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

                                    FORM 10-Q

[X][ X ] QUARTERLY REPORT UNDER SECTION 13 orOR 15 (d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended JulyFOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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 NumberFOR THE TRANSITION PERIOD FROM ______________ TO ______________

                         COMMISSION FILE NUMBER 0-16999
                             -----------------------

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

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


   1809 Walnut Street, Philadelphia,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
          ofTITLE OF EACH CLASS                         NUMBER OF SHARES OUTSTANDING
       OF COMMON STOCK                               AT NOVEMBER 22, 1999
      ------------------                          ----------------------------
Common Stock                               at August 27, 1999
          --------------------                     -----------------------------

Common Shares,shares, par value, $.0001 per share                    17,593,04117,619,241




                                      INDEX




                          PAGE
                                                                            ----

                          PART I Financial InformationFINANCIAL INFORMATION
                                                                            PAGE
ITEM 1    Financial Statements
- ------

          Condensed Consolidated Balance Sheets at JulyOctober 31, 1999,            2
          January 31, 1999 and JulyOctober 31, 1998 (Unaudited)                    2

          Condensed Consolidated Statements of Income for the three and
          3
         sixnine months ended JulyOctober 31, 1999 and 1998 (Unaudited)              3

          Condensed Consolidated Statements of Changes in Shareholders'
          4
         Equity for the sixnine months ended JulyOctober 31, 1999
          and 1998 (Unaudited)                                                 4

          Condensed Consolidated Statements of Cash Flows for the
          5
         sixnine months ended JulyOctober 31, 1999 and 1998 (Unaudited)              5

          Notes to Condensed Consolidated Financial Statements            6 - 89

ITEM 2    Management's Discussion and Analysis of Financial              910 - 15
- ------16
          Condition and Results of Operations

                            PART II Other InformationOTHER INFORMATION

ITEM 6    Exhibits and Reports on Form 8-K                                    16
- ------17

SIGNATURES                                                                    1718


                                        1



                             URBAN OUTFITTERS, INC.
                      Condensed Consolidated Balance SheetsCONDENSED CONSOLIDATED BALANCE SHEETS
                 (In thousands, except share and per share data)
                                   (Unaudited)

JulyOCTOBER 31, JANUARY 31, OCTOBER 31, 1999 January 31, 1999 July 31, 1998 ------------- ---------------- ------------------------ ----------- ----------- AssetsASSETS Current assets: Cash and cash equivalents $ 8,8797,306 $ 25,165 $ 22,98424,036 Marketable securities 10,1888,371 13,032 11,73211,258 Accounts receivable, net of allowance for doubtful accounts of $594,$563, $603 and $792$827 at JulyOctober 31, 1999, January 31, 1999 and JulyOctober 31, 1998, respectively 6,1768,914 4,824 4,6816,939 Inventory 31,08332,527 21,881 27,07326,500 Prepaid expenses and other current assets 6,74015,501 6,653 7,6076,758 --------- --------- --------- Total current assets 63,06672,619 71,555 74,07775,491 Property and equipment, less accumulated depreciation and amortization 51,59362,589 43,066 34,81037,393 Marketable securities 17,29413,785 12,218 11,88211,033 Other assets 9,1437,763 6,524 4,5765,599 --------- --------- --------- $ 141,096156,756 $ 133,363 $ 125,345129,516 ========= ========= ========= Liabilities and Shareholders' EquityLIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 17,28519,688 $ 14,763 $ 17,65017,471 Accrued expenses and other current liabilities 8,58113,945 9,265 7,1008,295 --------- --------- --------- Total current liabilities 25,86633,633 24,028 24,75025,766 Accrued rent and other liabilities 4,3794,495 4,041 3,4193,781 --------- --------- --------- Total liabilities 30,24538,128 28,069 28,16929,547 --------- --------- --------- Shareholders' equity: Preferred shares; $.0001 par, 10,000,000 authorized, none issued -- -- -- Common shares; $.0001 par, 50,000,000 shares authorized, 17,537,04117,619,241 issued at JulyOctober 31, 1999, 17,639,754 issued at January 31, 1999, and 17,784,95417,617,754 issued at July 31,1998,October 31, 1998, respectively 2 2 2 Additional paid-in capital 19,42220,876 20,825 22,77120,517 Retained earnings 91,98198,082 84,934 74,71479,749 Accumulated other comprehensive income (554)(332) (467) (311)(299) --------- --------- --------- Total shareholders' equity 110,851118,628 105,294 97,17699,969 --------- --------- --------- $ 141,096156,756 $ 133,363 $ 125,345129,516 ========= ========= =========
See accompanying notes 2 URBAN OUTFITTERS, INC. Condensed Consolidated Statements of IncomeCONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share data) (Unaudited)
Three Months Ended Six Months Ended JulyTHREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 31, JulyOCTOBER 31, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $ 67,97675,384 $ 48,06860,462 $ 125,967201,350 $ 87,452147,914 Cost of sales, including certain buying, distribution and occupancy costs 41,680 30,310 78,243 55,72046,716 37,506 124,959 94,123 ------------ ------------ ------------ ------------ Gross profit 26,296 17,758 47,724 31,73228,668 22,956 76,391 53,791 Selling, general and administrative expenses 15,664 12,376 31,080 23,18417,145 14,849 48,225 37,135 ------------ ------------ ------------ ------------ Income from operations 10,632 5,382 16,644 8,54811,523 8,107 28,166 16,656 Other income (expense), net (1,905) 452 (2,469) 842(388) 426 (2,856) 1,268 ------------ ------------ ------------ ------------ Income before income taxes 8,727 5,834 14,175 9,39011,135 8,533 25,310 17,924 Income tax expense 4,630 2,392 7,128 3,8505,035 3,498 12,162 7,349 ------------ ------------ ------------ ------------ Net income $ 4,0976,100 $ 3,4425,035 $ 7,04713,148 $ 5,54010,575 ============ ============ ============ ============ Net income per common share: Basic $ 0.230.35 $ 0.190.28 $ 0.400.75 $ 0.310.60 ============ ============ ============ ============ Diluted $ 0.230.34 $ 0.190.28 $ 0.400.74 $ 0.310.59 ============ ============ ============ ============ Weighted average common shares outstanding: Basic 17,463,954 17,782,063 17,477,153 17,738,98817,594,467 17,702,030 17,516,687 17,726,533 ============ ============ ============ ============ Diluted 17,854,249 18,028,164 17,780,847 18,022,61917,965,089 17,873,003 17,862,669 17,969,232 ============ ============ ============ ============
See accompanying notes 3 URBAN OUTFITTERS, INC. Condensed Consolidated Statements of Changes in Shareholders' EquityCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands, except share data) (Unaudited)
Common Shares ----------------------------------------------------------------------------------- Accumulated Comprehensive Number Additional Other Income of Par Paid-In Retained Comprehensive Quarter Year-To-Date Shares Value Capital Earnings Income Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at February 1, 1999 17,639,754 $ 2 $20,825$ 20,825 $ 84,934 $ (467) $ 105,294 Net income $ 4,0976,100 $ 7,04713,148 -- -- -- 7,04713,148 -- 7,04713,148 Foreign currency translation adjustments, net (273) (87)222 135 -- -- -- -- (87) (87) ------- -------135 135 -------- -------- Comprehensive income $ 3,8246,322 $ 6,960 ======= =======13,283 ======== ======== Exercise of stock options 268,832351,032 -- 3,5915,045 -- -- 3,5915,045 Purchase and retirement of common stock (371,545) -- (4,994) -- -- (4,994) ---------- --------- -------- --------- ------- -------- ------ ------------------- Balance at JulyOctober 31, 1999 17,537,04117,619,241 $ 2 $19,422 $ 91,98120,876 $ (554)98,082 $ 110,851(332) $ 118,628 ========== ===== =============== ======== ====== ========= Balance at February 1, 1998 17,649,360 $ 2 $21,482$ 21,482 $ 69,174 $ -- $ 90,658 Net income $ 3,4425,035 $ 5,54010,575 -- -- -- 5,54010,575 -- 5,54010,575 Foreign currency translation adjustments, net (311) (311)12 (299) -- -- -- -- (311) (311) ------- -------(299) (299) -------- -------- Comprehensive income $ 3,1315,047 $ 5,229 ======= =======10,276 ======== ======== Exercise of stock options 135,594 -- 1,289 -- -- 1,289 ----------Purchase and retirement of common stock (167,200) -- (2,254) -- -- (2,254) --------- ----- --------------- -------- ------- -------------------- Balance at JulyOctober 31, 1998 17,784,95417,617,754 $ 2 $22,771 $ 74,71420,517 $ (311)79,749 $ 97,176(299) $ 99,969 ========== ===== ======== ======== ======= ======== ====== ========= - ------------------------------------------------------------------------------------------------------------------------------------==========
See accompanying notes 4 URBAN OUTFITTERS, INC. Condensed Consolidated Statements of Cash Flows (InCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Six Months Ended JulyNINE MONTHS ENDED OCTOBER 31, ------------------------- 1999 1998 -------- ------------ ---- Cash flows from operating activities: Net income $ 7,04713,148 $ 5,54010,575 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,918 2,6685,894 3,982 Changes in assets and liabilities: Increase in receivables (1,352) (184)(4,090) (2,442) Increase in inventory (9,202) (9,945) Decrease (increase)(10,646) (9,372) Increase in prepaid expenses and other assets 2,869 (890)(1,937) (3,021) Increase in payables, accrued expenses and other liabilities 2,176 11,40310,059 12,781 -------- -------- Net cash provided by operating activities 5,456 8,59212,428 12,503 -------- -------- Cash flows from investing activities: Capital expenditures (12,304) (10,585) Purchases(25,158) (14,482) Purchase of marketable securities (11,572) (6,830)(12,159) (8,355) Sales and maturities of marketable securities 9,199 6,07414,994 8,922 Other assets (5,575) (1,957)(8,150) -- -------- -------- Net cash used in investing activities (20,252) (13,298)(30,473) (13,915) -------- -------- Cash flows from financing activities: Exercise of stock options 3,5915,045 1,289 PurchasesPurchase and retirement of common stock (4,994) --(2,254) -------- -------- Net cash provided by (used in) provided by financing activities (1,403) 1,28951 (965) -------- -------- Effect of exchange rate changes on cash and cash equivalents (87) (311)135 (299) -------- -------- Decrease in cash and cash equivalents (16,286) (3,728)(17,859) (2,676) Cash and cash equivalents at beginning of period 25,165 26,712 -------- -------- Cash and cash equivalents at end of period $ 8,8797,306 $ 22,98424,036 ======== ========
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, 1999, filed with the Securities and Exchange Commission on April 21, 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:
JulyOctober 31, 1999 January 31, 1999 JulyOctober 31, 1998 ------------- ---------------- ------------------------------ ---------------- (in thousands) Current portion Held-to-maturity ...................................... $ 7,5656,374 $ 9,206 $ 9,5629,391 Available-for-sale ....................... 2,623.......... 1,997 3,826 2,1701,867 ------- ------- ------- 10,1888,371 13,032 11,73211,258 ------- ------- ------- Noncurrent portion Held-to-maturity .......................... 17,294............ 13,785 12,218 11,88211,033 ------- ------- ------- Total marketable securities .................. $27,482.... $22,156 $25,250 $23,614$22,291 ======= ======= =======
The difference between the fair market value and amortized cost of marketable securities is immaterial. 6 3. Net Income Per Share The difference between the number of 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 dilutive stock options. 6 4. Segment Reporting Urban Outfitters is a national retailer of lifestyle-oriented general merchandise through 5152 stores operating under the retail names "Urban Outfitters" and "Anthropologie," and through a catalog and website.web site. Sales from this retail segment account for overapproximately 90% of total consolidated sales for the fiscal year ended January 31, 1999.sales. 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 this format provides management with the financial 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 pretax income from operations (excluding intercompany royalty and interest charges) of the segment. Corporate expenses includedinclude expenses incurred in and directed by the corporate office that are not allocated to segments. The principal identifiable assets for each operating segment are inventory 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 if the sales and transfers were made to third parties making similar volume purchases. 7 4. Segment Reporting (continued) Both the retail and wholesale segments are highly diversified. No customer comprises more than 10% of sales. Foreign operations are immaterial relative to the overall Company.
Three Months Ended SixNine Months Ended JulyOctober 31, JulyOctober 31, 1999 1998 1999 1998 ---- ---- ---- ---- Operating revenuesOPERATING REVENUES Retail operations ....................................... $ 62,72867,254 $ 43,86653,168 $ 115,171182,423 $ 77,788130,955 Wholesale operations ............... 6,172 5,307 12,358 11,664.................. 9,357 8,599 21,715 20,264 Intersegment elimination ........... (924) (1,105) (1,562) (2,000).............. (1,227) (1,305) (2,788) (3,305) --------- --------- --------- --------- Total net sales ........................................... $ 67,97675,384 $ 48,06860,462 $ 125,967201,350 $ 87,452147,914 ========= ========= ========= ========= Income from operationsINCOME FROM OPERATIONS Retail operations ....................................... $ 10,26310,808 $ 6,0457,778 $ 17,15228,266 $ 8,75516,534 Wholesale operations ............... 1,022 (51) 1,168 684.................. 1,158 721 2,019 1,406 --------- --------- --------- --------- Total segment operating income ..... 11,285 5,994 18,320 9,439........ 11,966 8,499 30,285 17,940 Corporate and other general expenses (653) (612) (1,676) (891).. (443) (392) (2,119) (1,284) --------- --------- --------- --------- Total income from operations ................. $ 10,63211,523 $ 5,3828,107 $ 16,64428,166 $ 8,54816,656 ========= ========= ========= =========
7 4. Segment Reporting (continued)
JulyOctober 31, 1999 January 31, 1999 JulyOctober 31, 1998 ------------- ---------------- ------------------------------ ---------------- Net fixed assets - ----------------NET FIXED ASSETS Retail operations ........... $50,517 $42,230 $33,953operations.............................. $ 61,460 $ 42,230 $ 36,573 Wholesale operations ........ 1,075operations........................... 1,128 835 856 Corporate ...................819 Corporate...................................... 1 1 1 ------- ------- --------------- -------- -------- Total net fixed assets ...... $51,593 $43,066 $34,810 ======= ======= ======= Inventory - ---------assets......................... $ 62,589 $ 43,066 $ 37,393 ======== ======== ======== INVENTORY Retail operations ........... $28,724 $19,397 $23,725operations.............................. $ 31,580 $ 19,397 $ 24,448 Wholesale operations ........ 2,359operations........................... 947 2,484 3,348 ------- ------- -------2,052 -------- -------- -------- Total inventory ............. $31,083 $21,881 $27,073 ======= ======= =======inventory................................ $ 32,527 $ 21,881 $ 26,500 ======== ======== ========
8 5. Investment in MXG media, inc. As of JulyMedia, Inc. At October 31, 1999 and 1998, the Company's net investmentsinvestment in MXG media, inc ("MXG,"Media, Inc. (MXG, formerly HMB Publishing, Inc.) were $5.8 million and $2.0 million, respectively.was $3.2 million. MXG is a development stage company which publishes a "magalog" and operates a website -www.MXGonline.com-web site - www.mxgonline.com - that caters to teenage girls. WhileSince October 31, 1998, the Company has advanced additional amounts$8.8 million in bridge and other financing to fund MXG's expansion duringexpansion. Additionally, the year, it has alsoCompany recognized net charges of $2.5 million to earnings of $853 thousand for the current quarter and $3.5$4.4 million for the sixnine months ended JulyOctober 31, 1999 to record the required accounting reserves for the Company's portion of MXG's operating losses. The net charge of $853 thousand for the current quarter included a gross charge of $2.9 million related to required reserves for MXG's operating losses, offset by a $2 million recovery of advances more fully explained below. Pursuant to an agreement dated October 31, 1999, MXG is seekingreceived an additional roundequity investment of $26 million from USA Networks Interactive, a USA company (USA Networks, Inc. - NASDAQ:USAI), reducing the Company's proportionate ownership. On November 1, 1999, the full amount of the bridge financing of $7.6 million was repaid with interest. The $7.6 million amount received was recorded in other current assets at October 31, 1999. The balance of the Company's investment has been fully reserved, and no further investments with third parties to fund its growth. The future structure ofare planned at this prospective growth financing will determine the level and timing oftime. Accordingly, no additional charges to earnings for MXG operating losses are expected to be recognized in future periods by the Company for the operating losses of MXG.Company. 6. Common Stock Purchase and Retirement In a series of open market transactions during the quarter ended April 30, 1999, the Company purchased and retired 371,545 shares of its common stock at a cost of $5.0 million. These purchases were made pursuant to a resolution adopted by the Board of Directors in 1995 that authorizes the Company to purchase, from time to time, up to 800,000 shares of the Company's common stock. As of JulyOctober 31, 1999, up to 261,255 additional shares are authorized for purchase under this resolution. 89 PART I FINANCIAL INFORMATION (continued)(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. Anyone, 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. Thus far this fiscal year, the Company opened four new Urban Retail stores and onetwo new Anthropologie store.stores. Management plans to open approximately sixfive new stores during the remainder of the fiscal year. RESULTS OF OPERATIONS The Company's operating years end on January 31 and include twelve periods ending on the last day of the calendar month. For example, fiscal year 2000 ("FY 2000") will end on January 31, 2000. This discussion of results of operations covers the secondthird quarter and the first sixnine months of FY 2000 and FY 1999. 910 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:
Three Months Ended Six Months Ended JulyTHREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 31, JulyOCTOBER 31, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales ....................................... 100.0% 100.0% 100.0% 100.0% Cost of sales, including certain buying, distribution and occupancy costs ............. 61.3% 63.1%62.0% 62.0% 62.1% 63.7%63.6% ----- ----- ----- ----- Gross profit .......................... 38.7% 36.9% 24.7% 36.3%38.0% 38.0% 37.9% 36.4% Selling, general and administrative expenses .... 23.1% 25.7% 24.7% 26.5%22.7% 24.6% 23.9% 25.1% ----- ----- ----- ----- Income from operations ............... 15.6% 11.2% 13.2% 9.8%15.3% 13.4% 14.0% 11.3% Other income (expense), net ..................... (2.8%(0.5%) 0.9% (1.9%0.7% (1.4%) 0.9% ----- ----- ----- ----- Income before income taxes ............. 12.8% 12.1% 11.3% 10.7%14.8% 14.1% 12.6% 12.2% Income tax expense .............................. 6.8%6.7% 5.8% 6.1% 5.0% 5.7% 4.4% ----- ----- ----- ----- Net income ............................ 6.0% 7.1% 5.6% 6.3%8.1% 8.3% 6.5% 7.2% ===== ===== ===== =====
SECONDTHIRD QUARTER ENDED JULYOCTOBER 31, 1999 COMPARED TO THE SECONDTHIRD QUARTER ENDED JULYOCTOBER 31, 1998 Net sales increased during the secondthird quarter ended JulyOctober 31, 1999 to $68.0$75.4 million, up 41 percent25.0% from $48.1$60.5 million for the same quarter last year. The $19.9$14.9 million increase over the prior year's secondthird quarter was the result of new and noncomparable stores' sales increases of $9.2$8.3 million, a 19 percentan 8% comparable store sales increase that contributed $8.0$3.8 million, Anthropologie direct response sales increases (catalog and website)web site) of $1.7$2.0 million and a $1.0$0.8 million increase from the Wholesale segment. Gross profit as a percentage of sales increased by 1.8 percent duringfor the secondthird quarter ended JulyOctober 31, 1999 compared towas unchanged versus the same quarter last year. The gross profit improvement was due to: (1) higherHigher initial markups in the retail segment; (2)segment combined with improved Wholesale results; (3) leveraging of storeresults were offset by higher occupancy costs based on comparable store sales; and (4) distribution efficiencies.versus the same quarter last year. Selling, general and administrative expenses for the quarter ended JulyOctober 31, 1999 expressed as a percentage of sales decreased to 23.1%22.7% compared to 25.7%24.6% for the same quarter last year. The comparable store sales gains combined with increases in Anthropologie direct response and Wholesale sales gains, resulted in the leveraging of operating expenses, despite the additional costs of moving catalog fulfillment operations in-house.expenses. Accordingly, operating income for the quarter increased by 98%42% in dollars and from 11.213.4 % of sales in FY 1999 to 15.6%15.3% this year. 10 Included in other income (expense) are charges to earnings of $2.5 million for the current quarter and $3.5 million for the six months ended JulyAt October 31, 1999 to recognize a required accounting reserve for1998, the Company's portion of operating losses relating to itsnet investment in MXG media, inc. ("MXG,"Media, Inc. (MXG, formerly HMB Publishing, Inc.). was $3.2 million. MXG is a development stage company which publishes a "magalog" and operates a websiteweb site - www.MXGonline.comwww.mxgonline.com - that caters to teenage girls. MXG has accelerated its marketing effortsSince October 31, 1998, the Company advanced $8.8 million in bridge and website development by establishing strategic advertising relationships with America Online, Inc., broadcast.com, Inc. and iXL Enterprises, Inc., along with preparing to launch www.MXGtv.com. The Company has advanced additional amounts during the quarterother financing to fund thisMXG's expansion. Additionally, the Company recognized net charges to earnings of $853 thousand for the current quarter and $4.4 million for the nine months ended October 31, 1999 to record required accounting reserves for the Company's portion of MXG's operating losses. The net charge of $853 thousand for the current quarter included a gross charge of $2.9 million related to required reserves for MXG's operating losses, offset by a $2 million recovery of advances more fully explained below. Pursuant to an agreement dated October 31, 1999, MXG has retained E*OFFERING to assist in seekingreceived an additional roundequity investment of $26 million from USA Networks Interactive, a USA company (USA Networks, Inc. - NASDAQ:USAI), reducing the Company's proportionate ownership. On November 1, 1999, the full amount of the bridge financing of $7.6 million was repaid with interest. The $7.6 million amount received was recorded in other current assets at October 31, 1999. The balance of the Company's investment with third parties to fund its growth plans. Based on the structure ofhas been fully reserved, and no further investments are planned at this financing, the level and timing oftime. Accordingly, no additional charges to earnings for MXG operating losses are expected to be recognized in future periods by the Company for the operating losses of MXG may vary. The net investment in MXG as of July 31, 1999 and July 31, 1998 was $5.8 million and $2.0 million, respectively. In addition, other income (expense) reflects a decrease in interest income due to decreases in average investable balances and decreased rates versus the prior year. SIXCompany. 11 NINE MONTHS ENDED JULYOCTOBER 31, 1999 COMPARED TO THE SIXNINE MONTHS ENDED JULYOCTOBER 31, 1998 Net sales increased during the sixnine months ended JulyOctober 31, 1999 to $126.0$201.4 million, up 44.0 percent36.2% from $87.5$147.9 million for the same period last year. The $38.5$53.5 million increase over the prior year's first sixnine months was the result of new and noncomparable stores' sales increases of $19.5$28.2 million, an 18 percenta 14% comparable store sales increase that contributed $13.0$16.4 million, Anthropologie direct sales increase of $4.9$6.9 million, and a $1.1$2.0 million increase in Wholesale segment sales. Gross profit as a percentage of sales increased by 1.6 percent1.5% during the sixnine months ended JulyOctober 31, 1999 compared to the same prior year period. The gross profit improvement was due toto: (1) higher initial mark-upsmarkups in the retail segment; (2) leveraging of store occupancy costs based on comparable store sales; and (3) distribution efficiencies. Selling, general and administrative expenses during the sixnine months ended JulyOctober 31, 1999 were $31.1$48.2 million, up $7.9$11.1 million or 34.1 percent30.0% from the same period in the prior year. These dollar increases were attributed principally to newly opened stores; the cost of moving catalog fulfillment in-house; and additions to corporate overhead structure to support an increased rate of store expansion. The comparable store sales gains resulted in leveraging of selling, general and administrative expenses which decreased from 26.5 percent25.1% of sales during the sixnine months ended JulyOctober 31, 1998 to 24.7 percent23.9% of sales during the same period this year. 12 Income from operations during the sixnine months ended JulyOctober 31, 1999 was $16.6$28.2 million, up 94.7 percent69.1% from the same period in the prior year. 11 LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and marketable securities were $36.4$29.5 million at JulyOctober 31, 1999, as compared to $50.4 million at January 31, 1999 and $46.6$46.3 million at JulyOctober 31, 1998. The Company's net working capital was $37.2$39.0 million at JulyOctober 31, 1999, as compared to $47.5 million at January 31, 1999 and $49.3$49.7 million at JulyOctober 31, 1998. The decrease in cash, cash equivalents and marketable securities on JulyOctober 31, 1999 from year end reflects the funding of FY 2000's increased level of capital expenditures (primarily for new store construction), the increase in inventory for new stores and the seasonal building of inventory in existing stores. Cash requirements for these activities, combined with $5.0 million expended to repurchase 371,545 shares of the Company's common stock and additional investments in and bridge loans to MXG, more than offset cash generated from earnings. Total inventories at JulyOctober 31, 1999 increased by 15%22.7% versus the comparable quarter end last year, principally attributable to additional stores and an increase in comparablenew store requirements. Comparable store inventories at the end of 8%.the period were flat compared to the same date last year. Catalog inventories increased substantially over last year's start-up leveldue to the expanded circulation and wholesaledemand, while Wholesale inventories decreased by 30%54.0%, reflecting a lower level of prior season inventory. The Company expects that capital expenditures duringfor the current year, including amounts expended for stores anticipated to open in FY 20002001, will be approximately $27.5$33.0 million. The Company believes that existing cash and investments at JulyOctober 31, 1999, as well as cash from future operations, and the $7.6 repayment on November 1, 1999 of the bridge loan by MXG, will be sufficient to meet the Company's cash needs through January 31, 2000.2001. Accrued expenses and other current liabilities increased to $8.6$13.9 million as of JulyOctober 31, 1999 from $7.1$8.3 million at JulyOctober 31, 1998. The increase in the components of accrued expenses and other current liabilities (which includes accrued incentive and other compensation, accrued benefits and accrued income taxes) is primarily attributable to additional stores, the strong comparable store sales performance and improved profitability. The Company has a $16.2 million revolving line of credit available to facilitate letter of credit transactions and cash advances. As of and during the sixnine months ended JulyOctober 31, 1999, there were no outstanding borrowings. Outstanding letters of credit totaled $8.0$7.1 million, $4.1 million and $6.8$3.9 million at JulyOctober 31, 1999, January 31, 1999 and JulyOctober 31, 1998, respectively. The fair value of these letters of credit is estimated to be the same as the contract values. 1213 OTHER MATTERS Outlook While the Company has exceeded its planned rate of comparable store sales increases during the first halfthree quarters of the fiscal year, management's plan for the remainder of the fiscal year is for morefourth quarter continues to be moderate comparable store sales growth. 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 have been upgraded or replaced through the normal course of business. Internal resources are being used in a timely manner to evaluate, modify and test the Company's other systems that were not scheduled to be upgraded or replaced through the normal course of business. The upgrades of the Company's core merchandising and financial system, Wholesale accounting and control systems, catalog fulfillment system, warehousing management system and store register system 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-informationnon- information technology systems ("non-IT"), including those with embedded processor chips -- heating, ventilation and air-conditioning systems, elevators, etc. The Company continues to evaluate key vendor preparedness by conducting interviews, obtaining updated compliance representation letters and, if deemed necessary, conducting additional comprehensive tests. CertainWhile most vendors have not completed their compliance work, and accordingly, ongoing Company efforts are required. The Company's Year 2000 compliance evaluation program is substantially complete. The incremental costs associated with these 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, have not been of a material nature to the Company. 13 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 banking systems, communications, 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 finalizingcontinues to refine its 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 14 methodologies, securing alternative suppliers, etc. These contingency plans to manage identified IT and non-IT areas of high risk will be reviewed and refinedtested, as appropriate, over the remainder of the year. Recent Accounting Pronouncements 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 fiscal 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 anticipated cash flow. The amounts of the contracts and related gains and losses have not been material. The adoption of SFAS No. 133 is not expected to have a significant effect on the financial position or results of operations of the Company. Market Risks The Company is exposed to the following types of market risks - fluctuations in the purchase price of merchandise, as well as other goods and services; the value 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 material. 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 position or results of operations. 1415 Seasonality and Quarterly Results While Urban Outfitters has been profitable in each of its last 3839 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""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 anyoneany 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. 1516 PART II OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 1617 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 Chief Financial Officer Dated: August 30,November 24, 1999 1718