation) deemed by the Company to be necessary or desirable at any time to perfect the full assignment to the Company of Executive's right and title (if any) to such Invention. 7.2. Restrictions on Use and Disclosure. Except as required by Executive's duties hereunder, Executive shall never, directly or indirectly, use, publish, disseminate or otherwise disclose any Confidential Information or Inventions which are the subject of Section 7.1 without the prior written consent of the Company, except as required by law. Nothing in this Section shall prevent disclosure of information which has been completely disclosed in a published patent or other integrated publication of general circulation, nor shall this Section govern the right to use Inventions for which a patent may have been issued. 7.3. Return of Documents and Materials. Upon termination of the Employment Period, Executive shall forthwith deliver to the Company all procedural manuals, guides, specifications, formulas, plans, drawings, designs and similar materials, records, notebooks and similar repositories of or containing Confidential Information and Inventions which are the subject of Section 7.1, including all copies, then in Executive's possession or control, whether prepared by Executive or others, as well as all other Company property in Executive's possession or control. 7.4. Competitive Activities. During the Restricted Period, Executive shall not, without the prior written approval of the Company, directly or indirectly, within the United States, become an employee or consultant or otherwise render services to, lend funds to, serve on the board of, invest in (other than as a 1% or less shareholder of a publicly-traded corporation) or guarantee the debts of, any business organization that competes with the Company in 8 those retail businesses in which the Company and its Subsidiaries are engaged, or intends to engage in, on the date the Employment Period is terminated. The Company may in its reasonable discretion give Executive written approval to engage in such activities or render such services after termination of the Employment Period if Executive and such prospective firm or business organization gives the Company written assurances, satisfactory to the Company in its sole discretion, that the integrity of the Confidential Information, the Inventions and the good will of the Company and its Subsidiaries will not be jeopardized by such employment. Executive shall, during the Restricted Period, notify the Company of any change in address and identify each subsequent employment or business activity in which Executive shall engage during such Restricted Period, stating the name and address of the employer or business organization and the nature of Executive's position. 7.5. Solicitation of Employees. During the Restricted Period and for a period of 12 months thereafter, Executive shall not, without the prior written approval of the Company, directly or indirectly, (i) solicit, raid, entice or induce any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its Subsidiaries to become employed by any other person, firm or corporation in any retail business in competition with the Company or (ii) employ in any person, firm or corporation engaged in any retail business in competition with the Company, any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its subsidiaries. 8. No Other Contracts. Executive represents and warrants that neither the execution and delivery of this Agreement by Executive nor the performance by Executive of Executive's obligations hereunder, shall constitute a default under or a breach of the terms of any other agreement, indenture or contract to which Executive is a party or by which Executive is bound, nor shall the execution and delivery of this Agreement by Executive or the performance of Executive's duties and obligations hereunder give rise to any claim or charge against either Executive or the Company based upon any other contract, indenture or agreement to which Executive is a party or by which Executive is bound. 9. Notices. Any notices or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid at the following addresses: If to the Company: 112 West 34th Street 22nd Floor New York, NY 10120 9 If to the Executive: Thomas Johnson 127 Milbob Drive Ivyland, PA 18974 Mailed notices shall be deemed given when received. Any person entitled to receive notice may designate in writing, by notice to the others, such other address to which notices to such party shall thereafter be sent. 10. Indemnification and Insurance; Legal Expenses. The Company shall indemnify the Executive to the fullest extent permitted by the laws of the State of Delaware, as in effect at the time of the subject act or omission, and shall advance to the Executive reasonable attorney's fees and expenses as such fees and expenses are incurred (subject to an undertaking from the Executive to repay such advances if it shall be finally determined by a judicial decision which is not subject to further appeal that the Executive was not entitled to the reimbursement of such fees and expenses) and he will be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (Directors and Officers Insurance) against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by reason of his being or having been a director, officer or employee of the Company or any of its Subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of the Company (other than any dispute, claim or controversy arising under or relating to this Agreement or to the extent a result of a breach by Executive of his representations in Section 8). The Company covenants to maintain during the Employment Period for the benefit of the Executive (in his capacity as an officer of the Company) Directors and Officers Insurance providing customary benefits to the Executive. 11. Miscellaneous. 11.1. Entire Agreement. This Agreement contains the entire understanding of the parties in respect of its subject matter hereof and supersedes all prior oral and written agreements and understandings between the parties with respect to such subject matter. 11.2. Amendment; Waiver. This Agreement may not be amended, supplemented, canceled or discharged, except by written instrument executed by the Executive and the Company. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any preceding breach of this Agreement shall operate as a waiver of a succeeding breach of this Agreement. 10 11.3. Binding Effect; Assignment. The rights and obligations of this Agreement shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation, or any assignee of all or substantially all of the Company's business and properties; Executive's rights or obligations under this Agreement may not be assigned by Executive. 11.4. Headings. The headings contained in this Agreement (except those in Section 1) are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 11.5. Governing Law; Interpretation. This Agreement shall be construed in accordance with and governed for all purposes by the laws and public policy of the State of New York applicable to contracts executed and to be wholly performed within such State. Service of process in any dispute shall be effective (a) upon the Company, if served on any senior officer of the Company (other than Executive); (b) upon Executive, if served at Executive's residence last known to the Company. Executive acknowledges that breach of Sections 7.1 through 7.5 would entail irreparable injury and that, in addition to the Company's other express and implied remedies, the Company shall be entitled to injunctive and other equitable relief to prevent any actual, intended or likely such breach. 11.6. Dispute Resolution. All controversies, claims and disputes arising out of or relating to this Agreement, including without limitation any alleged violation of its terms, shall be resolved by final and binding arbitration before a single arbitrator in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitration shall be commenced by filing a demand for arbitration with the AAA within sixty days after the filing party has given notice of such breach to the other party. The subject matter of the arbitration shall be limited to the conduct of the parties hereto and their employees. Each party shall bear its own costs and expenses, including costs and expenses of counsel and experts, in any such arbitration. 11.7. Further Assurances. Each party agrees at any time, and from time-to-time, to execute, acknowledge, deliver and perform, and/or cause to be executed, acknowledged, delivered and performed, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and/or assurances as may be necessary, and/or proper to carry out the provisions and/or intent of this Agreement. 11 11.8. Gender; Singular/Plural. In this Agreement, the use of one genders (e.g., "he", "she" and "it") shall mean each other gender; and the singular shall mean the plural, and vice versa, all as the context may require. 11.9. Severability. The parties acknowledge that the terms of this Agreement are fair and reasonable at the date signed by them. However, in light of the possibility of a change of conditions or differing interpretations by a court of what is fair and reasonable, the parties stipulate as follows: if any one or more of the terms, provisions, covenants and restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; further, if any one or more of the provisions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed, by limiting or reducing it, so as to be enforceable to the extent compatible with then applicable law. 11.10. Executive Incentive Bonus Plan. Notwithstanding anything to the contrary contained in this Agreement, Executive and the Company agree that (i) the Annual Bonus contemplated by this Agreement shall be payable to Executive only pursuant to the terms of an Executive Incentive Bonus Plan (the "Incentive Plan"), incorporating all applicable terms and conditions of the Annual Bonus contained in this Agreement, (ii) the Incentive Plan, and any Annual Bonus to be payable thereunder, is subject to the approval of the stockholders of the Company, and (iii) in the event that the Incentive Plan is not approved by the Company's stockholders at the Company's 2004 Annual Meeting, then (x) Executive shall not be entitled to receive the Annual Bonus contemplated by this Agreement and shall have no rights or claims against the Company arising from such failure of the Company's stockholders to approve the Incentive Plan, and (y) this Agreement shall remain in full force and effect except that all references in this Agreement to the Annual Bonus shall be deemed to be deleted from this Agreement and of no further force or effect. The Company agrees that the Incentive Plan shall be submitted for approval by the Company's stockholders at the Company's 2004 Annual Meeting of Stockholders. 11.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original. 12 EXECUTION IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year above first written. /s/ Thomas P. Johnson -------------------------------------- Thomas P. Johnson AEROPOSTALE, INC. a Delaware Corporation By: /s/ Julian R. Geiger ----------------------------------- TABLE OF CONTENTS
Page ---- 1. Definitions.....................................................................................1 2. Employment......................................................................................3 3. Compensation and Benefits; Disability...........................................................3 3.1. Base Salary............................................................................3 3.2. Annual Bonus...........................................................................4 3.3. Other Benefits.........................................................................4 3.4. Vacation...............................................................................5 3.5. Expenses...............................................................................5 3.6. Exclusive Compensation.................................................................5 4. Termination of Employment Period................................................................5 5. Termination.....................................................................................5 5.1. By Company for Cause...................................................................5 5.2. By Executive for Good Reason...........................................................6 5.3. On Executive's Death or Disability.....................................................6 5.4. By Company Without Cause...............................................................7 5.5. By Executive Without Good Reason.......................................................7 6. Severance.......................................................................................7 6.1. Severance..............................................................................7 7. Inventions, Confidential Information and Related Matters........................................8 7.1. Assignment of Inventions...............................................................8 7.2. Restrictions on Use and Disclosure.....................................................8 7.3. Return of Documents and Materials......................................................8 7.4. Competitive Activities.................................................................8 7.5. Solicitation of Employees..............................................................9 8. No Other Contracts..............................................................................9 9. Notices.........................................................................................9 10. Indemnification and Insurance; Legal Expenses..................................................10 11. Miscellaneous..................................................................................10 11.1. Entire Agreement......................................................................10 11.2. Amendment; Waiver.....................................................................10 11.3. Binding Effect; Assignment............................................................11 11.4. Headings..............................................................................11 11.5. Governing Law; Interpretation.........................................................11
Page ---- 11.6. Dispute Resolution....................................................................11 11.7. Further Assurances....................................................................11 11.8. Gender; Singular/Plural...............................................................12 11.9. Severability..........................................................................12 11.10. Counterparts..........................................................................12
ii EX-10.24 8 y94783exv10w24.txt EMPLOYMENT AGREEMENT: LEZIC-ZANGAS EXHIBIT 10.24 EMPLOYMENT AGREEMENT PARTIES This Employment Agreement (this "Agreement") dated and effective as of February 1, 2004 (the "Effective Date"), is entered into by and between Aeropostale, Inc., a Delaware corporation (the "Company"), and Olivera Lazic-Zangas ("Executive"). TERMS OF AGREEMENT In consideration of the mutual covenants in this Agreement, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the terms listed below shall be defined as indicated. Affiliate: A domestic or foreign business entity controlled by, controlling or under common control with the Company. Annual Bonus: See Section 3.2. Base Salary: See Section 3.1. Board: The Board of Directors of the Company. Cause: See Section 5.1. Confidential Information: All secret proprietary information of the Company and its Subsidiaries, not otherwise publicly disclosed (except if disclosed by the Executive in violation of this Agreement), whether or not discovered or developed by Executive, known by Executive as a consequence of Executive's employment with the Company at any time (including prior to the commencement of this Agreement) as an employee or agent. Without limiting the generality of the foregoing, such proprietary information shall include (a) customer lists; (b) acquisition, expansion, marketing, financial and other business information and plans; (c) research and development; (d) computer programs; (e) sources of supply; (f) identity of specialized consultants and contractors and confidential information developed by them for the Company and its Subsidiaries; (g) purchasing, operating and other cost data; (h) special customer needs, cost and pricing data; (i) manufacturing methods; (j) quality control information; (k) inventory techniques; (l) employee information; any of which information is not generally known in the industries in which the Company and its Subsidiaries are conducting business or shall at any time during Executive's Employment conduct business including (without limitation) the apparel retailing industry. Confidential Information also includes the overall business, financial, expansion and acquisition plans of the Company and its Subsidiaries, and includes information contained in manuals, memoranda, projections, minutes, plans, drawings, designs, formula books, specifications, computer programs and records, whether or not legended or otherwise identified by the Company and its Subsidiaries as Confidential Information, as well as information which is the subject of meetings and discussions and not so recorded. Consolidated Net Income: For any period the net income (or loss) of the Company for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that (i) there shall be excluded therefrom (to the extent included and without duplication) (A) all extraordinary gains and extraordinary losses (as defined by generally accepted accounting principles) and (B) any effect that any change (after the Effective Date) in any law or in generally accepted accounting principles relating to the Company's recognition of compensation expense for employee stock options has on the net income (or loss) of the Company determined on a consolidated basis in accordance with generally accepted accounting principles; and (ii) that neither Annual Bonus nor any annual bonus based upon Percentage Increase in Consolidated Net Income payable to any employee (other than Executive) of the Company shall be considered in the computation thereof. Disability: The absence of the Executive from the Executive's duties to the Company on a full-time basis for a total of 120 days during any 12-month period as a result of incapacity due to mental or physical illness which is determined to be permanent by a physician selected by the Company and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). Employment Period: Unless earlier terminated as provided in Section 5 hereof, the Employment Period shall be the period commencing on the Effective Date and terminating on the last day of the 2006 Fiscal Year. Fiscal Year: The 52 or 53 week period ending on the Saturday closest to January 31 of each calendar year. Fiscal Years shall be referred to herein on the basis of the calendar year which contains 11 months of such Fiscal Year. (For example, "2002 Fiscal Year" means the twelve-month period ending February 1, 2003). Inventions: Those discoveries, developments, concepts and ideas, whether or not patentable, relating to the present, future and prospective activities and Products and Services of the Company and its Subsidiaries, which such activities and Products and Services are known to Executive by virtue of Executive's employment with the Company and its Subsidiaries. Percentage Increase in Consolidated Net Income: Percentage Increase in Consolidated Net Income shall mean, with respect to any Fiscal Year of the Company, the percentage increase, if any, in Consolidated Net Income of the Company in such Fiscal Year over the Consolidated Net Income of the Company in the immediately preceding Fiscal Year. By way of example, in the event that the Consolidated Net Income of the Company in the 2001 Fiscal Year is $20 million and the Consolidated Net 2 Income of the Company in the 2002 Fiscal Year is $26.5 million, the Percentage Increase in Consolidated Net Income in the 2002 Fiscal Year shall be equal to 32.5%. Products and Services: All products or services sold, rented, leased, rendered or otherwise made available to its customers by the Company and its Subsidiaries, or otherwise the subject of the business of the Company and its Subsidiaries. Restricted Period: The period beginning on the Effective Date and ending on the first anniversary of the date of termination of Executive's employment; provided, however, that in the event that the termination of Executive's employment occurs during the 2006 Fiscal Year, then the Restricted Period shall terminate on the earlier of (I) the first anniversary of such termination date, and (II) July 31, 2007. Subsidiary: Any entity of which the Company owns, directly or indirectly, 50% or more of the aggregate voting power of the voting securities. 2. Employment. (a) Subject to the terms and conditions of this Agreement, the Company hereby agrees to employ and the Executive hereby accepts employment in the position of Senior Vice President and Director of Design of the Company and agrees during the Employment Period to perform to the best of Executive's ability, experience and talent those acts and duties and to furnish those services to the Company and its Subsidiaries in connection with and related to such positions as the Chief Executive Officer or the Board shall from time to time direct, provided such acts and directives are consistent with the duties of Senior Vice President and Director of Design. Executive shall, during the Employment Period, use Executive's best efforts to promote the interests of the Company and its Subsidiaries. Executive agrees to devote all of his business time to the business affairs of the Company, and to perform all duties and fulfill all responsibilities incident to his employment in a manner reasonably expected of senior executives in similar positions. Executive further agrees that he will not, directly or indirectly, engage or participate in any activities at any time during such employment which conflict with the interests of the Company. (b) During the Employment Period, subject to Section 5.2(c) hereof, Executive's principal place of employment shall be located at one of the Company's principal places of business or principal executive office, wherever located as designated from time to time by the Chief Executive Officer or the Board, and Executive shall be provided with an office and similar support services and facilities as appropriate to Executive's position and responsibilities and of at least substantially the same quality as provided to Executive on the Effective Date. 3. Compensation and Benefits; Disability. 3.1. Base Salary. The Company shall pay Executive a Base Salary in the amount of $250,000 for the 2004 Fiscal Year, and an amount of not less than $250,000 for each of the 2005 and 3 2006 Fiscal Years. The Base Salary shall be reviewed annually by the Compensation Committee of the Board for increase, based upon merit or upon increases in the cost of living, and shall be payable in equal installments pursuant to the Company's customary payroll policies in force at the time of payment (but in no event less frequently than monthly), less required payroll deductions. 3.2. Annual Bonus. (a) Subject to Section 11.10 hereof, in addition to Executive's Base Salary, during the Employment Period the Company shall pay Executive, as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year, an Annual Bonus in cash for each Fiscal Year commencing with the 2004 Fiscal Year which is the product of (A) Percentage Increase in Consolidated Net Income for such Fiscal Year times 100; (B) 2.50%; and (C) Executive's Base Salary in effect during such Fiscal Year. By way of example, in the event that the Percentage Increase in Consolidated Net Income of the Company in the 2004 Fiscal Year is 32.5%, Executive shall be entitled to an Annual Bonus in an amount equal to $203,125 (i.e., 32.5 x .025 x $250,000). In the event that there is no Percentage Increase in Consolidated Net Income (either by reason of the Consolidated Net Income declining or remaining unchanged between successive Fiscal Years), Executive shall not be entitled to an Annual Bonus. (b) Such bonus shall be payable in cash as soon as reasonably practicable but in no event later than 30 days following the Company's receipt of its audited financial statements for the applicable Fiscal Year. (c) Notwithstanding anything to the contrary in this Section 3.2, in no event shall Executive be entitled to receive an Annual Bonus in excess of one (1) times his then applicable Base Salary in respect of any Fiscal Year. However, if, for any Fiscal Year, the Annual Bonus computed under subsection (a) of this Section exceeds the amount permitted by this subsection (c) and there is a Percentage Increase in Consolidated Net Income for the succeeding Fiscal Year, then the amount of such excess shall be added to and payable with the Annual Bonus for such succeeding Fiscal Year, subject to the first sentence of this subsection (c). 3.3. Other Benefits. Executive shall be entitled, during the Employment Period, to participate, on the same basis and to the same extent as other executive employees of the Company, 4 in any pension, life insurance, health insurance, short-term disability and hospital plans and other fringe benefits or benefit plans presently in effect and hereafter maintained or created by the Company. In addition, Executive shall receive an automobile allowance in the amount of $8,500 per year, payable monthly. During the Employment Period, Company agrees not to reduce the benefits provided to Executive. Service with the Company, any Subsidiary, or Federated Department Stores, Inc. ("Federated") or any affiliate of Federated shall be recognized for vesting purposes under any benefit plan of the Company. 3.4. Vacation. Executive shall be entitled to four (4) weeks of paid vacation per calendar year, such vacation to be taken during period or periods during each such year as shall be consonant with Executive's responsibilities and (in the Company's judgment) with the Company's vacation schedule and policies for senior officers. 3.5. Expenses. Pursuant to the Company's customary policies in force at the time of payment, Executive shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorized expenses properly incurred by Executive on the Company's behalf in the performance of Executive's duties hereunder. 3.6. Exclusive Compensation. In respect of services rendered to the Company, Executive shall receive only the compensation set forth in this Section 3 and Sections 5 and 6. 4. Termination of Employment Period. The Employment Period shall continue as described in Section 1 unless earlier terminated by reason of (a) Executive's discharge for Cause pursuant to Section 5.1, (b) Executive's discharge without Cause pursuant to Section 5.4, (c) Executive's death or Disability pursuant to Section 5.3, (d) termination of this Agreement by Executive pursuant to Section 5.2, or (e) termination of this Agreement by Executive pursuant to Section 5.5. In all events, the post employment provisions of Section 7 shall survive termination of the Employment Period for the periods provided therein. 5. Termination. 5.1. By Company for Cause. The Company may discharge Executive and terminate the Employment Period for Cause. As used in this Section 5.1, "Cause" shall mean any one or more than one of the following: (a) Gross negligence or gross or willful misconduct of Executive in the performance of his duties hereunder during the Employment Period; 5 (b) Executive's conviction of a felony, any crime of moral turpitude during the Employment Period or any act of fraud or dishonesty; (c) Willful failure to follow instructions of the Chief Executive Officer or the Board which instructions are material, legal, and not inconsistent with the duties assigned to Executive hereunder and which failure is not cured within fifteen (15) business days after written notice of such failure is delivered to Executive by the Company with respect to failures which are curable, provided, however, that if such failure is not capable of being cured within fifteen (15) business days, the Company may terminate Executive immediately; or (d) Any breach of any of the material terms of this Agreement by Executive which is not cured within fifteen (15) business days after written notice of breach is delivered to Executive by the Company with respect to breaches which are curable, provided, however, that if such breach is not capable of being cured within fifteen (15) business days, the Company may terminate Executive immediately. Upon discharge of Executive for Cause, the Company shall be relieved and discharged of all obligations to make payments to Executive which would otherwise be due under this Agreement except as to salary, benefits and bonuses earned for actual services rendered prior to the date of termination, and otherwise reimbursable expenses under Section 3.5. 5.2. By Executive for Good Reason. Executive may terminate the Employment Period for Good Reason. Good Reason shall mean the occurrence of any of the following events: (a) any breach of any of the material terms of this Agreement by the Company continuing for more than fifteen (15) days after written notice thereof from Executive that such breach will be grounds for termination for Good Reason; (b) without the consent of Executive, a material reduction in the authorities, powers, functions and/or duties attached to Executive's position which reduction is not rescinded within fifteen (15) days after notice from Executive that such reduction will be grounds for termination for Good Reason; provided, however, that Executive shall deliver any such notice of such material reduction within five (5) business days of the occurrence of such material reduction; or (c) without the consent of Executive, the Company relocates the principal location of Executive's employment to a location more than 25 miles from its current location. 5.3. On Executive's Death or Disability. The Employment Period shall terminate, and the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date of the death or Disability of Executive, except as to salary earned for actual services rendered prior to the date of the death or Disability of Executive, reimbursement of 6 expenses, and a pro-rata portion of Executive's Annual Bonus for the full applicable Fiscal Year calculated following such year and pro-rated for the number of days Executive was actually employed in such Fiscal Year. 5.4. By Company Without Cause. The Company may, on 15 days written notice to Executive, terminate the Employment Period without Cause at any time during the Employment Period. 5.5. By Executive Without Good Reason. The Executive may, on 30 days written notice to the Company, terminate the Employment Period at any time during the Employment Period. In the event of a termination by Executive pursuant to this Section 5.5, the Company shall be relieved and discharged of all obligations to make further payment to Executive after the date as of which the Employment Period terminates, except as to salary earned for actual services rendered prior to such date, payment of any Annual Bonus under Section 3.2 with respect to any Fiscal Year ending prior to such date, and reimbursement of expenses under Section 3.5. All amounts payable pursuant to this Section 5.5 shall be paid to Executive in a single lump sum in cash not later than ten (10) days after the date of termination or with respect to the Annual Bonus, within ten (10) days of its determination in accordance with the terms hereof. 6. Severance. 6.1. Severance. Upon termination of employment pursuant to Sections 5.2 or 5.4 (but in any event not upon termination of the Employment Period pursuant to Sections 5.1, 5.3, 5.5 or upon expiration of the Employment Period or otherwise), and so long as the Executive executes a release in the Company's customary form and the Executive has not breached any of his representations set forth in Section 8, the Company shall pay to Executive (a) an amount equal to the lesser of (x) the amount of Base Salary due and owing Executive through the expiration of the Employment Period (such amount to be calculated based upon his then current Base Salary), and (y) one (1) times his then applicable Base Salary; provided, however that in no event shall Executive be entitled to receive less than one-half (1/2) his then applicable Base Salary pursuant to this Section 6.1(a), and (b) an amount equal to a pro rata portion (based upon the portion of the Fiscal Year elapsed to the date of such termination) of the Annual Bonus which would have been payable to the Executive had Executive been employed by the Company under this Agreement for the entire Fiscal Year in which such termination occurs. All amounts payable pursuant to Section 6.1(a) shall be paid to Executive in a single lump sum in cash not later than five (5) days after the date of termination. Any amount 7 due and payable to Executive under Section 6.1(b) shall be paid within ten (10) days of its determination in accordance with the terms hereof. 7. Inventions, Confidential Information and Related Matters. 7.1. Assignment of Inventions. All Inventions which are at any time made by Executive, acting alone or in conjunction with others, (a) during the Employment Period, or (b) if based on or related to any Confidential Information on, made by Executive within one year after the termination of the Employment Period, shall be the property of the Company. Executive agrees that Executive shall, at the cost and expense of the Company, execute formal application for U.S. and other patents, and also do all other acts and things (including, among others, the execution and delivery of instruments of further assurance or confirmation) deemed by the Company to be necessary or desirable at any time to perfect the full assignment to the Company of Executive's right and title (if any) to such Invention. 7.2. Restrictions on Use and Disclosure. Except as required by Executive's duties hereunder, Executive shall never, directly or indirectly, use, publish, disseminate or otherwise disclose any Confidential Information or Inventions which are the subject of Section 7.1 without the prior written consent of the Company, except as required by law. Nothing in this Section shall prevent disclosure of information which has been completely disclosed in a published patent or other integrated publication of general circulation, nor shall this Section govern the right to use Inventions for which a patent may have been issued. 7.3. Return of Documents and Materials. Upon termination of the Employment Period, Executive shall forthwith deliver to the Company all procedural manuals, guides, specifications, formulas, plans, drawings, designs and similar materials, records, notebooks and similar repositories of or containing Confidential Information and Inventions which are the subject of Section 7.1, including all copies, then in Executive's possession or control, whether prepared by Executive or others, as well as all other Company property in Executive's possession or control. 7.4. Competitive Activities. During the Restricted Period, Executive shall not, without the prior written approval of the Company, directly or indirectly, within the United States, become an employee or consultant or otherwise render services to, lend funds to, serve on the board of, invest in (other than as a 1% or less shareholder of a publicly-traded corporation) or guarantee the debts of, any business organization that competes with the Company in 8 those retail businesses in which the Company and its Subsidiaries are engaged, or intends to engage in, on the date the Employment Period is terminated. The Company may in its reasonable discretion give Executive written approval to engage in such activities or render such services after termination of the Employment Period if Executive and such prospective firm or business organization gives the Company written assurances, satisfactory to the Company in its sole discretion, that the integrity of the Confidential Information, the Inventions and the good will of the Company and its Subsidiaries will not be jeopardized by such employment. Executive shall, during the Restricted Period, notify the Company of any change in address and identify each subsequent employment or business activity in which Executive shall engage during such Restricted Period, stating the name and address of the employer or business organization and the nature of Executive's position. 7.5. Solicitation of Employees. During the Restricted Period and for a period of 12 months thereafter, Executive shall not, without the prior written approval of the Company, directly or indirectly, (i) solicit, raid, entice or induce any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its Subsidiaries to become employed by any other person, firm or corporation in any retail business in competition with the Company or (ii) employ in any person, firm or corporation engaged in any retail business in competition with the Company, any person who presently is or at any time during the six (6) months immediately prior to the date of termination of Executive shall be an employee of the Company or any of its subsidiaries. 8. No Other Contracts. Executive represents and warrants that neither the execution and delivery of this Agreement by Executive nor the performance by Executive of Executive's obligations hereunder, shall constitute a default under or a breach of the terms of any other agreement, indenture or contract to which Executive is a party or by which Executive is bound, nor shall the execution and delivery of this Agreement by Executive or the performance of Executive's duties and obligations hereunder give rise to any claim or charge against either Executive or the Company based upon any other contract, indenture or agreement to which Executive is a party or by which Executive is bound. 9. Notices. Any notices or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid at the following addresses: If to the Company: 112 West 34th Street 22nd Floor New York, NY 10120 9 If to the Executive: Olivera Lazic-Zangas 5 Norvel Lane Stamford, CT 06905 Mailed notices shall be deemed given when received. Any person entitled to receive notice may designate in writing, by notice to the others, such other address to which notices to such party shall thereafter be sent. 10. Indemnification and Insurance; Legal Expenses. The Company shall indemnify the Executive to the fullest extent permitted by the laws of the State of Delaware, as in effect at the time of the subject act or omission, and shall advance to the Executive reasonable attorney's fees and expenses as such fees and expenses are incurred (subject to an undertaking from the Executive to repay such advances if it shall be finally determined by a judicial decision which is not subject to further appeal that the Executive was not entitled to the reimbursement of such fees and expenses) and he will be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (Directors and Officers Insurance) against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by reason of his being or having been a director, officer or employee of the Company or any of its Subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of the Company (other than any dispute, claim or controversy arising under or relating to this Agreement or to the extent a result of a breach by Executive of his representations in Section 8). The Company covenants to maintain during the Employment Period for the benefit of the Executive (in his capacity as an officer of the Company) Directors and Officers Insurance providing customary benefits to the Executive. 11. Miscellaneous. 11.1. Entire Agreement. This Agreement contains the entire understanding of the parties in respect of its subject matter hereof and supersedes all prior oral and written agreements and understandings between the parties with respect to such subject matter. 11.2. Amendment; Waiver. This Agreement may not be amended, supplemented, canceled or discharged, except by written instrument executed by the Executive and the Company. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any preceding breach of this Agreement shall operate as a waiver of a succeeding breach of this Agreement. 10 11.3. Binding Effect; Assignment. The rights and obligations of this Agreement shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation, or any assignee of all or substantially all of the Company's business and properties; Executive's rights or obligations under this Agreement may not be assigned by Executive. 11.4. Headings. The headings contained in this Agreement (except those in Section 1) are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 11.5. Governing Law; Interpretation. This Agreement shall be construed in accordance with and governed for all purposes by the laws and public policy of the State of New York applicable to contracts executed and to be wholly performed within such State. Service of process in any dispute shall be effective (a) upon the Company, if served on any senior officer of the Company (other than Executive); (b) upon Executive, if served at Executive's residence last known to the Company. Executive acknowledges that breach of Sections 7.1 through 7.5 would entail irreparable injury and that, in addition to the Company's other express and implied remedies, the Company shall be entitled to injunctive and other equitable relief to prevent any actual, intended or likely such breach. 11.6. Dispute Resolution. All controversies, claims and disputes arising out of or relating to this Agreement, including without limitation any alleged violation of its terms, shall be resolved by final and binding arbitration before a single arbitrator in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitration shall be commenced by filing a demand for arbitration with the AAA within sixty days after the filing party has given notice of such breach to the other party. The subject matter of the arbitration shall be limited to the conduct of the parties hereto and their employees. Each party shall bear its own costs and expenses, including costs and expenses of counsel and experts, in any such arbitration. 11.7. Further Assurances. Each party agrees at any time, and from time-to-time, to execute, acknowledge, deliver and perform, and/or cause to be executed, acknowledged, delivered and performed, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and/or assurances as may be necessary, and/or proper to carry out the provisions and/or intent of this Agreement. 11 11.8. Gender; Singular/Plural. In this Agreement, the use of one genders (e.g., "he", "she" and "it") shall mean each other gender; and the singular shall mean the plural, and vice versa, all as the context may require. 11.9. Severability. The parties acknowledge that the terms of this Agreement are fair and reasonable at the date signed by them. However, in light of the possibility of a change of conditions or differing interpretations by a court of what is fair and reasonable, the parties stipulate as follows: if any one or more of the terms, provisions, covenants and restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; further, if any one or more of the provisions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed, by limiting or reducing it, so as to be enforceable to the extent compatible with then applicable law. 11.10. Executive Incentive Bonus Plan. Notwithstanding anything to the contrary contained in this Agreement, Executive and the Company agree that (i) the Annual Bonus contemplated by this Agreement shall be payable to Executive only pursuant to the terms of an Executive Incentive Bonus Plan (the "Incentive Plan"), incorporating all applicable terms and conditions of the Annual Bonus contained in this Agreement, (ii) the Incentive Plan, and any Annual Bonus to be payable thereunder, is subject to the approval of the stockholders of the Company, and (iii) in the event that the Incentive Plan is not approved by the Company's stockholders at the Company's 2004 Annual Meeting, then (x) Executive shall not be entitled to receive the Annual Bonus contemplated by this Agreement and shall have no rights or claims against the Company arising from such failure of the Company's stockholders to approve the Incentive Plan, and (y) this Agreement shall remain in full force and effect except that all references in this Agreement to the Annual Bonus shall be deemed to be deleted from this Agreement and of no further force or effect. The Company agrees that the Incentive Plan shall be submitted for approval by the Company's stockholders at the Company's 2004 Annual Meeting of Stockholders. 11.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original. 12 EXECUTION IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year above first written. ______/s/ Olivera Lazic-Zangas_____ Olivera Lazic-Zangas AEROPOSTALE, INC. a Delaware Corporation By:___/s/ Julian R. Geiger______ TABLE OF CONTENTS
Page ---- 1. Definitions........................................................................... 1 2. Employment............................................................................ 3 3. Compensation and Benefits; Disability................................................. 3 3.1. Base Salary........................................................................... 3 3.2. Annual Bonus.......................................................................... 4 3.3. Other Benefits........................................................................ 4 3.4. Vacation.............................................................................. 5 3.5. Expenses.............................................................................. 5 3.6. Exclusive Compensation................................................................ 5 4. Termination of Employment Period...................................................... 5 5. Termination........................................................................... 5 5.1. By Company for Cause.................................................................. 5 5.2. By Executive for Good Reason.......................................................... 6 5.3. On Executive's Death or Disability.................................................... 6 5.4. By Company Without Cause.............................................................. 7 5.5. By Executive Without Good Reason...................................................... 7 6. Severance............................................................................. 7 6.1. Severance............................................................................. 7 7. Inventions, Confidential Information and Related Matters.............................. 8 7.1. Assignment of Inventions.............................................................. 8 7.2. Restrictions on Use and Disclosure.................................................... 8 7.3. Return of Documents and Materials..................................................... 8 7.4. Competitive Activities................................................................ 8 7.5. Solicitation of Employees............................................................. 9 8. No Other Contracts.................................................................... 9 9. Notices............................................................................... 9 10. Indemnification and Insurance; Legal Expenses......................................... 10 11. Miscellaneous......................................................................... 10 11.1. Entire Agreement...................................................................... 10 11.2. Amendment; Waiver..................................................................... 10 11.3. Binding Effect; Assignment............................................................ 11 11.4. Headings.............................................................................. 11 11.5. Governing Law; Interpretation......................................................... 11
Page ---- 11.6. Dispute Resolution.................................................................... 11 11.7. Further Assurances.................................................................... 11 11.8. Gender; Singular/Plural............................................................... 12 11.9. Severability.......................................................................... 12 11.10. Counterparts.......................................................................... 12
ii EX-23.1 9 y94783exv23w1.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-91700 of Aeropostale, Inc. on Form S-8 of our report dated April 14, 2004, which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's change in method of accounting for goodwill and other intangible assets appearing in this Annual Report on Form 10-K of Aeropostale, Inc. for the year ended January 31, 2004. /s/ DELOITTE & TOUCHE LLP -------------------------------------- New York, New York April 14, 2004 EX-31.1 10 y94783exv31w1.txt CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Julian R. Geiger, Chairman and Chief Executive Officer of Aeropostale, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Aeropostale, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the end of the period covered by this annual report; and (c) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation on internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. /s/ JULIAN R. GEIGER -------------------------------------- Julian R. Geiger Chairman and Chief Executive Officer (Principal Executive Officer) Date: April 14, 2004 EX-31.2 11 y94783exv31w2.txt CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael J. Cunningham, Executive Vice President-Chief Financial Officer of Aeropostale, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Aeropostale, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the end of the period covered by this annual report; and (c) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation on internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. /s/ MICHAEL J. CUNNINGHAM -------------------------------------- Michael J. Cunningham Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: April 14, 2004 EX-32.1 12 y94783exv32w1.txt CERTIFICATION OF CEO EXHIBIT 32.1 CERTIFICATE OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) The undersigned, Julian R. Greiger, Chairman and Chief Executive Officer of Aeropostale, Inc. (the "Company") has executed this certificated in connection with the filing with the Securities and Exchange Commission of the Company's Annual Report on Form 10-K for the period ended January 31, 2004, (the "Report"). The undersigned hereby certifies that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"); and 2. The information contained the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. IN WITNESS WHEREOF, the undersigned has executed this certification as of the 14th day of April, 2004. /s/ JULIAN R. GEIGER -------------------------------------- Julian R. Geiger Chairman and Chief Executive Officer This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Exchange Act. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 13 y94783exv32w2.txt CERTIFICATION OF CFO EXHIBIT 32.2 CERTIFICATE OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) The undersigned, Michael J. Cunningham, Executive Vice President and Chief Financial Officer of Aeropostale, Inc. (the "Company") has executed this certificated in connection with the filing with the Securities and Exchange Commission of the Company's Annual Report on Form 10-K for the period ended January 31, 2004 (the "Report"). The undersigned hereby certifies that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"); and 2. The information contained the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. IN WITNESS WHEREOF, the undersigned has executed this certification as of the 14th day of April, 2004. /s/ MICHAEL J. CUNNINGHAM -------------------------------------- Michael J. Cunningham Executive Vice President and Chief Financial Officer This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Exchange Act. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----