SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                               -------------------

                                    FORM 10-Q
 [X]     QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the Quarterly Period Ended October 31, 1998
              ----------------April 30, 1999

                                       OR

 [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the transition period from  ______________ to ______________

                         Commission File Number 0-16999

                             -----------------------

                             Urban Outfitters, Inc.
                             ----------------------
             (Exact name of registrant as specified in its charter)

        PENNSYLVANIA                                             23-2003332
        State------------                                             ----------
(State or Other Jurisdiction of                              (I.R.S. Employer
 Incorporation orof Organization)                              Identification No.)


  1809 Walnut Street, Philadelphia, PA                              19103
  ------------------------------------                              -----
(Address of principal executive office)                           (Zip Code)

                                 (215) 564-2313
                                 --------------
               (Registrant's telephone number including area code)

                                       N/A
                                   -----------
              (Former name, former address and former fiscal year,
                         if changed since last report)

                              ---------------------

     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[X]         No  ---        ---[_]


      Title of Each Class                         Number of Shares Outstanding
        of Common Stock                                  at November 30, 1998  
          -------------------                     ----------------------------June 1, 1999
        ---------------                           -----------------------------

Common shares,Shares, par value, $.0001 per share                  17,717,75417,444,541




                                      INDEX

                                                                         PAGE
                                                                         ----

                          PART I    Financial Information


ITEM 1   Financial Statements

         - ------
         Condensed Consolidated Balance Sheets at
         October 31, 1998April 30, 1999 (Unaudited), January 31, 19981999,
         and October 31, 1997April 30, 1998 (Unaudited)                                     2

         Condensed Consolidated Statements of Income for
         the three and
         nine months ended October 31,April 30, 1999 and 1998
         and 1997 (Unaudited)                                                        3

         Condensed Consolidated Statements of Changes in
         Shareholders' Equity (Unaudited)                                   4

         Condensed Consolidated Statements of Cash Flows
         for the ninethree months ended October 31,April 30, 1999 and
         1998 and 1997 (Unaudited)                                                   5

         Notes to Condensed Consolidated Financial Statements              6 - 78


ITEM 2   Management's Discussion and Analysis of Financial
         8 - 13
- ------
         Condition and Results of Operations                              9 - 15



                          PART II   Other Information


ITEM 6   Exhibits and Reports on Form 8-K                                   14
- ------16


SIGNATURES                                                                  1517



                                        1



                             URBAN OUTFITTERS, INC.
                      Condensed Consolidated Balance Sheets
                 (In thousands, except share and per share data)
                                   (Unaudited)


October 31, 1998April 30, January 31, April 30, 1999 1999 1998 October 31, 1997 ---------------- ---------------- ---------------- (Unaudited) (1) (Unaudited)--------- --------- --------- Assets Current assets: Cash and cash equivalents $24,036 $26,712 $19,654$ 14,134 $ 25,165 $ 23,915 Marketable securities 11,258 10,865 9,90810,105 13,032 12,594 Accounts receivable, net of allowance for doubtful accounts of $827, $616$740, $603 and $742$672 at October 31, 1998,April 30, 1999, January 31, 1999 and April 30, 1998, and October 31, 1997, respectively 6,939 4,497 6,7115,060 4,406 4,824 Inventory 26,500 17,128 22,44025,292 21,881 21,144 Prepaid expenses and other current assets 6,758 6,591 6,643 -------- -------- --------7,715 6,653 7,215 --------- --------- --------- Total current assets 75,491 65,793 65,35662,306 71,555 69,274 Property and equipment, less accumulated depreciation and amortization 37,393 26,893 25,31848,477 43,066 31,563 Marketable securities 11,033 11,993 12,83316,299 12,218 11,466 Other assets 5,599 2,745 1,514 -------- -------- -------- $129,516 $107,424 $105,021 ======== ======== ========8,248 6,524 4,147 --------- --------- --------- $ 135,330 $ 133,363 $ 116,450 ========= ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $17,471 $10,386 $ 9,86616,394 $ 14,763 $ 14,542 Accrued expenses and other current liabilities 8,295 3,274 6,010 -------- -------- --------10,095 9,265 4,766 --------- --------- --------- Total current liabilities 25,766 13,660 15,87626,489 24,028 19,308 Accrued rent and other liabilities 3,781 3,106 2,934 -------- -------- --------4,215 4,041 3,240 --------- --------- --------- Total liabilities 29,547 16,766 18,810 -------- -------- --------30,704 28,069 22,548 --------- --------- --------- Shareholders' equity: Preferred shares; $.0001 par, 10,000,000 authorized, none issued -- -- -- Common shares; $.0001 par, 50,000,000 shares authorized, 17,617,754, 17,649,360 and 17,643,02817,398,541 issued at OctoberApril 30, 1999, 17,639,754 issued at January 31, 1998, January 31,1998,1999, and October 31, 1997,17,777,954 issued at April 30, 1998, respectively 2 2 2 Additional paid-in capital 20,517 21,482 20,85417,021 20,825 22,626 Retained earnings 79,749 69,174 65,35587,884 84,934 71,274 Accumulated other comprehensive income (299)(281) (467) -- -- -------- -------- ----------------- --------- --------- Total shareholders' equity 99,969 90,658 86,211 -------- -------- -------- $129,516 $107,424 $105,021 ======== ======== ========104,626 105,294 93,902 --------- --------- --------- $ 135,330 $ 133,363 $ 116,450 ========= ========= =========
- ------------------------ (1) Derived from audited financial statements. See accompanying notes 2 URBAN OUTFITTERS, INC. Condensed Consolidated Statements of Income (in(In thousands, except share and per share data) (Unaudited)
Three Months Ended Nine Months Ended October 31, October 31,April 30, 1999 1998 1997 1998 1997 ----------- ----------- ----------- ----------------------- ------------ Net sales $ 60,46257,991 $ 48,373 $ 147,914 $ 126,88739,383 Cost of sales, 29,294 24,347 71,230 63,903 ----------- ----------- ----------- -----------including certain buying, distribution and occupancy costs 36,563 25,409 ------------ ------------ Gross profit 31,168 24,026 76,684 62,98421,428 13,974 Selling, general and administrative expenses 23,061 16,235 60,028 46,821 ----------- ----------- ----------- -----------15,416 10,808 ------------ ------------ Income from operations 8,107 7,791 16,656 16,163 Interest6,012 3,166 Other income 524 483 1,622 1,266 Other expenses,(expense), net (98) (98) (354) (229) ----------- ----------- ----------- -----------(564) 391 ------------ ------------ Income before income taxes 8,533 8,176 17,924 17,2005,448 3,557 Income tax expense 3,498 3,393 7,349 7,138 ----------- ----------- ----------- -----------2,498 1,457 ------------ ------------ Net income $ 5,0352,950 $ 4,783 $ 10,575 $ 10,062 =========== =========== =========== ===========2,100 ============ ============ Net income per common share: Basic $ 0.280.17 $ 0.27 $ 0.60 $ 0.57 =========== =========== =========== ===========0.12 ============ ============ Diluted $ 0.280.17 $ 0.27 $ 0.59 $ 0.57 =========== =========== =========== ===========0.12 ============ ============ Weighted average common shares:shares outstanding: Basic 17,702,030 17,608,764 17,726,533 17,578,756 =========== =========== =========== ===========17,490,797 17,694,461 ============ ============ Diluted 17,873,003 17,915,156 17,969,232 17,812,381 =========== =========== =========== ===========17,668,709 18,004,852 ============ ============
See accompanying notes 3 URBAN OUTFITTERS, INC. Condensed Consolidated Statements of Changes in Shareholders' Equity (in thousands)thousands, except share data) (Unaudited)
Common Shares -------------------------------- Accumulated Comprehensive Number Additional Other Income Commonof Par Paid-In Retained Comprehensive Quarter Year-To-Date StockShares Value Capital Earnings Income Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at February 1, 1999 17,639,754 $ 2 $20,825 $84,934 $(467) $105,294 Net income $2,950 $2,950 -- -- -- 2,950 -- 2,950 Foreign currency translation adjustments, net 186 186 -- -- -- -- 186 186 ------ ------ Comprehensive income $3,136 $3,136 ====== ====== Exercise of stock options 130,332 -- 1,190 -- -- 1,190 Purchase and retirement of common stock (371,545) -- (4,994) -- -- (4,994) ----------- ----- ------- ------- ------- -------- Balance at April 30, 1999 17,398,541 $ 2 $17,021 $87,884 $(281) $104,626 ========== ===== ======= ======= ====== ======== Balance at February 1, 1998 17,649,360 $ 2 $21,482 $69,174 $ 21,482 $ 69,174 $ -0--- $ 90,658 Net income $ 5,035 $ 10,575 10,575 10,575$2,100 $2,100 -- -- -- 2,100 -- 2,100 Foreign currency translation adjustments, net 12 (299) (299) (299) ---------- -------------- -- -- -- -- -- -- -- ------ ------ Comprehensive income $ 5,047 $ 10,276 ========= ========$2,100 $2,100 ====== ====== Exercise of stock options 1,289 1,289 Purchase and retirement of 167,200 shares of common stock (2,254) (2,254)128,594 -- 1,144 -- -- 1, 144 ---------- ----- ------- ------- ------ --------- -------- --------- --------- Balance at October 31,April 30, 1998 17,777,954 $ 2 $22,626 $71,274 $ 20,517-- $ 79,749 $ (299) $ 99,96993,902 ========== ===== ======= ======= ====== ======== ======== ======== ========= - ------------------------------------------------------------------------------------------------------------------------------------ Balance at February 1, 1997 $ 2 $ 20,396 $ 55,293 $ -0- $ 75,691 Net income $ 4,783 $ 10,062 10,062 10,062 Foreign currency translation adjustments, net -0- -0- -0- -0- --------- -------- Comprehensive income $ 4,783 $ 10,062 ========= ======== Exercise of stock options 458 458 ------ --------- --------- ------- --------- Balance at October 31, 1997 $ 2 $ 20,854 $ 65,355 $ -0- $ 86,211 ====== ========= ========= ======= ========= - ---------------------------------------------------------------------------------------------------------------------
See accompanying notes 4 URBAN OUTFITTERS, INC. Condensed Consolidated Statements of Cash Flows (in(In thousands) (Unaudited)
NineThree Months Ended October 31, ----------------------------April 30, 1999 1998 1997 -------- ------------ ---- Cash flows from operating activities: Net income $ 10,5752,950 $ 10,0622,100 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,982 3,402 Provision for losses on accounts receivable 211 1001,926 1,258 Changes in assets and liabilities: Increase(Increase) decrease in receivables (2,653) (3,983)(236) 91 Increase in inventory (9,372) (5,475) (Increase) decrease(3,411) (4,016) Increase in prepaid expenses and other assets (3,021) 634(611) (619) Increase in payables, accrued expenses and other liabilities 12,781 4,8272,635 5,782 -------- -------- Net cash provided by operating activities 12,503 9,5673,253 4,596 -------- -------- Cash flows from investing activities: Capital expenditures (14,482) (3,513) Purchase(7,274) (5,928) Purchases of investments held-to-maturity (7,057) (7,747) Purchasemarketable securities (6,816) (3,502) Sales and maturities of investments available-for-sale (1,298) (6,100) Maturities of investments held-to-maturity 7,222 7,908 Sale of investments available-for-sale 1,700 4,500marketable securities 5,599 2,300 Other assets (2,175) (1,407) -------- -------- Net cash used in investing activities (13,915) (4,952)(10,666) (8,537) -------- -------- Cash flows from financing activities: Exercise of stock options 1,289 458 Purchase1,190 1,144 Purchases and retirement of common stock (2,254) 0(4,994) -- -------- -------- Net cash (used in) provided by financing activities (965) 458(3,804) 1,144 -------- -------- Effect of foreign currency translation, net (299) -0-exchange rate changes on cash and cash equivalents 186 -- -------- -------- Increase (decrease)Decrease in cash and cash equivalents (2,676) 5,073(11,031) (2,797) Cash and cash equivalents at beginning of period 25,165 26,712 14,581 -------- -------- Cash and cash equivalents at end of period $ 24,03614,134 $ 19,65423,915 ======== ========
See accompanying notes 5 URBAN OUTFITTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998,1999, filed with the Securities and Exchange Commission on April 21, 1998.1999. Certain prior period amounts have been reclassified to conform to the current year's presentation. 2. Marketable Securities Marketable securities are classified as follows:
October 31, 1998 January 31, 1998 October 31, 1997 ---------------- ---------------- ---------------- (in thousands) Current portion Held-to-maturity...................... $ 9,391 $ 8,590 $ 8,008 Available-for-sale.................... 1,867 2,275 1,900 ------- ------- ------- 11,258 10,865 9,908 ------- ------- ------- Noncurrent portion Held-to-maturity...................... 11,033 11,993 12,833 ------- ------- ------- Total marketable securities.............. $22,291 $22,858 $22,741April 30, January 31, April 30, 1999 1999 1998 --------- ----------- --------- (in thousands) Current portion Held-to-maturity .......... $ 7,348 $ 9,206 $10,922 Available-for-sale ........ 2,757 3,826 1,672 ------- ------- ------- 10,105 13,032 12,594 ------- ------- ------- Noncurrent portion Held-to-maturity .......... 16,299 12,218 11,466 ------- ------- ------- Total marketable securities... $26,404 $25,250 $24,060 ======= ======= =======
3. Foreign Currency Translation Financial statementsNet Income Per Share The difference between the number of foreign subsidiaries are translated into U.S. dollars at current rates, except that revenues, costs and expenses are translated at the weighted average common shares outstanding used for basic net income per share and the number used for dilutive net income per share represents the share effect of exchange ratesdilutive stock options. 6 4. Segment Reporting Urban Outfitters is a national retailer of lifestyle-oriented general merchandise through 49 stores operating under the retail names "Urban Outfitters" and "Anthropologie," and through a catalog and website. Sales from this retail segment account for over 90% of total consolidated sales for the fiscal year ended January 31, 1999. The remainder is derived from a wholesale division that manufactures and distributes apparel to the retail segment and to over 1,300 better specialty stores worldwide. The Company has aggregated its operations into these two reportable segments based upon their unique management, customer base and economic characteristics. Reporting in effect duringthis format provides management with the reporting period. Translation adjustmentsfinancial information necessary to evaluate the success of the segments and the overall business. The Company evaluates the performance of the segments based on the net sales and pre-tax income from operations (excluding intercompany royalty and interest charges) of the segment. Corporate expenses include expenses incurred in and directed by the corporate office that are not included in determining net income butallocated to segments. The principal identifiable assets for each operating segment are accumulatedinventory and fixed assets. Other assets are comprised primarily of general corporate assets, which principally consist of cash and cash equivalents, marketable securities and other assets. Intersegment sales are immaterial. The Company accounts for intersegment sales and transfers as a separate componentif the sales and transfers were made to third parties making similar volume purchases. Both the retail and wholesale segment are highly diversified. No customer comprises more than 10% of shareholders' equity. In accordance with SFAS 130, 6 "Reporting Comprehensive Income," components of comprehensive income, such as foreign currency transactions and unrealized gains on securities,sales. Foreign operations are required to be disclosed within the basic financial statements. The Company's adoption of SFAS 130, required for fiscal periods beginning after December 15, 1997, resulted in comprehensive income that was $12 thousand more and $299 thousand less than net income reported for the three- and nine-month periods, respectively, ended October 31, 1998, dueimmaterial relative to the effect of currency translation on the financial statements. 4. Effect of New Accounting Pronouncements The FASB issued SFAS 131, "Disclosures about Segments of an Enterpriseoverall Company. Quarter Ending: April 30, 1999 April 30, 1998 -------------- -------------- Operating revenues Retail operations ...................... $ 52,443 $ 33,921 Wholesale operations ................... 6,186 6,357 Intersegment elimination ............... (638) (895) -------- -------- Total net sales ........................ $ 57,991 $ 39,383 ======== ======== Income from operations Retail operations ...................... $ 6,040 $ 2,584 Wholesale operations ................... 477 860 -------- -------- Total segment operating income ......... 6,517 3,444 Corporate and Related Information," effective for periods beginning after December 15, 1997. The new standard requires disclosure of revenues, results ofother general expenses ... (505) (278) -------- -------- Total income from operations and........... $ 6,012 $ 3,166 ======== ======== Net fixed assets of each segment of a public enterprise that qualifies based on quantifiable and decision-making criteria. The Company is in the process of developing the specific disclosures that will be contained in the Company's consolidated financial statements.Retail operations ...................... $ 47,490 $ 30,688 Wholesale operations ................... 986 874 Corporate .............................. 1 1 -------- -------- Total net fixed assets ................. $ 48,477 $ 31,563 ======== ======== 7 Inventory Retail operations....................... $ 24,280 $ 18,951 Wholesale operations.................... 1,012 2,193 -------- -------- Total inventory......................... $ 25,292 $ 21,144 ======== ======== 5. Common Stock Purchase and Retirement In a series of open market transactions during the thirdfirst quarter, the Company purchased and subsequently retired 167,200371,545 shares of its common stock at a cost of $2,254 thousand.$5.0 million. These purchases were made pursuant to a resolution adopted by the Board of Directors in 1995 which authorizedthat authorizes the Company to purchase, from time to time, up to 800,000 shares of the Company's common stock. 7As of April 30, 1999, up to 261,255 additional shares are authorized for purchase under this resolution. 8 PART I FINANCIAL INFORMATION (continued) ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL This Securities and Exchange Commission filing is being made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Certain matters contained in this filing may constitute forward-looking statements. Any one, or all, of the following factors could cause actual financial results to differ materially from those financial results mentioned in the forward-looking statements: industry competition factors, unavailability of suitable retail space for expansion, timing of store openings, difficulty in predicting and responding to fashion trend shifts, seasonal fluctuations in gross sales, the departure of one or more key senior managers and other risks identified in filings with the Securities and Exchange Commission. During the third quarter of FY 1999, new Urban Outfitters stores wereThe Company opened in Philadelphia, PA and New York City, NY. In December 1998, new Anthropologie stores opened in Boston, MA and Birmingham, MI. These openings bring the number ofthree new stores openedduring the quarter: two Urban Retail locations in FY 1999Burlington, Vermont and Los Angeles, California and one Anthropologie store in Chestnut Hill, Massachusetts. Management plans to ten.open approximately eight additional stores during the remainder of the current fiscal year. RESULTS OF OPERATIONS The Company's operating years end on January 31 and include 12twelve periods ending on the last day of the calendar month. For example, fiscal year 19992000 ("FY 1999"2000") will end on January 31, 1999.2000. This discussion of results of operations covers the thirdfirst quarter and the nine months of FY 19992000 and FY 1998. 81999. 9 The following table sets forth, for the periods indicated, the percentage of the Company's net sales represented by certain income statement data. The following discussion should be read in conjunction with the table that follows:
THIRD QUARTER ENDED NINE MONTHS ENDED October 31, October 31, 1998 1997 1998 1997 ------ ------ ----- ------ Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 48.5% 50.3% 48.2% 50.4% ----- ----- ----- ----- Gross profit 51.5% 49.7% 51.8% 49.6% Selling, general and administrative expenses 38.1% 33.6% 40.6% 36.9% ----- ----- ----- ----- Income from operations 13.4% 16.1% 11.2% 12.7% Net interest and other 0.7% 0.8% 0.9% 0.8% ----- ----- ----- ----- Income before income taxes 14.1% 16.9% 12.1% 13.5% Income tax expense 5.8% 7.0% 5.0% 5.6% ----- ----- ----- ----- Net income 8.3% 9.9% 7.1% 7.9% ===== =====THREE MONTHS ENDED April 30, 1999 1998 ---- ---- Net sales 100.0% 100.0% Cost of sales, including certain buying, distribution and occupancy costs 63.0% 64.5% ----- ----- Gross profit 37.0% 35.5% Selling, general and administrative expenses 26.6% 27.5% ----- ----- Income from operations 10.4% 8.0% Other income (expense), net (1.0%) 1.0% ----- ----- Income before income taxes 9.4% 9.0% Income tax expense 4.3% 3.7% ----- ----- Net income 5.1% 5.3% ===== =====
THIRDFIRST QUARTER ENDED OCTOBER 31, 1998APRIL 30, 1999 COMPARED TO THE THIRDFIRST QUARTER ENDED OCTOBER 31, 1997APRIL 30, 1998 Net sales increased during the thirdfirst quarter ended October 31, 1998April 30, 1999 to $60.5$58.0 million, up 25.047 percent from $48.4$39.4 million duringfor the same period of the priorquarter last year. The $12.1$18.6 million increase over the prior year's thirdfirst quarter was primarily the result of new and noncomparable stores' sales of $8.3$10.1 million, a 1217 percent comparable store sales increase that contributed $4.6$5.5 million and the new Anthropologie catalog'sdirect response sales (catalog and website) of $2.4$3.7 million. These additions more than offset the $2.8 million decrease in Wholesale company sales. Management believes that the primary causes of this decrease in Wholesale sales are a reduction in demand for the Wholesale company's sweaters and other knits that constituted a major component of sales in FY 1998 and the continuation of the trend of larger customers opting to produce their own private label merchandise rather than purchase branded products from the Wholesale company. Gross profit as a percentage of sales increased by 1.81.5 percent during the thirdfirst quarter ended October 31, 1998April 30, 1999 compared to the prior year quarter.same quarter last year. The margin rate increased because ofgross profit improvement was due to: (1) the improvement in both retail divisions due to higher initial markups and lower markdowns, and (2) the change in sales mix because the Wholesale company, which typically has a lower gross profit margin, accounted for a smaller proportion of total sales in the quarter thanretail segment, accompanied by lower markdown requirements as a result of strong sales performance; (2) occupancy cost leveraging based on comparable store sales increases; and (3) distribution efficiencies. These favorable factors were offset, in the comparable period last year.part, by investments in merchandising personnel and a decrease in Wholesale division margin. Selling, general and administrative expenses for the quarter ended October 31, 1998 increased in dollars and as a percentage of sales. The preponderance of the increase in the quarter's selling, general and administrative expensesApril 30, 1999 expressed as a percentage of sales is attributabledecreased to the start-up costs of the Anthropologie catalog. In addition, the Wholesale company, which has a significantly lower expense structure than the retail operations, decreased substantially as a proportion of the 9 Company's sales. This "mix" impact accounted26.6% compared to 27.5% for the remainder ofsame quarter last year. The comparable store sales gains and the quarter's percentage increase as thein catalog sales resulted in leveraging of expenses by both retail companies offset the increases at the corporate office to support the Company's higher rate of new store expansion and start-up costs for the European retail expansion. The increase in dollars reflects the impact of new store openings, as well as the other aforementioned factors.operating expenses. Accordingly, operating income from operations during the quarter ended October 31, 1998 was $8.1 million, up $0.3 million (4.1%) from the prior year. The effective income tax rate for the quarter was 41.0%increased by 90% in dollars and from 8.0 % of sales in FY 1999 to 10.4% this year. 10 The change in other income (expense) is primarily attributable to a required charge to earnings to recognize a reserve for the Company's portion of operating losses relating to its investment in MXG media, inc. ("MXG", down from 41.5% last year. The reductionformerly HMB Publishing, Inc.). MXG is a resultdevelopment stage company which publishes a "magalog" and operates a website - www.mXgonline.com - that caters to teenage girls. Management is pleased with MXG's accelerated marketing efforts and website development and has advanced additional amounts to facilitate MXG's expansion. MXG is currently negotiating an additional round of investment with third parties to fund its growth plans. The implicit valuations by these potential investors attribute no decline to the value of the Company's investment. The Company anticipates, however, that the accounting rules regarding the operating losses of MXG will require additional charges be recognized by the Company in subsequent periods. The net investment in MXG as of April 30, 1999 and April 30, 1998 was $4.9 million and $1.4 million, respectively. In addition, other income (expense) reflects a lowerdecrease in interest income due to decreases in average state income tax rate. NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE NINE MONTHS ENDED OCTOBER 31, 1997 Net sales increased during the nine months ended October 31, 1998 to $147.9 million, up 16.6 percent from the same period last year. The $21.0 million increase overinvestable balances and decreased rates versus the prior year's first nine months was the result of sales from new and noncomparable stores of $15.5 million, an 11 percent comparable store sale increase that yielded $11.0 million and sales of $2.9 million from the new Anthropologie catalog, which more than offset the $8.4 million decrease in Wholesale company sales. Gross profit for the nine months ended October 31, 1998 was $76.7 million, up $13.7 million (a 21.8 percent increase) from the comparable prior year period. The dollar increases came from the volume growth previously described. Gross profit increased to 51.8 percent this year versus 49.6 percent last year. The increase in percentage resulted from the increase in retail sales as a proportion of total sales (since the retail divisions have a higher gross profit margin percentage than the Wholesale company), as well as higher initial retail markups and lower retail markdowns. Selling, general and administrative expenses during the nine months ended October 31, 1998 were $60.0 million, up $13.2 million or 28.2 percent from the same period in the prior year. These dollar increases were attributed principally to newly opened stores and the costs to fund the startup expenses of the European subsidiary and the new Anthropologie catalog. Stated as a percentage of sales, selling, general and administrative expenses increased from 36.9 percent to 40.6 percent during the nine months compared to the same period in the preceding year. The increase in percent of sales is attributable to the aforementioned startup costs and the Wholesale company's inability to reduce expenses commensurate with its 33 percent decrease in sales. These factors more than offset the leveraging of retail expenses due to the 11 percent comparable store sales increase. Income from operations during the nine months ended October 31, 1998 was $16.7 million, up 3.1 percent from the same period in the prior year. 10 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $24.0$14.1 million at October 31, 1998,April 30, 1999, as compared to $26.7$25.2 million at January 31, 19981999 and $19.7$23.9 million at October 31, 1997.April 30, 1998. The Company's net working capital was $49.7$35.8 million at October 31, 1998,April 30, 1999, as compared to $52.1$47.5 million at January 31, 19981999 and $49.5$50.0 million at October 31, 1997.April 30, 1998. The decrease in cash and cash equivalents on October 31, 1998April 30, 1999 from year end reflects the funding of FY 1999's2000's increased level of capital expenditures ($14.5 million versus $3.5 million for the nine months ended October 31, 1997), primarily(primarily for new store construction,construction), the increase in inventory for new stores and the seasonal building of inventory in existing stores. Cash requirements for these activities, togethercombined with the $2,254 thousand$5.0 million expended to purchase and retire 167,200repurchase 371,545 shares of the Company's common stock and additional investments in MXG, more than offset the amountscash generated from earningsearnings. Total inventories at April 30, 1999 increased by 20% versus the comparable quarter end last year, principally attributable to additional stores. Comparable store inventories increased by 6%. Catalog inventories increased substantially over last year's modest test level and wholesale inventories decreased by 46% due to liquidation of prior season merchandise. The Company expects that capital expenditures during FY 2000 will be approximately $25 million. Three stores are currently under construction. The Company believes that existing cash and investments at April 30, 1999, as well as cash from future operations, will be sufficient to meet the Company's cash needs through January 31, 2000. Accrued expenses and other current liabilities increased to $10.1 million as of April 30, 1999 from $4.8 million at April 30, 1998. The increase in accounts payablethe components of accrued expenses and other current liabilities (which includes accrued compensation and benefits and accrued expenses.income taxes) is primarily attributable to additional stores, the strong comparable store sales performance and improved profitability. 11 The Company has a $16.2 million revolving line of credit available to facilitate letter of credit transactions and cash advances. Interest on anyAs of and during the quarter ended April 30, 1999, there were no outstanding cash advance balance is payable monthly and is based on an "as offered" basis not to exceed the London Interbank Offered Rate (LIBOR) plus 3/8 of 1%. No cash borrowing has ever taken place on this line and, accordingly, no principal amounts were outstanding at October 31, 1998, January 31, 1998 or October 31, 1997.borrowings. Outstanding letters of credit totaled $3.9$5.7 million, $4.7$4.1 million and $5.3$6.1 million at October 31, 1998,April 30, 1999, January 31, 1999 and April 30, 1998, and October 31, 1997, respectively. These letters of credit, which have terms from one month to one year, collateralize the Company's obligation to third parties for the purchase of inventory. The fair value of these letters of credit is estimated to be the same as the contract values. There were no loan balances of any kind at October 31, 1998, January 31, 1998 or October 31, 1997. The Company expects that capital expenditures during FY 1999 will be approximately $18 million. Two stores are currently under construction. The Company believes that existing cash and investments at October 31, 1998, as well as cash from future operations, will be sufficient to meet the Company's cash needs through January 31, 2000. The Company has increased the number of new store openings in FY 1999 over historical trends, and management expects to maintain this higher level of expansion over the next several years. If the need for additional capital after FY 2000 is forecasted and if deemed by management to be in the best interests of the Company, then additional equity, long-term debt, capital leases or other permanent financing may be considered.12 OTHER MATTERS Outlook While the Company has exceeded its planned rate of comparable store sales increases during the first three quarters,quarter, management's plan for the fourth quarterremainder of the fiscal year is for more moderate comparable store sales growth. The added sales of noncomparable and new stores are planned to more than offset the planned decrease in the level of Wholesale company sales. 11 Year 2000 The Company does not generally sell products that must be brought into Year 2000 compliance. However, the Company does rely upon many vendors and suppliers for their products and services. The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue. The Company has also reviewed and continues to monitor the implemented changes or planned changes of its major suppliers that management believes could be affected by the Year 2000 date. Based on the review, the Company's major information technology systems ("IT") that would be adversely affected by Year 2000 issues will be upgraded or replaced through the normal course of business prior to December 31, 1999. Internal resources will beare being used in a timely manner to evaluate, modify and test the Company's other systems that are not scheduled to be upgraded or replaced through the normal course of business. The Company's core merchandising and financial system upgrade and the store register system upgrades have been completed, and testing of these upgrades continues. In addition, the Company is in the process of completing the inventory and assessment of its non-information technology systems ("non-IT"), including those with embedded processor chips -- heating, ventilation and air conditioning systems, elevators, etc. The Company is evaluating key vendor preparedness by conducting interviews, obtaining compliance representation letters and, if deemed necessary, conducting comprehensive tests. The Company expects to complete its Year 2000 compliance evaluation program by June 30, 1999. At this time, management continues to believe that the incremental costs associated with major system upgrades and/or replacements, as well as internal efforts to evaluate, modify and test the Company's other systems to ensure Year 2000 compliance, are not expected to be of a material nature to the Company. There can be no guarantee, however, that the Company's efforts will prevent Year 2000 issues from having a material adverse impact on its results of operations, financial condition and cash flows. The possible consequences to the Company if its business partners are not fully Year 2000 compliant (including the banking systems, communications, and other public utilities and the transportation industry) include temporary store closings and delays in the receipt of key merchandise categories. Accordingly, the Company is in the process of developing contingency plans to mitigate the potential disruptions that may result from the Year 2000 issue. Such plans may include earlier receipt of key merchandise categories, preparing alternative merchandise delivery methodologies, securing alternative suppliers, etc. It is anticipated that these contingency plans to manage identified IT and non-IT areas of high risk will be completed by June 30, 1999. Effect of New13 Recent Accounting Pronouncements The FASB issued SFAS 130,Financial Accounting Standards Board released Statement of Position 98-5, "Reporting Comprehensive Income,on the Costs of Start-Up Activities," which requires disclosure of comprehensive income within the basic financial statements for those entities with items that qualify as components of comprehensive income such as foreign currency transactions and unrealized gains on securities. The Company's adoption of SFAS 130, requiredis effective for fiscal periodsyears beginning after December 15, 1997, resulted1998. Effective February 1, 1999, the Company is required to expense as incurred all start-up and organization costs, including travel, training, recruiting, salaries and other operating costs. Previously, the Company deferred pre-opening costs until the store opened. The amounts deferred were then amortized over the lesser of six months or the remainder of the Company's fiscal year. This accounting change did not have a material effect on the Company's results or the presentation of comparable financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") which is required to be adopted in comprehensive income that was $12 thousand morefiscal years beginning after June 15, 2000. The Company plans to adopt SFAS No. 133 effective February 1, 2001. The Company currently enters into short-term foreign currency forward exchange contracts to manage exposures related to its Canadian dollar denominated investments and $299 12 thousand less than net income reported foranticipated cash flow. The amounts of the three-contracts and nine-month periods ended October 31, 1998, duerelated gains and losses have not been material. The adoption of SFAS No. 133 is not expected to thehave a significant effect of currency translation on the financial statements. The FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," effective for periods beginning after December 15, 1997. The new standard requires disclosure of revenues,position or results of operations and assets of each segment of a public enterprise that qualifies based on quantifiable and decision-making criteria.the Company. Market Risks The Company is exposed to the following types of market risks - fluctuations in the processpurchase price of developingmerchandise, as well as other goods and services; the specific disclosures that willvalue of foreign currencies in relation to the U.S. dollar; and changes in interest rates. Due to the Company's inventory turn and its historical ability to pass through the impact of any generalized changes in its cost of goods to its customers through pricing adjustments, commodity and other product risks are not expected to be containedmaterial.The Company purchases substantially all its merchandise in U.S. dollars, including a portion of the goods for its stores located in Canada and the United Kingdom. As explained in the section above on "Recent Accounting Pronouncements," the market risk is further limited by the Company's purchase of foreign currency forward exchange contracts. Since the Company has not been a borrower, its exposure to interest rate fluctuations is limited to the impact on its marketable securities portfolio. This exposure is minimized by the limited investment maturities and "put" options available to the Company. The impact of a hypothetical two percent increase or decrease in prevailing interest rates would not materially affect the Company's consolidated financial statements. 13position or results of operations. 14 Seasonality and Quarterly Results While Urban Outfitters has been profitable in each of its last 37 operating quarters, its operating results are subject to seasonal fluctuations. The Company's highest sales levels have historically occurred during the five-month period from August 1 to December 31 of each year (the "Back-to-School" and Holiday periods). Sales generated during these periods have traditionally had a significant impact on the Company's results of operations. Any decreases in sales for these periods or in the availability of working capital needed in the months preceding these periods could have a material adverse effect on the Company's results of operations. The Company's results of operations in any one fiscal quarter are not necessarily indicative of the results of operations that can be expected for any other fiscal quarter or for the full fiscal year. The Company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of expenses incurred in connection with, and sales contributed by, new stores, store expansions and the integration of new stores into the operations of the Company or by the size and timing of mailings of the Company's Anthropologie catalog. Fluctuations in the bookings and shipments of Wholesale products between quarters can also have positive or negative effects on earnings during the quarters. 15 PART II OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibits: Income Per Share CalculationNone (b) Reports on Form 8-K: None 1416 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. URBAN OUTFITTERS, INC. (Registrant) By: /s/ Richard A. Hayne -------------------------------------------------------------------- Richard A. Hayne Chairman of the Board of Directors By: /s/ Stephen A. Feldman --------------------------------- Stephen A. Feldman Treasurer (ChiefChief Financial Officer)Officer Dated: December 14, 1998 15June 9, 1999 17