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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2002 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition from to Commission File No. 0-
URBAN OUTFITTERS, INC.
(Exact Name of Registrant as Specified in Its Charter) Pennsylvania 23- (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 1809 Walnut Street, Philadelphia, PA 19103 (Address of Principal Executive Offices) (Zip Code) (215) 564- Registrant’s telephone number, including area code: Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Shares, $.0001 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate 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 a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x 17,383,086 Common Shares were outstanding at March 20, 2002 The aggregate market value of voting shares held by non-affiliates at March 20, 2002 was $215,999,870. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant’s 2002 Annual Meeting of Shareholders — Part III.
TABLE OF CONTENTS
- Item 1 Business PART I
- Item 2 Properties
- Item 3 Legal Proceedings
- Item 4 Submission of Matters to a Vote of Security Holders
- Item 5 Market for Registrant’s Common Equity and Related Shareholder Matters PART II
- Item 6 Selected Financial Data
- Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Item 7A Quantitative and Qualitative Disclosures About Market Risk
- Item 8 Financial Statements and Supplementary Data
- Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
- Item 10 Directors and Executive Officers of the Registrant PART III
- Item 11 Executive Compensation
- Item 12 Security Ownership of Certain Beneficial Owners and Management
- Item 13 Certain Relationships and Related Transactions
- Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8K PART IV
- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-
items. The home furnishings range from furniture, rugs, lighting and antiques to table top items, bedding and gifts. Stores average approximately 8, square feet of selling space, typically carry 20,000 to 25,000 SKUs and are located in specialty retail centers, upscale street locations and enclosed malls. As of March 20, 2002, we operated 33 Anthropologie stores in the United States, as well as the anthropologie.com web site and the Anthropologie catalog. Anthropologie’s sales accounted for approximately 41% of total sales for the fiscal year ended January 31, 2002. Wholesale Segment Free People. Free People, our wholesale division, designs, develops and markets young women’s casual apparel. Our range of tops, bottoms, sweaters and dresses are sold worldwide through approximately 1,100 better department and specialty stores, including Bloomingdale’s, Nordstrom and Urban Outfitters. In order to further develop and support the Free People brand, we plan to open a limited number of Free People retail stores over the next several years. Free People’s sales accounted for approximately 5% of total sales for the fiscal year ended January 31, 2002. Store Environment We create a unified environment in our stores that establishes an emotional bond with the customer. Every element of the environment is tailored to the aesthetic preferences of our target customers. Through creative design, the existing retail space is modified to incorporate a mosaic of fixtures, finishes and revealed architectural details. In our stores, merchandise is integrated into a variety of creative vignettes and displays designed to offer our customers an entire look at a distinct lifestyle. This dynamic visual merchandising and display technique provides the connection among the grandscale store design, the merchandise and the customer. Essential components of the ambience of each store include playing music that appeals to our target customers, using unique signage and employing a staff that understands and identifies with the target customer. Creating an individualized and tailored shopping experience for each customer is especially important in our Anthropologie stores. By providing an inviting and pleasant shopping atmosphere and an attentive sales staff, including in-store customer care managers, we strive to create a sense of community in our Anthropologie stores that encourages our target customers to linger and spend time exploring our stores and product offerings. Our Urban Outfitters stores average approximately 10,000 selling square feet and are often located in unconventional retail spaces, including a former movie theater, bank and stock exchange. Anthropologie stores average approximately 8,500 selling square feet and are typically placed in unique and non- traditional retail locations, although five of our Anthropologie stores are located in more traditional specialty centers. We also have two Anthropologie stores in traditional enclosed shopping malls. Buying Operations Maintaining a constant flow of fresh, fashionable merchandise for our retail segment is critically important to the on-going performance of the stores and the direct-to-consumer operations. We maintain our own buying organizations that select and develop products to satisfy our target customers and that provide us with the appropriate amount of products at the correct time. Merchandise managers
supervise several buyers and assistant buyers. These buyers stay in touch with the evolving tastes of their target customers by constantly shopping at the major trade markets, attending national and regional trade shows and staying current with mass media influences, including music, video, film and magazines. Merchandise managers and buyers may earn a significant portion of their compensation based on their individual contribution to gross profit. Merchandise Our Urban Outfitters stores and the urbn.com web site offer a wide array of eclectic merchandise, including women’s and men’s fashion apparel, footwear and accessories, and apartment wares and gifts. Product offerings at our Anthropologie stores, the anthropologie.com web site and the Anthropologie catalog include women’s casual apparel and accessories, as well as home furnishings and an eclectic array of gifts and decorative accessories for the home, garden, bed and bath. Our merchandise is continuously updated to appeal to our target customers’ changing tastes and is supplied by a large number of domestic and foreign vendors, with new shipments of merchandise arriving at our stores several times a week. The wide breadth of merchandise offered by our retail segment includes national brands, as well as exclusive private label merchandise developed and designed by Free People, Urban Outfitters and Anthropologie. This selection allows us to offer fashionable merchandise and to differentiate our product mix from that of traditional department stores, as well as that of other specialty and direct-to-consumer retailers. Private label merchandise generally yields higher gross profit margins than brand name merchandise, and helps to keep our product offerings fresh and unique. The ever-changing mix of products available to our customers allows us to adapt our merchandise to prevailing fashion trends, and, together with the inviting atmosphere of our stores, encourages our core customers to visit our stores frequently. We seek to select price points for our merchandise that are consistent with the spending patterns of our target customers. As such, our stores carry merchandise at a wide array of price points that may vary considerably within product categories. Store Operations We have organized our retail store operations into geographic areas or districts, each with a district manager. District managers are responsible for several stores and monitor and supervise individual store managers. Each store manager is responsible for overseeing the daily operations of one of our stores. In addition to a store manager, the staff of a typical store includes a visual manager, several departmental managers and a full- and part-time sales staff. The staff of a typical Anthropologie store also includes a customer care manager who helps tailor the shopping experience to the needs of Anthropologie’s target customers. An essential requirement for the success of our stores is our ability to attract, train and retain talented, highly motivated store managers, visual managers and other key employees. In addition to management training programs for both newly hired and existing employees, we have a number of retention programs that offer qualitative and quantitative performance-based incentives to district-level managers, store-level managers and full-time sales associates.
Suppliers To serve our target customers and to recognize changes in fashion trends and seasonality, we purchase merchandise from numerous foreign and domestic vendors. During our most recently completed fiscal year, we did business with approximately 1,900 vendors. No single vendor accounted for more than 10% of merchandise purchased during that time. While certain of our vendors have limited financial resources and production capabilities, we do not believe that the loss of any one vendor would have a material effect on our business. Company Operations Distribution. The majority of merchandise purchased by both our retail and our wholesale businesses is shipped directly to our distribution center in Lancaster County, Pennsylvania. We own the facility, which has an advanced computerized materials handling system, and is approximately 60 miles from our home offices in Philadelphia. The current 191,000 square foot structure is expected to provide the majority of United States distribution and direct-to- consumer fulfillment capability, at least through fiscal 2004. We utilize a distribution facility in Reno, Nevada operated by a third-party. This facility services our stores in the western United States at a favorable freight cost per unit, and provides a faster turnaround from selected vendors. Future expansion of distribution capabilities in the western United States is anticipated due to our growing retail store network. In addition, we utilize a portion of the Toronto Urban Outfitters store as a distribution facility in Canada, and have a distribution center in Essex, England to service our current and near-term needs for stores in the United Kingdom and Ireland. Management Information Systems. Very early in our growth, we recognized the need for high-quality information in order to manage merchandise planning/buying, inventory management and control functions. We invested in a retail software package that we believe meets our processing and reporting requirements and will continue to do so in the foreseeable future. We utilize point-of-sale register systems connected by a frame relay network to our home offices. These systems provide for register efficiencies, timely customer checkout and instant back office access to register information, as well as for nightly polling of sales and inventory, transmittal of data and price changes. Our direct-to-consumer operations, including the Anthropologie catalog and two retail web sites, maintain separate software systems which manage the merchandise and customer information for the in-house call center order processing and fulfillment functions. To manage its needs, Free People uses a separate software system for customer service, order entry and allocations, production planning and inventory management. We have contracted with a nationally-recognized company to provide disaster-recovery services with respect to our key systems. Competition The specialty retail and direct-to-consumer businesses and the wholesale apparel business are highly competitive. Our retail stores compete on the basis of, among other things, the location of our stores, the breadth, quality, style, and availability of merchandise, the level of customer service offered and merchandise price. Although we feel the eclectic mix of products offered in our retail stores helps differentiate us, it also means that both Urban Outfitters and Anthropologie stores compete against a wide variety of smaller, independent specialty stores as well as department stores and national
specialty chains. Our Anthropologie stores also face competition from small boutiques that offer an individualized shopping experience similar to the one we provide to our target customers. Along with certain retail segment factors noted above, other key competitive factors for our direct-to-consumer operations include the success or effectiveness of customer mailing lists, response rates, catalog presentation, merchandise delivery and web site design and availability. Our direct-to-consumer operations compete against numerous catalogs and web sites, which may have greater circulation and web traffic. Free People competes with numerous wholesale companies based on the quality, fashion and price of our wholesale product offerings. Many of our wholesale business competitors’ products have wider distribution than ours. In addition, certain of our retail and wholesale competitors have greater name recognition and financial and other resources than we do. Trademarks and Service Marks We are the registered owner in the United States of certain service marks and trademarks, including “Urban Outfitters,” “Anthropologie,” “Urban Renewal,” “Free People,” “Co-Operative,” “Ecote,” “Slant,” “Fink,” “Lisa L.,” “Lip Gloss,” “Shag,” “365 Days” and “Stapleford.” Each mark is renewable indefinitely, contingent upon continued use at the time of renewal. In addition, we currently have pending registration applications with the U.S. Patent and Trademark Office covering certain other marks. We also own marks that have been registered in foreign countries, and have applications for marks pending in additional foreign countries as well. We regard our marks as important to our business due to their name recognition with our customers. In order to more effectively protect them from infringement and to defend against claims of infringement, we established a separate subsidiary whose primary purpose is to maintain and manage existing and future marks, thereby increasing their value to our operating companies. We are not aware of any claims of infringement or challenges to our right to use any of our marks in the United States. Employees We employ approximately 3,000 people, approximately 53% of whom are full-time employees. The number of part-time employees fluctuates depending on seasonal needs. Of our total employees, 3% work at Free People and the remaining 97% work in the retail segment. None of our employees is covered by a collective bargaining agreement, and we believe that our relations with our employees are excellent. Financial Information about Operations See Note 12: Segment Reporting in the Company’s Consolidated Financial Statements for information. Seasonality See Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality and Quarterly Results for information.
Urban Outfitters Stores LOCATION LOCATION LOCATION LOCATION North America UK and Ireland Philadelphia, PA 110 South 36th Street Pasadena, CA 139 W. Colorado Blvd. Lawrence, KS 1013 Massachusetts Street London, England 36-38 Kensington High Street Cambridge, MA 11 J.F. Kennedy Street Chicago, IL 935 N. Rush Street East Lansing, MI 119 E. Grand River Ave. Dublin, Ireland 4 Cecilia St. & 7th Fownes St. Philadelphia, PA 1627 Walnut Street Portland, OR 2320 N.W. Westover Road Miami, FL 5701 SW 72nd St., # Glasgow, Scotland 157 Buchanan Street New York, NY 628 Broadway Austin, TX 2406 Guadalupe Street Seattle, WA 1507 5th Avenue Washington, DC 3111 M Street, N.W. Tempe, AZ 545 South Mill Ave. Tucson, AZ 901 E. University Blvd. New York, NY 374 Avenue of Americas Houston, TX 2501 University Blvd. Santa Barbara, CA 624 State Street Madison, WI 604 State Street Montreal, PQ 1246 Ste. Catherine Street, W. New York, NY 72nd & Broadway Ann Arbor, MI 231 S. State Street Toronto, ON 235 Yonge Street Evanston, IL 921 Church Street Boston, MA 361 Newbury Street Miami Beach, FL 653 Collins Avenue Providence, RI 285 Thayer Street Minneapolis, MN 3006 Hennepin Ave., S. Boulder, CO 934 Pearl Street Dallas, TX 5331 E. Mockingbird Lane Seattle, WA 401 Broadway, East Bloomington, IN 530 E. Kirkwood Avenue New Haven, CT 43 Broadway Berkeley, CA 2590 Bancroft Way San Diego, CA 665 Fifth Avenue Cincinnati, OH 2510 Ohio Avenue Santa Monica, CA 1440 Third Street Promenade Columbus, OH 1782 N. High Street New York, NY 526 Avenue of the Americas San Francisco, CA 80 Powell Street New York, NY 162 2nd Avenue Tampa, FL 1600 E. 8th Avenue, Suite A- Costa Mesa, CA 2930 Bristol Street Los Angeles, CA 7650 Melrose Avenue Chicago, IL 2352 N. Clark Street Burlington, VT 81 Church Street
Anthropologie Stores LOCATION LOCATION LOCATION Wayne, PA 201 W. Lancaster Ave. Boston, MA 799 Boylston Street Scottsdale, AZ 15210 N. Scottsdale Road Rockville, MD 11500 Rockville Pike Birmingham, MI 214 West Maple Road Cincinnati, OH 2643 Edmonson Road Westport, CT 1365 Post Road, East Santa Barbara, CA 901 State Street West Palm Beach, FL 700 South Rosemary Avenue Greenvale, NY 9 Northern Blvd. Chestnut Hill, MA 300 Boylston Street Miami Beach, FL 1108 Lincoln Road New York, NY (SoHo) 375 West Broadway New York, NY 85 Fifth Avenue Minneapolis, MN 4999 France Avenue South Santa Monica, CA 1402 Third Street Promenade Atlanta, GA 3393 Peachtree Road, N.E. Houston, TX 4066 Westheimer Road Newport Beach, CA 823 Newport Center Drive Philadelphia, PA 1801 Walnut Street Kansas City, MO 531 Nichols Road Chicago, IL 1120 N. State Street Seattle, WA 1509 Fifth Avenue Columbus, OH 4235 The Strand Highland Park, IL 1780 Green Bay Road Tampa, FL 705 S. Dakota Avenue Salt Lake City, UT 116 South Rio Grande Street Beverly Hills, CA 320 N. Beverly Drive Greenwich, CT 480 W. Putnam Avenue Woodcliff Lake, NJ (opened 2/1/02) 379 Chestnut Ridge Road Seattle, WA 2520 N.E. University Village, # San Francisco, CA 880 Market Street Los Angeles, CA (opened 3/18/02) 6301 W. 3rd Street, Suite J We own a 191,000 square foot distribution center in Lancaster County, Pennsylvania. We utilize a distribution facility in Reno, Nevada operated by a third-party. For more information on our distribution center properties, see Item 1: Business—Company Operations—Distribution. Free People operates showrooms in New York City and Los Angeles, which are leased through 2004 and 2007, respectively. We believe that our facilities are well maintained, in good operating condition and adequate for our current needs. Item 3. Legal Proceedings The Company is party to various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition or results of operations.
PART II
Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters Our common shares are traded on the Nasdaq National Market under the symbol “URBN.” The following table sets forth for the periods indicated below the reported high and low sale prices for our common shares as reported on the Nasdaq National Market. Market Information High Low Fiscal 2001 Quarter ended April 30, 2000 $ 15.13 $ 10. Quarter ended July 31, 2000 12.48 8. Quarter ended October 31, 2000 11.00 7. Quarter ended January 31, 2001 9.75 6. Fiscal 2002 Quarter ended April 30, 2001 $ 13.78 $ 8. Quarter ended July 31, 2001 16.20 10. Quarter ended October 31, 2001 17.25 10. Quarter ended January 31, 2002 26.64 12. Holders On March 20, 2002, the Company had approximately 2,700 beneficial holders of its common shares. Dividends The Company’s current line of credit facility prohibits the payment of cash dividends on its common shares. The Company has not paid any cash dividends since its inital public offering and does not anticipate paying any cash dividends on its common shares in the foreseeable future.
Item 6. Selected Financial Data The following table sets forth selected consolidated income statement and balance sheet data for the periods indicated. The selected consolidated balance sheet and income statement data at the fiscal year end for each of the five fiscal years presented below is derived from the consolidated financial statements of the Company. The data presented below should be read in conjunction with the consolidated financial statements of the Company, and the related notes thereto, which appear elsewhere in this report. Fiscal Year Ended January 31, 2002 2001 2000 1999 1998 (in thousands, except share amounts and per share data) Income Statement Data: Net sales $ 348,958 $ 295,333 $ 278,113 $ 209,865 $ 173, Gross profit 113,647 95,331 104,654 78,810 60, Income from operations 25,498 17,878 37,565 25,117 22, Net income 15,007 10,495 18,680 15,760 13, Net income per common share—basic $ 0.87 $ 0.61 $ 1.07 $ 0.89 $ 0. Weighted average common shares outstanding—basic 17,268,615 17,257,186 17,531,971 17,702,922 17,576, Net income per common share—diluted $ 0.86 $ 0.61 $ 1.05 $ 0.88 $ 0. Weighted average common shares outstanding—diluted 17,438,457 17,274,830 17,844,356 17,929,109 17,843, Balance Sheet Data: Working capital $ 41,319 $ 31,655 $ 38,006 $ 47,342 $ 52, Total assets 195,102 168,716 153,501 133,363 107, Total liabilities 49,214 39,104 32,585 28,069 16, Long-term debt, excluding current maturities — — — — — Total shareholders’ equity 145,888 129,612 120,916 105,294 90,
cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly stated at the lower of cost or market. Factors related to current inventories such as future consumer demand and fashion trends, current aging, current and anticipated retail markdowns or wholesale discounts, and class or type of inventory are analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results. Long-Lived Assets Our long-lived assets consist principally of store leasehold improvements and are included in the “Property and Equipment” line item in our consolidated balance sheets included in this report. These long-lived assets are recorded at cost and are amortized using the straight-line method over the lesser of the applicable store lease term or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten years. In assessing potential impairment of these assets, we will periodically evaluate the historical and forecasted operating results and cash flows on a store-by-store basis. Newly-opened stores may take time to generate positive operating and cash flow results. Factors such as store type (e.g., mall versus free-standing), store location (e.g., urban area versus college campus or suburb), current marketplace awareness of the Urban Outfitters and Anthropologie brands, local customer demographic data and current fashion trends are all considered in determining the time frame required for a store to achieve positive financial results. If economic conditions are substantially different from our expectations, the carrying value of certain of our long-lived assets may become impaired. Accounting for Income Taxes As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment and valuation of inventories, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. To the extent we believe that recovery is not more likely than not, we must establish valuation allowances. To the extent we establish valuation allowances or increase the allowances in a period, we must include an expense within the tax provision in the statement of operations. We have valuation allowances of $1.7 million as of January 31, 2002, due to uncertainties related to our ability to utilize the net operating loss carry forwards of certain foreign subsidiaries and capital loss carry forwards related to our prior investments in MXG Media, Inc. In the future, if enough evidence of our ability to generate sufficient future taxable income in these foreign jurisdictions or realize off-setting capital gains becomes apparent, we would be required to reduce our valuation allowances, resulting in a reduction in income tax expense in the consolidated statement of operations. On a quarterly basis, management evaluates and assesses the realizability of deferred tax assets and adjusts valuation allowances if required.
Results of Operations The following tables set forth, for the periods indicated, the percentage of the Company’s net sales represented by certain income statement data and the change in certain income statement data from period to period. Fiscal Year Ended January 31, 2002 2001 2000 As a Percentage of Net Sales: Net sales 100.0% 100.0% 100.0% Cost of sales, including certain buying, distribution and occupancy costs 67.4 67.7 62. Gross profit 32.6 32.3 37. Selling, general and administrative expenses 25.3 26.2 24. Income from operations 7.3 6.1 13. Other income (expense), net (0.1) — (1.0) Income before income taxes 7.2 6.1 12. Income tax expense 2.9 2.5 5. Net income 4.3% 3.6% 6.7% Period over Period Change: Net sales 18.2% 6.2% 32.5% Gross profit 19.2% (8.9%) 32.8% Income from operations 42.6% (52.4%) 49.6% Net income 43.0% (43.8%) 18.5% Fiscal 2002 Compared to Fiscal 2001 Net sales in fiscal 2002 increased by 18.2% to $349.0 million from $295.3 million in the prior fiscal year. The $53.7 million increase was attributable to a $56.0 million or 20.4% increase in retail segment sales, offset in part by a $2.3 million or 11.4% decline in Free People’s wholesale sales, excluding sales to Urban Retail and Anthropologie. Noncomparable and new store net sales increases of $46.3 million, comparable store sales increases of $6.5 million or 2.8%, and direct-to-consumer sales increases of $3.2 million or 14.5% accounted for the retail segment increase. Comparable store sale increases were comprised of 0.5% for Urban Retail and 6.8% for Anthropologie. The increase in net sales attributable to noncomparable and new stores was caused by the opening of 12 new stores in fiscal 2002 and 11 new stores in fiscal 2001 (net of one store closing). Increases in the number of transactions in comparable stores and an increase in average sales prices resulting from a lower proportion of markdowns accounted for the comparable store sales dollar increase in fiscal 2002. In addition, direct-to-consumer sales increased as a result of an increase in customer response rates to the Anthropologie catalog and web site and the Urban Retail web site. The decline in Free People wholesale sales in the first half of the year was due to a lackluster response to our spring and summer 2001 fashion offerings combined with production problems associated with a factory we no longer utilize. Additionally, a weaker wholesale market environment in the latter half of fiscal 2002
percentage of sales by 2.4% for the year. The impact on occupancy costs as a percentage of sales due to the negative comparable store sales results and increased percentage occupancy costs of noncomparable and new stores accounted for the majority of the remaining margin decline. Total inventories at January 31, 2001 increased by 29.5%, principally attributable to new store requirements. Comparable store inventory levels were flat. Selling, general and administrative expenses increased to 26.2% of sales in fiscal 2001 from 24.1% of sales in fiscal 2000 due principally to noncomparable and new stores with lower average sales volumes which, consequently, have higher proportionate expenses than comparable stores. The decrease in comparable store sales in fiscal 2001 also caused selling, general and administrative expenses for these stores to increase when measured as a percentage of sales. In addition, Anthropologie direct-to-consumer operations experienced an increase in operating expense percentages due to the deleveraging of catalog production costs caused by reduced customer response rates and increased catalog circulation. These increases in selling, general and administrative expenses as a percentage of sales were partially offset by a reduction in catalog fulfillment costs due to the elimination of third-party service fulfillment providers in July 1999. We also incurred start up costs for the design, production and administration of the Urban Retail e-commerce web site that was launched in May 2000. Other income (expense) for fiscal 2000 includes a net charge to earnings of $4.4 million to reserve for our portion of operating losses related to our minority investment in MXG Media, Inc. Income tax expense for fiscal 2000 does not include a tax benefit related to this reserve which, in part, has caused an increase in our effective income tax rate. Liquidity and Capital Resources During the last three years, we have satisfied our cash requirements through cash flow from operations, accumulated cash and the sales of marketable securities. Our primary uses of cash have been to open new stores, purchase inventories and purchase our common shares. We have also continued to invest in direct-to-consumer efforts and in our United Kingdom and Ireland subsidiaries. In addition to the above sources of cash, sources of cash included the net proceeds from the exercise of certain employee stock options in fiscal 2002 and fiscal 2000. We expect to incur additional capital expenditures in support of our store expansion program. Accumulated cash and future cash from operations, as well as available credit under our line of credit facility, assuming renewal or replacement, are expected to fund such expansion-related uses of cash for at least the next year. We entered into a new $25 million line of credit facility with one of our banks on September 12, 2001. This new credit facility, which replaced our former $16.2 million discretionary line of credit with the bank, is a one-year committed line of credit to fund working capital requirements and letters of credit. The new line of credit contains sublimits for letters of credit and European subsidiary borrowings. Cash advances bear interest at LIBOR plus 1.25% to 1.75% based on our achievement of prescribed adjusted debt ratios. The agreement subjects us to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage, adjusted debt and minimum tangible net worth and limits our capital expenditures and share repurchases while prohibiting the payments of cash dividends on our common shares. At January 31, 2002, we were in compliance with all covenants under this facility. There were no short-term or long-term borrowings
outstanding at January 31, 2002 or at January 31, 2001. Outstanding letters of credit totaled $9.4 million and $8.0 million at January 31, 2002 and January 31, 2001, respectively. We plan to renew the current line of credit on or before its expiration on September 11, 2002, however, there can be no assurance that we will be able to renew or replace the line of credit. Based on fiscal 2002 operating trends and the operating model that management has planned for fiscal 2003, we do not believe it will be necessary to borrow short-term or long-term funds. In the event, however, that there is a serious decline in sales for any reason or a significant increase in store expansion plans, we may be required to use our available line of credit for cash borrowings to fund operations. There can be no assurance that, based upon existing covenants or financial covenants contained in any renewed or replacement line of credit, that such borrowings would be available. We have entered into agreements that create contractual obligations and commercial commitments. These obligations and commitments will have an impact on future liquidity and the availability of capital resources. The tables noted below present a summary of these obligations and commitments: Contractual Obligations: Total Obligations Payments Due by Period (in thousands) Description Less Than One Year One to Three Years Four to Five Years After Five Years Operating leases(1) $ 320,793 $ 35,696 $ 71,310 $ 64,841 $ 148, Capital leases(2) 678 183 440 5 5 — Total contractual cash obligations $ 321,471 $ 35,879 $ 71,750 $ 64,896 $ 148, (1) Includes store operating leases, which generally provide for payment of direct operating costs in addition to rent. These obligation amounts include future minimum lease payments and exclude such direct operating costs. (2) At January 31, 2002, the Company had entered into a capital lease for computer equipment with a cost of approximately $660 which will be recorded in the first quarter of Fiscal 2003 upon receipt of the related equipment in accordance with the contract. Commercial Commitments(1): Amount of Commitment Per Period (in thousands) Description Total Amounts Committed Less Than One Year One to Three Years Four to Five Years After Five Years Lines of credit(2) $ 9,400 $ 9,400 $ — $ — $ — Standby letters of credit 163 163 — — — Total commercial commitments $ 9,563 $ 9,563 $ — $ — $ — (1) Excludes purchase orders for merchandise and supplies in the normal course of business which are liquidated within 12 months. (2) Consists solely of outstanding letter of credit commitments.
