UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to 240.14a-12

 

American Eagle Outfitters, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AMERICAN EAGLE OUTFITTERS, INC.

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

to be held

 

June 16, 2009

 

and

 

PROXY STATEMENT

American Eagle Outfitters, Inc.

77 Hot Metal Street

Pittsburgh, Pennsylvania 15203

412-432-3300

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 16, 2009

 

May 4, 2009

 

To the Stockholders of

American Eagle Outfitters, Inc.:

 

The 2009 Annual Meeting of Stockholders of American Eagle Outfitters, Inc., a Delaware corporation, will be held at the Company’s offices located at 77 Hot Metal Street, Pittsburgh, Pennsylvania, on Tuesday, June 16, 2009, at 11:00 a.m., local time, for the following purposes:

 

 

We have elected to furnish proxy materials and our Fiscal 2008 Annual Report on Form 10-K (“Annual Report”) to many of our stockholders over the Internet pursuant to Securities and Exchange Commission rules. On or about May 4, 2009, we mailed to most of our stockholders a Notice of Internet Availability of Proxy Materials (“the Notice”) containing instructions on how to access our Proxy Statement and Annual Report and how to vote online. All other stockholders received a copy of the Proxy Statement and Annual Report by mail. The Notice also contains instructions on how you can elect to receive a printed copy of the Proxy Statement and Annual Report, if you only received a Notice by mail.

 

Whether or not you plan to attend the meeting, please vote your shares promptly as outlined in the following Proxy Statement. If you attend the meeting, you may vote in person and your proxy will not be used.

 

By Order of the Board of Directors

 

Neil Bulman, Jr.
Secretary

AMERICAN EAGLE OUTFITTERS, INC.

 

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
JUNE 16, 2009

 

This Proxy Statement is being furnished in connection with the solicitation of proxies by the Board of Directors of American Eagle Outfitters, Inc., a Delaware corporation, for use at the Annual Meeting of Stockholders to be held on June 16, 2009, at 11:00 a.m., local time, at the Company’s offices located at 77 Hot Metal Street, Pittsburgh, Pennsylvania and at any adjournment thereof. It is being mailed to the stockholders on or about May 4, 2009. (“We,” “our,” and the “Company” refer to American Eagle Outfitters, Inc.)

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING

 

Who is entitled to vote?

 

Stockholders of record at the close of business on April 20, 2009, the record date for the Annual Meeting, are entitled to vote at the Annual Meeting. As of the record date, there were 206,530,578 shares of Common Stock, with $.01 par value, outstanding and entitled to vote. Each share that you own entitles you to one vote.

 

What am I voting on?

 

There are three matters scheduled for a vote at the Annual Meeting:

 

 

How does the Board recommend I vote on these proposals?

 

The Board of Directors recommends a vote FOR each of the nominees for director listed in this Proxy Statement, FOR the amendment and restatement of the Company’s 2005 Stock Award and Incentive Plan, and FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending January 30, 2010.

 

Why did I receive a Notice of Internet Availability of Proxy Materials?

 

We have elected to provide access to our proxy materials and Fiscal 2008 Annual Report on Form 10-K (“Annual Report”) on the Internet, instead of mailing the full set of printed proxy materials, in accordance with Securities and Exchange Commission (“SEC”) rules for the electronic distribution of proxy materials. On or about May 4, 2009, we mailed to most of our stockholders a Notice of Internet Availability of Proxy Materials (the “Notice”) containing instructions on how to access our Proxy Statement and Annual Report and how to vote online. If you received a Notice by mail, you will not receive a printed copy of the proxy materials in the mail unless you request it. Instead, the Notice instructs you on how to access and review all of the important information contained in the Proxy Statement and Annual Report. The Notice also instructs you on how you may submit your proxy over the Internet. If you received a Notice by mail and would like to

receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials included in the Notice.

 

How do I vote my shares?

 

If your shares are registered directly in your name (you are a “registered stockholder”), you received a proxy card along with a printed copy of the proxy materials. You may complete and sign the enclosed proxy card and return it in the pre-paid envelope. Alternatively, you may attend and vote in person at the Annual Meeting.

 

If you are a beneficial owner of shares registered in the name of your broker, bank or other agent (in “street name”), you should receive either a Notice or a voting instruction form along with a Proxy Statement. You should follow the instructions on the Notice or the voting instruction form in order to ensure that your vote is counted. To vote in person at the Annual Meeting, you must obtain a legal proxy from the broker, bank or agent that holds your shares to present at the meeting.

 

Can I change or revoke my proxy?

 

Yes. If you are a registered stockholder, you may revoke your proxy at any time before it is voted by delivering written notice to the Company (Attention: Neil Bulman, Jr., Secretary), by submitting a properly executed proxy bearing a later date or by attending the meeting and voting in person.

 

If your shares are held in street name, you may revoke your proxy by submitting new voting instructions to your broker or, if you have obtained a legal proxy from your broker, by attending the Annual Meeting and voting in person.

 

What constitutes a quorum?

 

A quorum of stockholders is necessary to transact business at the Annual Meeting. A quorum will be present if a majority of the outstanding shares of the Company’s common stock, as of the close of business on the record date, are represented by stockholders present at the meeting or by proxy. At the close of business on the record date, there were 206,530,578 shares of Common Stock outstanding and entitled to vote. Therefore, 103,265,290 shares will be required to be represented by stockholders present at the meeting or by proxy in order to establish a quorum.

 

Abstentions and broker non-votes will be counted towards the quorum. Broker non-votes occur when brokers, who hold their customers’ shares in street name, sign and submit proxies for such shares and vote such shares on some matters but not others. This would occur when brokers have not received any instructions from their customers, in which case the brokers, as the holders of record, are permitted to vote on “routine” matters, which include the election of directors and the ratification of the appointment of an independent registered public accounting firm, but not on non-routine matters.

 

What vote is required to approve each proposal?

 

Once a quorum is established, directors in an uncontested election are elected by a majority of the votes cast in respect to that director’s election. In the event of a contested election of directors, directors shall be elected by the vote of a plurality of the votes represented by the shares of Common Stock present at the meeting in person or by proxy. Properly executed proxies marked “Abstain” and broker non-votes are not voted with respect to the nominee or nominees indicated, although they are counted for purposes of determining if a quorum is present.

 

Amendment and restatement of the Company’s 2005 Stock Award and Incentive Plan requires the affirmative vote of the majority of the shares of Common Stock present at the meeting, in person or by proxy.

Appointment of Ernst & Young LLP as our independent registered public accounting firm is ratified by the affirmative vote of a majority of the shares of Common Stock present at the meeting, in person or by proxy.

 

For any other item that is properly submitted to stockholders for approval at the Annual Meeting, an affirmative vote of a majority of the shares of Common Stock voting on the matter is required for approval. For purposes of determining the number of shares of Common Stock voting on a matter, abstentions are counted and will have the effect of a negative vote; broker non-votes are not counted and have no effect on the vote.

 

Who bears the costs of this solicitation?

 

We bear the cost of the solicitation of proxies, including the charges and expenses of brokerage firms and others for forwarding solicitation material to beneficial owners of stock. Our representatives may solicit proxies by mail, telegram, telephone or personal interview. To solicit proxies, we request the assistance of banks, brokerage houses and other custodians, and, upon request, reimburse such organizations for their reasonable expenses in forwarding soliciting materials to beneficial owners and in obtaining authorization for the execution of proxies.

 

Can I nominate someone for election to the Board of Directors?

 

Yes, for election at next year’s Annual Meeting. You may do so by delivering to the Corporate Secretary, no earlier than March 20, 2010 and no later than April 19, 2010, a notice stating: (i) the name and address of the stockholder who intends to make the nomination; (ii) the name, age, business address and, if known, residence address of each nominee; (iii) the principal occupation or employment of each nominee; (iv) the number of shares of stock of the Company that are beneficially owned by each nominee and the nominating stockholder; and (v) the other information specified in Article Tenth (b) of our Certificate of Incorporation. Our Certificate of Incorporation is available on our website at www.ae.com under the links “About AE, AE Investment Info, Corporate Governance, Other Governance Documents.”

 

Additionally, you may recommend a nominee for consideration by our Nominating and Corporate Governance Committee (the “Nominating Committee”). Recommendations should be submitted to our Nominating Committee in accordance with the procedures described below under the ‘‘Nominating Committee’’ section.

 

May I submit a stockholder proposal for next year’s Annual Meeting?

 

Yes. Stockholder proposals to be included in the proxy statement for the 2010 Annual Meeting of Stockholders must be received by the Company (addressed to the attention of the Secretary) by January 4, 2010. We may omit from the proxy statement and form of proxy any proposals that are not received by the Secretary by January 4, 2010. Any stockholder proposal submitted outside the processes of Rule 14a-8 under the Securities Exchange Act of 1934 for presentation at our 2010 Annual Meeting will be considered untimely for purposes of Rule 14a-4 and 14a-5 under the Securities Exchange Act of 1934 if notice thereof is received before March 20, 2010 or after April 19, 2010. To be submitted at the meeting, any such proposal must be a proper subject for stockholder action under the laws of the State of Delaware, and must otherwise conform to applicable requirements of the proxy rules of the SEC.

 

SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

 

The following table shows, as of April 1, 2009, certain information with regard to the beneficial ownership of our Common Stock by: (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each of the Company’s directors; (iii) each executive officer named in the summary compensation table below; and (iv) all directors and executive officers as a group.

 

 

 

 

 

PROPOSAL ONE: ELECTION OF DIRECTORS

 

General

 

The Board of Directors is divided into three classes. Each class of directors is elected for a three-year term. On the recommendation of the Nominating Committee, the Board of Directors fixed the size of the board at ten directors and nominated three candidates, all of whom are currently directors of the Company, to be elected as Class II directors at the Annual Meeting. Class II directors serve for three-year terms ending at the 2012 annual meeting, or when their successors are duly elected and qualified. The terms of the remaining Class I and Class III directors expire at the annual meetings to be held in 2011 and 2010, respectively. Any director over age 72 shall not be eligible for re-election.

 

Your proxy, if executed and not revoked, will be voted as specified in the proxy, or if no instructions are given will be voted FOR each of the nominees listed below. If any nominee should become unavailable to serve, the Board of Directors may decrease the number of directors pursuant to the Bylaws or may designate a substitute nominee, in which event the proxy will be voted FOR such substitute nominee. The Board has no reason to believe that any nominee will be unavailable or, if elected, unable to serve.

 

Certain information regarding each nominee and incumbent director is set forth below as of April 1, 2009, including age, principal occupation, a brief description of business experience during at least the last five years, and other directorships.

 

Information Regarding Nominees for Class II Directors with Terms Expiring in 2012

 

Janice E. Page, age 60, has served as a Director of the Company since June 2004. Prior to her retirement in 1997, Ms. Page spent 27 years in retailing holding numerous merchandising, marketing and operating positions with Sears Roebuck & Company, including Group Vice President from 1992 to 1997. Ms. Page is currently a private investor. She also serves on the Board of Directors of R.G. Barry Corporation.

 

J. Thomas Presby, age 69, has been a Director of the Company since December 2005. Mr. Presby has used his business experience and professional qualifications to forge a second career of essentially full-time board service since he retired in 2002 as a partner in Deloitte Touche Tohmatsu. At Deloitte he held numerous positions in the United States and abroad, including the posts of Deputy Chairman and Chief Operating Officer. He also serves as a Director and Audit Committee Chair of First Solar, Inc., Invesco Ltd., Tiffany & Co. and World Fuel Services, Inc. As Mr. Presby has no significant business activities other than board service, he is available full time to fulfill his board responsibilities. He is a certified public accountant and a holder of the NACD Certificate of Director Education. He holds a BSEE from Rutgers University and a MBA from Carnegie Mellon University. The Board has determined that Mr. Presby’s simultaneous service on five audit committees will not impair his ability to effectively serve on the Company’s Audit Committee.

 

Gerald E. Wedren, age 72, has been a Director of the Company since November 1997. Mr. Wedren has served as President of Craig Capital Co., a Washington D.C. based merger and acquisition firm since 1973. Mr. Wedren was President of G.E.W. Inc., an owner of fast food restaurants, from 1981 to 1988. Mr. Wedren also serves on the Board of Directors of Encompass Group, Inc. and Westaff, Inc.

 

The Board of Directors recommends that the stockholders vote “FOR” each of the nominees for Director.

 

Information Regarding Class I Directors with Terms Expiring in 2011

 

Michael G. Jesselson, age 57, has served as a Director of the Company since November 1997. Mr. Jesselson is President of Jesselson Capital Corporation, a private investment corporation headquartered in New York City. He also serves on the Board of Directors of a number of nonprofit institutions.

 

Roger S. Markfield, age 67, has served as Vice Chairman and Executive Creative Director of the Company since February 2009 and as a Director since March 1999. From February 2007 to February 2009, Mr. Markfield served as a non-executive officer employee of the Company. Prior to February 2007, he served the Company as Vice-Chairman since November 2003, as President from February 1995 to February 2006, and as Co-Chief Executive Officer of the Company from December 2002 to November 2003. Mr. Markfield

also served the Company and its predecessors as Chief Merchandising Officer from February 1995 to December 2002 and as Executive Vice President of Merchandising from May 1993 to February 1995. Prior to joining the Company, he served as Executive Vice President-General Merchandising Manager for the Limited Division of The Limited, Incorporated, a large national specialty retailer, from May 1992 to April 1993. From 1969 to 1976 and from 1979 to 1992, he was employed by R.H. Macy & Co., a national retailer operating department and specialty stores, as a Buyer in Boys’ Wear rising to the office of President of Corporate Buying-Men’s. From 1976 to 1979, Mr. Markfield served as Senior Vice President of Merchandising and Marketing for the Gap Stores, Inc. He also serves on the Board of Directors of DSW, Inc.

 

Jay L. Schottenstein, age 54, has served as Chairman of the Company and its predecessors since March 1992. He served the Company as Chief Executive Officer from March 1992 until December 2002 and prior to that time, he served as a Vice President and Director of the Company’s predecessors since 1980. He has also served as Chairman of the Board and Chief Executive Officer of Schottenstein Stores Corporation (“SSC”), a private company owned by the Schottenstein-Deshe-Diamond families, since March 1992 and as President since 2001. Prior thereto, Mr. Schottenstein served as Vice Chairman of SSC from 1986 to 1992. He has been a Director of SSC since 1982. He has also served as Chairman since March 1992 and as Chief Executive Officer from July 1999 through December 2000 and from April 1991 through July 1997 of Retail Ventures, Inc. (“RVI”), a company traded on the New York Stock Exchange. Mr. Schottenstein also served as Chief Executive Officer from March 2005 to April 2009 and as Chairman of the Board since March 2005 of DSW, Inc., a company traded on the New York Stock Exchange. He has also served as an officer and director of various other corporations owned or controlled by members of his family since 1976. Jay L. Schottenstein is the brother-in-law of Jon P. Diamond.

 

Information Regarding Class III Directors with Terms Expiring in 2010

 

Jon P. Diamond, age 51, has been a Director of the Company since November 1997. Since 1996, Mr. Diamond has served as President and Chief Operating Officer of Safe Auto Insurance Company, a property and casualty insurance company and as Executive Vice President and Chief Operating Officer from 1993 to 1996. Mr. Diamond served as Vice President of SSC, from March 1987 to March 1993 and served in various management positions with SSC since 1983. He also serves on the Board of Directors of RVI.

 

Alan T. Kane, age 67, has been a Director of the Company since January 2007. Mr. Kane served as Dean of the School of Business and Technology at the Fashion Institute of Technology from 2005 to 2008. Mr. Kane also served as Professor of Retailing at the Columbia University Graduate School of Business from 1997 to 2006. Before joining the faculty at Columbia, Mr. Kane spent 28 years in the retailing industry with Federated Department Stores, The May Company, Grossman’s Inc. and a privately held retailer. He also serves on the Board of Directors of Circuit City Stores, Inc.

 

Cary D. McMillan, age 51, has been a Director of the Company since June 2007. He has served as Chief Executive Officer of True Partners Consulting, LLC, a professional services firm providing tax and other financial services, since December 2005. From October 2001 to April 2004, he was the Chief Executive Officer of Sara Lee Branded Apparel. Mr. McMillan served as Executive Vice President and on the Board of Directors of Sara Lee Corporation, a branded consumer packaged goods company, from January 2000 to April 2004. From November 1999 to December 2001, he served as Chief Financial and Administrative Officer of Sara Lee Corporation. He also serves on the Board of Directors of McDonald’s Corporation and Hewitt Associates, Inc.

 

James V. O’Donnell, age 68, has served as Chief Executive Officer of the Company since November 2003 and prior thereto as Co-Chief Executive Officer of the Company since December 2002 and as Chief Operating Officer for the Company since December 2000. Mr. O’Donnell became a member of the Board in December 2000. Prior to joining the Company, since December 1999, he served as President and Chief Operating Officer of Lyte, Inc., a retail technology services company. From 1997 to 2000, Mr. O’Donnell served as Director of Merchant Banking for Colmen Capital Advisors, Inc., and as a Project Consultant for the C. Everett Koop Foundation. From 1992 to 1997, Mr. O’Donnell was an owner and Chief Executive Officer of Computer Aided Systems, Inc. From 1980 to 1992, Mr. O’Donnell held various executive positions at The Gap Inc., and from 1987 to 1992, he was a member of the Board of Directors and was Executive Vice President. From 1989 to 1992, he served as Chief Operating Officer of The Gap Inc. Mr. O’Donnell is also a member of the Advisory Board to the Villanova School of Nursing.

 

INFORMATION CONCERNING THE BOARD OF DIRECTORS

 

During the fiscal year ended January 31, 2009 (“Fiscal 2008”), the Board of Directors met nine times. During Fiscal 2008, all members of the Board of Directors attended 75% or more of the total number of meetings of the Board and of the committees of the Board on which they served. It is the expectation of the Company that all incumbent directors attend the Annual Meeting of Stockholders. All incumbent members of the Board of Directors were present at our 2008 Annual Meeting except for Mr. Kane.

 

Director Compensation

 

Directors who are employees of the Company do not receive additional compensation for serving as directors. The table below sets forth the compensation for directors who are not employees of the Company as well as Mr. Schottenstein, who is considered a part-time employee of the Company. In addition, the Company pays attorneys fees related to the preparation and filing of director stock ownership forms with the SEC. The Company also reimburses travel expenses to attend Board and committee meetings and director continuing education expenses.

 

Fiscal 2008 Director Compensation (1)

 

 

 

 

Until June 2005, non-employee directors received an automatic quarterly grant of options to purchase shares of common stock. At January 31, 2009, the aggregate number of option awards outstanding was: Mr. Jesselson—2,813 shares; Ms. Page—19,688 shares; and Mr. Wedren—25,313 shares. Mr. Schottenstein also received various stock option awards prior to June 2005, as determined by the Compensation Committee, and awards for 1,560,172 shares remain outstanding.

 

In June 2005, the Board of Directors determined that each director should own common stock of the Company and established the following ownership guidelines. Within three years of joining the Board or the implementation of the ownership guidelines, each director must hold stock of the Company worth at least four times the current annual cash base retainer amount, or currently $220,000. The following forms of equity interests in the Company count towards the stock ownership requirement: shares purchased on the open market; shares obtained through stock option exercise; shares held as deferred stock units; shares held in benefit plans; shares held in trust for the economic benefit of the director or spouse or dependent children of the director; and shares owned jointly or separately by the spouse or dependent children of the director. Stock options do not count towards the stock ownership requirement.

 

Board Committees

 

The Board has a standing Audit Committee, a standing Compensation Committee and a standing Nominating Committee. These committees are governed by written charters, which were approved by the Board of Directors and are available on the Company’s website at www.ae.com under the links “About AE, AE Investment Info, Corporate Governance.”

 

The Board has determined that the following directors who are members of each of the standing committees are independent as defined in the applicable rules of the New York Stock Exchange:

 

 

In particular, the Board has determined that none of these directors have relationships that would cause them not to be independent under the specific criteria of Section 303A.02 of the NYSE Listed Company Manual.

 

In making these determinations, the Board took into account all factors and circumstances that it considered relevant, including the following:

 

 

 

The following sets forth Committee memberships as of the date of this proxy statement:

 

 

X = Member

 

XX = Committee Chair

 

 

Audit Committee

 

The primary function of the Audit Committee is to assist the Board in monitoring (1) the integrity of the financial statements of the Company, (2) the qualifications, performance and independence of the independent registered public accounting firm, (3) the performance of the internal auditors, and (4) the Company’s compliance with regulatory and legal requirements. The Audit Committee also reviews and approves the terms of any new related party agreements. The Audit Committee met fifteen times in Fiscal 2008.

 

The Board has determined that Mr. Presby and Mr. McMillan qualify as “audit committee financial experts” as defined by the SEC rules adopted pursuant to the Sarbanes-Oxley Act of 2002.

 

Compensation Committee

 

The function of the Compensation Committee is to aid the Board in meeting its responsibilities with regard to oversight and determination of executive compensation. The Compensation Committee reviews and approves salaries and other compensation of executive officers, administers the Company’s 1994 Stock Option Plan, 1999 Stock Incentive Plan and 2005 Stock Award and Incentive Plan and administers the Company’s Management Incentive Plan. The Compensation Committee met nine times in Fiscal 2008.

 

Nominating Committee

 

The function of the Nominating Committee is to aid the Board in meeting its responsibilities with regard to the organization and operation of the Board, selection of nominees for election to the Board and other corporate governance matters. The Nominating Committee met three times in Fiscal 2008. The Nominating

Committee developed and reviews each year the Company’s Corporate Governance Guidelines, which were adopted by the Board and are available on our website at www.ae.com under the links “About AE, AE Investment Info, Corporate Governance.”

 

The Nominating Committee periodically reviews the appropriate size of the Board, whether any vacancies are expected due to retirement or otherwise, and the need for particular expertise on the Board. In evaluating and determining whether to recommend a candidate to the Board, the Committee reviews the appropriate skills and characteristics required of Board members in the context of the background of existing members and in light of the perceived needs for the future development of the Company’s business, including issues of diversity and experience in different substantive areas such as retail operations, marketing, technology, distribution, real estate and finance. Candidates may come to the attention of the Committee from a variety of sources, including current Board members, stockholders, and management. All candidates are reviewed in the same manner regardless of the source of the recommendation. In the past, the Nominating Committee has retained the services of a search firm to assist in identifying and evaluating qualified director candidates.

 

The Committee will consider the recommendations of stockholders regarding potential director candidates. In order for stockholder recommendations regarding possible candidates for director to be considered by the Nominating Committee:

 

 

Meetings of Non-Management and Independent Directors

 

The Board’s policy is to have the non-management directors meet separately in executive session in connection with each regularly scheduled board meeting (at least four times annually). Additionally, the independent directors meet at least annually. During each meeting of the non-management or independent directors, the Lead Independent Director will lead the discussion.

 

Compensation Committee Interlocks and Insider Participation

 

During Fiscal 2008, the members of the Compensation Committee included Messrs. McMillan (Chairman), Kane, Presby, Wedren and Ms. Page. None of the current or former members of the Compensation Committee are present or former officers of the Company or its subsidiaries or have affiliates that are parties to agreements with the Company.

 

Communications with the Board

 

The Board provides a process for all interested parties to send communications to the non-management members of the Board. That process is described on the Company’s website at www.ae.com under the links “About AE, AE Investment Info, Corporate Governance, Board of Directors.”

 

Corporate Governance Information

 

The Company’s corporate governance materials, including our corporate governance guidelines, the charters of our audit, compensation and nominating committees and our Code of Ethics that applies to all of our directors, officers (including the Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and Controller) and employees may be found on the Company’s website at www.ae.com under the links “About AE, AE Investment Info, Corporate Governance.” Any amendments or waivers to our code of ethics will also be available on our website. A copy of the corporate governance materials is also available in print to any stockholder who requests it.

 

EXECUTIVE OFFICERS

 

The following persons are executive officers of the Company. For information regarding officers who are also directors, see “Election of Directors.” The officers of the Company are elected annually by the Board and serve at the pleasure of the Board.

 

Thomas A. DiDonato, age 50, has served the Company as Executive Vice President of Human Resources since July 2005. Prior to joining the Company, Mr. DiDonato served the H.J. Heinz Company as Chief People Officer from September 2004 to July 2005, as Vice President of Global Leadership and Development for the Heinz World Headquarters from December 2003 to September 2004 and prior thereto as Vice President of Human Resources for Heinz North America since July 2001. From 1997 to 2001, Mr. DiDonato served as Senior Vice President of Human Resources for Merck-Medco Managed Care LLC. Prior to that time, Mr. DiDonato held various Vice President level positions with Pepsico from 1990 to 1997 and with Philip Morris Companies, Inc. from 1982 to 1990.

 

Joan Holstein Hilson, age 49, has served the Company as Executive Vice President, Chief Financial Officer, since April 2009 and as Principal Financial and Accounting Officer since April 2006. Prior thereto, Ms. Hilson served as Executive Vice President, Chief Financial Officer, AE Brand, since April 2006 and as Senior Vice President, Finance from September 2005 to April 2006. Prior to joining the Company, Ms. Hilson held various positions at the Victoria’s Secret Stores division of Limited Brands, Inc., including Executive Vice President and Chief Financial Officer from July 2002 to August 2005, Vice President of Planning and Allocation from April 1997 to June 2002, Vice President of Finance from February 1996 to March 1997 and Vice President of Financial Planning from August 1995 to January 1996. Prior to that time, Ms. Hilson held various other management level positions with Limited Brands, Inc. from April 1993 to July 1995. Ms. Hilson held various finance management positions at Sterling Jewelers, Inc. from August 1985 to January 1993 and prior thereto she worked as a Certified Public Accountant at the accounting firm Coopers & Lybrand.

 

Joseph E. Kerin, age 63, has served the Company as Executive Vice President, Supply Chain and Real Estate since April 2009. Prior thereto, he served the Company and its predecessors as Executive Vice President of Store Operations since November 2007 and from January 1991 to March 2006. From March 2006 to November 2007, he served as Executive Vice President of Store Operations and Real Estate. Prior to that time, he held various positions with the Company’s predecessors, including Senior Vice President-Store Operations from October 1987 to October 1988, Vice President-General Manager Store Operations from February 1979 to October 1987, General Manager Store Operations from November 1975 to February 1979, and Regional/District Manager of the Silverman’s Division from October 1972 to November 1975.

 

LeAnn Nealz, age 52, has served the Company as Executive Vice President and Chief Design Officer since May 2004. Prior to joining the Company, Ms. Nealz served as Senior Vice President-Design of GapKids and babyGap from March 2002 to April 2004. From May 2000 to March 2002, she was a consultant for Esprit. From June 1997 to April 2000, Ms. Nealz was Vice President-Creative Director of Nine West Group Inc. and President, creator and owner of Le Havlin Piro. From 1996 to September 1997 she was one of the creators of Theory. From 1993 to 1996 Ms. Nealz acted as the Senior Vice President of Design and Marketing for Pepe Jeans. From 1989 to 1993 Ms. Nealz served as both men’s and women’s Senior Design Director at Banana Republic. Prior to that time, Ms. Nealz held several positions, including Design Director of CK Jeans and Calvin Klein Sport as well as the Creative Director for Guess Jeans.

 

Dennis R. Parodi, age 57, has served the Company as Executive Vice President, Store Operations since April 2009. Prior thereto, he served the Company as Executive Vice President and Chief Operating Officer, New York Design Center, since February 2006, as Senior Vice President of Real Estate and Construction since May 2004 and as Vice President and Chief Operating Officer, New York Design Center, since March 2003. Prior to joining the Company, Mr. Parodi served as a consultant for Whelan’s International Corporation from January 2002 to March 2003. From February 1983 to December 2001, Mr. Parodi held various positions with GAP, Inc., including Executive Vice President-U.S. Stores & Global Operations from 1998 to 2001, Senior Vice President-Director of Stores from 1993 to 1998, Vice President-Eastern Zone from 1988 to 1993 and Regional Manager from 1983 to 1988.

Michael R. Rempell, age 35, has served the Company as Executive Vice President and Chief Operating Officer, New York Design Center, since April 2009. Prior thereto, he served the Company as Senior Vice President and Chief Supply Chain Officer from May 2006 to April 2009, Senior Vice President of Information Technology and Supply Chain from May 2003 to April 2006, Vice President of Supply Chain from April 2002 to May 2003 and Senior Director of AE Direct from February 2000 to April 2002. Prior to joining the Company, Mr. Rempell was an associate with PricewaterhouseCoopers Consulting and Accenture.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers, directors or persons who are beneficial owners of more than ten percent of the Company’s Common Stock (“reporting persons”) to file reports of ownership and changes in ownership with the SEC. Reporting persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms filed by them. Based on its review of the copies of Section 16(a) forms received by it, the Company believes that, during Fiscal 2008, with the exception of one late Form 4 filing for each of Messrs. Schottenstein, Diamond, Jesselson, Kane, McMillan, Presby and Wedren and Ms. Page, all reporting persons complied with applicable filing requirements.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview

 

This Compensation Discussion and Analysis describes the compensation philosophy, objectives, policies and practices with respect to our named executive officers (the “NEOs”). For Fiscal 2008, our NEOs included our Chief Executive Officer, President/Chief Merchandising Officer, Chief Design Officer, Chief Marketing Officer, and Chief Financial Officer.

 

Performance-Results

 

For Fiscal 2008, NEO compensation was driven by the Company’s financial results, as measured by earnings before interest, taxes, and depreciation and amortization (“EBITDA”). Fiscal 2008 EBITDA incorporates operational results including American Eagle, Inc., aerie, Martin & Osa, and 77kids. As described herein, our EBITDA growth was below threshold and did not meet target-level performance. Accordingly, this resulted in no payout nor vesting of performance-based compensation for the fiscal year. All performance awards were based on pre-established goals and discretion was not exercised in determining any NEO awards.

 

The NEO’s resulting realized compensation based on Fiscal 2008 Company performance reflects the performance-oriented nature of the plan. In a year with below threshold performance, executives’ realized compensation was significantly lower than grant date target value. Earn-outs under the annual incentive bonus plan, the long-term incentive cash plan, and the restricted stock program were all eliminated due to Company performance. As a result, there was no realized performance-based compensation for NEO’s for Fiscal 2008.

 

Role of Our Compensation Committee

 

Our Compensation Committee reviews and approves salaries and other compensation of named executive officers, administers the Company’s 1994 Stock Option Plan, 1999 Stock Incentive Plan and 2005 Stock Award and Incentive Plan and administers the Company’s Management Incentive Plan. The Committee also reviews and approves, where applicable, the design of compensation, severance, and perquisite programs.

 

Role of Executive Officers in Compensation Decisions

 

Mr. O’Donnell, our Chief Executive Officer, annually reviews the performance of each NEO with the Compensation Committee and makes recommendations with respect to each element of executive compensation for each NEO, excluding himself. Based in part on these recommendations and other

considerations discussed below, the Compensation Committee approves, when appropriate, the annual compensation package of our NEOs. Mr. O’Donnell reviews and recommends changes to the Company peer group, as deemed appropriate, for approval by the Compensation Committee.

 

Variations for NEOs with Employment Agreements

 

The Chief Executive Officer is employed pursuant to an individual employment agreement and, prior to the termination of her employment with the Company, so was the President/Chief Merchandising Officer. Because these agreements were separately negotiated with the Compensation Committee based on the individual NEO’s circumstances and the criticality of retaining these key leaders, the value of some of the compensation elements are above the range of our general plan design. However, the primary compensation elements are the same as those in our overall plan and align with our governing philosophy and objectives regarding executive compensation.

 

Compensation Program Objectives

 

The overall objective of our executive compensation program is to attract highly skilled, performance-oriented executives and to motivate them to achieve outstanding results through appropriate means. We focus on the following core principles in structuring an effective compensation program that meets our stated objective:

 

 

Compensation Program Elements

 

Our executive compensation program is designed to place a large amount of pay at risk for all executives. Our philosophy serves to cultivate a pay-for-performance environment. Our executive compensation plan design has five key elements:

 

 

 

Three of the elements (Annual Incentive Bonus, LTICP, and Restricted Stock) were entirely “at risk” based on Company performance and were subject to forfeiture if the Company did not achieve threshold performance goals. Company performance below threshold levels results in forfeiture of all elements of direct compensation other than base salary and NSOs. At threshold performance and below, the NEO’s total annual compensation declines by an average of 62% relative to target performance. Annual compensation at threshold levels and below includes only base salary and the stock option component of the long-term incentive opportunity, the latter of which provides compensation only to the extent that vesting requirements are satisfied and share price appreciates.

 

We strategically allocate compensation between short-term and long-term components and between cash and equity in order to maximize executive performance and retention. While we endeavor to design compensation packages consistently for our executives, long-term compensation and equity awards comprise an increasingly larger proportion of total compensation as position level increases. The portion of total pay attributable to long-term incentive cash/equity compensation increases at successively higher levels of management, which ensures that executive compensation closely aligns with changes in stockholder value and achievement of performance objectives and that executives are held accountable for results relative to position level.

 

The following components form the foundation of the executive compensation program in place during Fiscal 2008. Beginning in the second half of Fiscal 2008, the Company’s executive compensation management team partnered with our compensation consultant to research and determine the need to make changes to the existing program based on internal philosophy/objectives and external market data/practice. As a result, after four years with minimal change, changes were made to the program effective for the fifty-two week period ending January 30, 2010 (“Fiscal 2009”). In short, our goal was to design a new program that balanced the focus on both our short- and long-term financial and strategic goals, while retaining the performance-based nature of the program and the original program objectives. Notwithstanding the changes, our executives will continue to have a larger portion of their total compensation “at risk” based on Company performance than our peer companies. The plan components, mix and metrics continue to minimize the possibility that the compensation system could encourage management to pursue overly risky business strategies to maximize compensation payouts. Full details of the changes made will be described in the Fiscal 2009 Compensation Discussion & Analysis.

 

Base Salary

 

Base salary represents the annual salary paid to each executive. The objective of base salary is to provide a baseline compensation level that delivers current cash income to the NEOs and reflects his or her job responsibilities, experience and value to the Company. To aid in attracting and retaining high quality executives, salaries for our NEOs are generally targeted at the 75th percentile of our peer group to reflect the Company’s large size relative to the peer group as measured by revenue, the aggressive nature of our overall business plan, and the highly performance-based nature of the other elements of the direct compensation program. We review base salaries in the last quarter of the fiscal year and increases, where applicable, are typically effective for the beginning of the new fiscal year. Individual salaries range above or below the 75th percentile based on a variety of factors, including position level, executive experience relative to industry peers, individual performance, future potential, leadership qualities and unique skill sets.

 

Annual Incentive Bonus

 

We structure the Annual Incentive Bonus to encourage the achievement of above market annual performance targets and to recognize and reward short-term Company performance. The Annual Incentive Bonus focuses the executive team on key annual objectives and business drivers that support growth of Company EBITDA, improvement in overall operations and increases in stockholder value. We establish an

executive’s annual incentive bonus as a percentage of base salary, with increases in target percentages directly related to position level and individual performance. This approach places a proportionately larger percentage of total annual pay at risk for our executives relative to position level and ensures that accountability is directly proportionate to each executive’s role and responsibility. In Fiscal 2008, the target award opportunity for our Chief Executive Officer was equal to 125% of base salary and the target award opportunities for our other NEOs ranged from 60% to 100% of base salary. Annual incentive bonus payouts fluctuate based upon Company EBITDA, with actual Annual Incentive Bonus payments ranging from 0% of the targeted percentage below threshold performance, to 50% of the targeted percentage at threshold performance, to 100% of the targeted percentage at target performance, to 200% of the targeted percentage if the Company achieves goals that are substantially above our business plan for the fiscal year. Refer to the Fiscal 2008 Performance Metrics section for a description of the Fiscal 2008 Annual Incentive Bonus metrics. There were no bonuses earned based on Fiscal 2008 actual EBITDA of $411.9 million.

 

Long-term Incentive Cash Plan

 

The LTICP is a performance based variable incentive plan that supports both retention and performance motivation objectives. The Company instituted the LTICP in Fiscal 2005 and makes LTICP awards, if earned, to the NEOs and to certain other executives who participate in the plan. Executives that do not participate in the LTICP receive the same long-term incentive/equity proportion of total compensation as similarly situated executives participating in the LTICP; however, their total long-term incentive/equity value is delivered entirely through Restricted Stock and NSOs and their total equity includes a relatively larger percentage of Restricted Stock and NSO’s than a LTICP participant. Target award opportunities under the LTICP are equal to 50% of the participant’s Annual Incentive Bonus target opportunity. LTICP awards are contingent upon the achievement of pre-established annual EBITDA goals, which are described below.

 

Like the Annual Incentive Bonus plan, LTICP awards are contingent upon satisfaction of EBITDA targets. However, the performance goals in the LTICP are set below the goals in the Annual Incentive Bonus and Restricted Stock program, each of which contains aggressive performance requirements. The more modest goals in the LTICP support retention oriented objectives and help to mitigate the potential volatility in compensation opportunity that may result from the setting of aggressive targets in the other variable compensation plans.

 

Actual LTICP awards range from zero for performance below the threshold EBITDA goal, to 25% of the targeted percentage amount at the threshold EBITDA goal, to 100% of the targeted percentage amount at the target EBITDA goal, to 200% of the targeted percentage amount if the Company achieves goals that are substantially above our business plan. For Fiscal 2008, the LTICP awards were not earned based on actual EBITDA of $411.9 million. Each year, upon achievement of stated goals, the Company defers LTICP awards (if any) into notional accounts. For Fiscal 2008, the value of previously earned LTICP notional accounts was based on a single diversified fund, selected by the Company. After a three year waiting period from a participant’s first award, the executive begins to receive an annual payout of one-third of their existing account balance. The payments are taxed at distribution to the executive. The Company pays all account balances in full upon an executive’s retirement.

 

During the fifty-two week period ended February 2, 2008 (“Fiscal 2007”), the Company and Compensation Committee researched and approved plan design changes to the LTICP as described in the Fiscal 2007 proxy. To mitigate the possibility of senior executives entering into direct competition with the Company and to protect the Company’s investment in human capital following termination of a NEO’s employment, these changes incorporated formal twelve month non-compete and eighteen month non-solicitation agreements. These agreements were executed in the spring of 2008 for certain executives who participate in this feature of the plan, including certain NEO’s (Chief Design Officer, Chief Marketing Officer and Chief Financial Officer).

Equity Awards

 

Equity compensation is designed to align executive compensation with short-term and long-term Company performance. The Company utilizes a combination of performance-based Restricted Stock awards and time-based NSO grants to focus management on corporate performance and sustainable earnings growth. The overall plan design has a heavier emphasis on NSOs than on Restricted Stock due to the growth positioning of the Company and our commitment to increasing long-term stockholder value. Total equity grant value pools are pre-determined based upon the framework of the executive compensation plan design.

 

Restricted Stock: Restricted Stock awards represent approximately 40% of the value of an executive’s overall long-term incentive/equity, once the LTICP (if any) has been calculated. This value may vary depending on position level and eligibility for the LTICP. We determine the number of shares of Restricted Stock based on the overall dollar value of the award, adjusted for performance risk, divided by the closing price of our common stock on the grant date. We adjust the overall dollar value of the award for risk in order to take into account the inherent volatility of the specialty retail industry and the potential risk of forfeiture due to Company performance.

 

Restricted Stock grants feature one-year performance based vesting. Restricted Stock vests upon achievement of pre-established annual EBITDA goals, which are described below. Vesting of Restricted Stock awards range from zero for performance below the threshold EBITDA goal, to 50% of the targeted amount at the threshold EBITDA goal, to 100% of the targeted amount at the target EBITDA goal. If threshold performance is not met, the award recipient forfeits all shares. An award recipient cannot earn more than 100% of target, and unlike the Annual Incentive Bonus and LTICP, above-target performance does not result in receipt of additional shares of Restricted Stock. Based on Fiscal 2008 EBITDA of $411.9 million, 0% of the target restricted shares granted during Fiscal 2008 were earned and all shares were forfeited.

 

The table below describes key features of our Restricted Stock award program:

 

 

The CEO may exercise discretion in his recommendations to the Compensation Committee with regard to grants of Restricted Stock for all executives based on individual performance, including the named executive officers, excluding himself. However, adjustments suggested by the Chief Executive Officer must not result in

an expansion of the overall grant value pool under any circumstances. Compensation Committee approval of individual Restricted Stock awards is final and no changes are permitted after that approval.

 

Non-Qualified Stock Options: NSOs represent 60% of the value of an executive’s overall long-term incentive/equity, once the LTICP (if any) has been calculated. This value may vary depending on position level and eligibility for the LTICP. We determine the number of shares underlying each NSO grant based on the overall value of the grant using a Black-Scholes option pricing model and the closing price of our common stock on the grant date. In no event will we grant NSOs at an exercise price below the fair market value of our common stock on the date of grant. NSO grants vest proportionally over three years with a seven year term from the grant date, assuming continued employment.

 

The table below describes key features of our NSO award program:

 

The Chief Executive Officer may exercise discretion in his recommendations to the Compensation Committee with regard to grants of NSOs for all executives based on individual performance, including the named executive officers, excluding himself. However, adjustments suggested by the Chief Executive Officer must not result in an expansion of the overall grant value pool under any circumstances. Compensation Committee approval of individual NSO awards is final and no changes are permitted after that approval.

 

Delegation of Authority: The Compensation Committee delegates authority to the Chief Executive Officer to grant Restricted Stock and/or NSO awards for internal promotions and new hires, subject to an overall dollar value for each award and for all awards in total. No authority is delegated for awards to NEO’s.

 

Ownership Requirements: The Company has share ownership requirements to establish commonality of interest between management and stockholders and to encourage executives to think and act like owners. By encouraging executives to accumulate a specific level of ownership, the program ensures that pay remains at risk not only with regard to outstanding awards but also with regard to realized gains. Effective with NSO & Restricted Stock grants for the fifty-three week period ended February 3, 2007 (“Fiscal 2006”), the Company instituted a requirement for certain senior executives to hold the equivalent value equal to one times their current salary in Company stock. The Chief Executive Officer has an ownership requirement of five times his current salary and the President/Chief Merchandising Officer had an ownership requirement of three times her current salary.

 

This requirement can be met through various forms of equity; vested NSOs, vested Restricted Stock, employee stock purchase plan shares and personal holdings.

 

Until a given executive has satisfied their ownership requirement, they must hold half of their after-tax gains from any sale, of grants from Fiscal 2006 and beyond, in Company stock. If an executive does not hold half of after-tax gains in Company stock, they jeopardize eligibility for future stock grants. The compensation team monitors and communicates executive compliance with the requirements throughout the fiscal year.

 

Executive Perquisites

 

Executive perquisites, which are disclosed in the Summary Compensation Table, are not a significant component of our executive compensation program.

 

Fiscal 2008 Performance Metrics

 

In the continued interest of simplicity and focus, for Fiscal 2008, the Compensation Committee chose a single performance metric, EBITDA, to develop targets for awarding performance-based compensation. Annual Incentive Bonus, LTICP and Restricted Stock awards are all contingent upon the achievement of specific EBITDA goals. The Compensation Committee has chosen EBITDA as the key performance metric because it reflects the Company’s success in managing its core operations, growing the business and driving sustained increases in profit. We believe that EBITDA reflects all key controllable financial and operational performance objectives, while maintaining simplicity in the design and execution of our executive compensation program. Moreover, we believe that EBITDA targets encourage management to focus on all aspects of performance, including both top line growth in revenue, expense control and bottom line results.

 

Our Compensation Committee establishes performance goals at the beginning of each fiscal year based on a variety of factors such as internal budget, investor expectations, peer company results, prior year Company performance, upcoming fiscal year business plan and strategic initiatives. To ensure a direct correlation between the level of responsibility and accountability for results, the Company has developed EBITDA goals for the executive team that are higher than those below the executive level.

 

For Fiscal 2008, the Compensation Committee established the following EBITDA goals for executive-level associates, measuring EBITDA growth against prior year realized EBITDA:

 

 

 

A 10% EBITDA growth target aligned with our business strategy and with our status as a growth company. Moreover, the 10% EBITDA growth target established at the beginning of Fiscal 2008 also aligned with the then general analyst consensus for the Company of 10% growth. Fiscal 2008 actual EBITDA was $411.9 million (-42% growth) and, as discussed above, there were no payouts under the Annual Incentive Bonus, Restricted Stock, nor LTICP plans.

 

Compensation Benchmarking

 

In addition to many other factors that affect compensation determinations, we take into account the compensation practices of comparable companies in formulating our compensation program. We consider three key factors in choosing the companies that comprise our peer group:

 

 

For Fiscal 2008, the Company used a peer group of specialty retailers consisting of the following component companies. (Note: Company named followed by stock ticker symbol):

 

 

We evaluate our peer group on an annual basis for relevance and propose changes when appropriate. The Compensation Committee reviews and approves the recommended peer group changes as necessary. For Fiscal 2008, there were no changes to the peer group.

 

Timing of Equity Awards

 

Although the Company does not have a formal policy surrounding the timing of equity awards and the release of material non-public information, the Company does utilize a consistent approach in selecting both the grant dates and the terms of equity awards as previously described. The Company makes annual equity grants in the first quarter of the fiscal year. For the past four years, the grant date was the Compensation Committee meeting date during which earnings were certified for the prior fiscal year.

 

Severance and Change of Control Payments

 

Some of our NEOs are entitled to receive severance payments and other benefits in the event of a change in control of the Company and/or upon the termination of the executive’s employment with the Company under specified circumstances. These arrangements provide essential protections to both the executive and the Company. Agreements providing for severance and change in control payments assist the Company in

attracting and retaining qualified executives that could have other job alternatives. At the same time, the applicable agreements preserve valuable Company assets by imposing upon the executive’s non-competition and non-solicitation restrictions, confidentiality obligations and cooperation covenants. For a description and quantification of these severance and change of control benefits, please refer to the proxy section entitled “Post-Employment Compensation.”

 

As of January 31, 2009, Susan P. McGalla, President and Chief Merchandising Officer, ended her contract term with the Company. She did not seek to renew her contract with the Company. Ms. McGalla was offered and accepted a separation and severance agreement per the terms of her contract. Refer to the proxy section entitled “Post-Employment Compensation” for additional information regarding her separation and related agreement.

 

As of January 30, 2009, Kathy J. Savitt, Executive Vice President and Chief Marketing Officer, ended her employment with the Company. Ms. Savitt was offered and accepted a separation and severance agreement per the terms of her employment letter. Refer to the proxy section entitled “Post-Employment Compensation” for additional information regarding her separation and related agreement.

 

Role of Compensation Consultants

 

The Compensation Committee has the authority under the Compensation Committee Charter to retain outside consultants or advisors to assist the Committee. In accordance with this authority, the Committee engaged the services of Watson Wyatt & Company at the beginning of Fiscal 2008. In September 2008, the Compensation Committee changed consultants and engaged the services of Frederic W. Cook & Co., Inc. as its primary outside independent compensation consultant to advise the Committee on all matters related to Chief Executive Officer and other executive compensation. The services provided by Frederic W. Cook & Co., Inc. are subject to agreement and engagement letters and the Committee has sole authority to terminate the relationship. Representatives of Watson Wyatt & Company or Frederic W. Cook & Co., Inc. attended four of nine of the Compensation Committee meetings during Fiscal 2008. Frederic W. Cook & Co., Inc does not provide any other services to the Company. The Compensation Committee may engage other consultants as needed in order to provide analysis, recommendations or other market data.

 

Under the direction of the Compensation Committee, Frederic W. Cook & Co., Inc. interacts with members of the senior management team to provide insights into market practices and to ensure that management is fully informed with regard to emerging best practices and market trends. This ensures that proposals developed by management align with the marketplace, the Company’s overall compensation objectives and the objectives of stockholders.

 

Management engages the Hay Group, Inc. as needed to provide market data and analysis with regard to competitive market compensation rates. This data is used as a supplement to that provided to the Compensation Committee by Frederic W. Cook & Co. and to validate and verify the accuracy of data used by the Committee in its deliberations.

Tax Matters

 

Section 162(m) of the Internal Revenue Code (“Section 162(m)”) generally permits a tax deduction to public corporations for compensation over $1,000,000 paid in any fiscal year to a corporation’s Chief Executive Officer and certain other highly compensated executive officers only if the compensation qualifies as being performance-based under Section 162(m). The Company endeavors to structure its compensation policies to qualify as performance-based under Section 162(m) whenever it is reasonably possible to do so while meeting our compensation objectives.

 

Nonetheless, from time to time certain non-deductible compensation may be paid and the Board of Directors and the Compensation Committee reserve the authority to award non-deductible compensation in appropriate circumstances. In addition, it is possible that some compensation paid pursuant to certain equity awards that have already been granted may be non-deductible as a result of Section 162(m). The Section 162(m) disallowance for the tax year ended July 2008 was $128,000 with a tax impact of $49,000 at 38%.

 

Additionally, Section 409A of the Internal Revenue Code (“Section 409A”) governs our ability to establish the time and form of payment under our nonqualified deferred compensation arrangements. We believe that we have been operating our nonqualified deferred compensation arrangements in good faith compliance with Section 409A and the guidance available thereunder in effect since January 1, 2005.

 

EXECUTIVE OFFICER COMPENSATION

 

General

 

The following table summarizes the compensation for each of the last three fiscal years of the Company’s Principal Executive Officer, Principal Financial Officer and the three other most highly compensated executive officers ranked by their total compensation as listed in the table below. Both Ms. McGalla and Ms. Savitt terminated their employment with the Company on the last day of Fiscal 2008.

 

Summary Compensation Table

 

 

 

 

(4) Non-equity incentive plan compensation includes the following for each of 2008, 2007 and 2006:

 

 

 

 

 

In addition, the Company pays attorneys fees related to the preparation and filing of NEO stock ownership forms with the SEC.

Grants of Plan-Based Awards

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

 

 

 

Option Exercises and Stock Vested

 

 

 

 

Nonqualified Deferred Compensation

 

The Company has a nonqualified deferred compensation program which allows eligible participants to defer a portion of their salary and/or bonus on an annual basis into the plan. Participants can defer up to 90% of their annual salary (with a minimum annual deferral of $2,000) and up to 100% of their annual performance-based bonus into the plan. Distributions from the plan automatically occur upon retirement, termination of employment, disability or death during employment. Participants may also choose to receive a scheduled distribution payment while they are still employed with the Company. The plan operates in compliance with the requirements of Section 409A. The following table summarizes the activity in each of the NEO’s nonqualified deferred compensation accounts during Fiscal 2008.

 

 

 

 

Post-Employment Compensation

 

Mr. O’Donnell was employed in Fiscal 2008 pursuant to an employment agreement dated December 28, 2006 (the “Agreement”). Pursuant to the Agreement, Mr. O’Donnell will serve as the Company’s Chief Executive Officer through Fiscal 2009 and as a non-executive employee through January 29, 2011 (“Fiscal 2010”). The Agreement provides for a retirement benefit upon its expiration equal to the greater of (a) $2,200,000, or (b) Mr. O’Donnell’s total cash compensation (base salary plus annual cash incentive bonus, which is limited to target bonus for purposes of the calculation) for the highest compensated fiscal year of the prior six fiscal years. The retirement benefit is payable by the Company over five years after the expiration of the Agreement’s term in Fiscal 2010. If the Company were to achieve its annual cash bonus goals in each year of the Agreement, the retirement benefit payable would be $3,600,000. Additionally, in the event of a non-cause termination by the Company, the Agreement provides for severance payments equal to one year of base salary payable in a lump sum within 30 days of termination; the retirement benefit, payable in a lump sum within 30 days of termination; any incentive bonus that would have been paid to the extent that the performance goals established at the time of grant are met for the fiscal year during which termination occurred, even though he was not employed for the entire fiscal year; outstanding stock options shall vest and shall be exercisable for one year after the date of termination; restricted stock awards outstanding at the time of the termination and not previously forfeited shall vest to the extent that the performance goals established at the time of grant are met for the fiscal year during which termination occurred, even though he was not employed for the entire fiscal year; and payment of his LTICP account in a lump sum payment within 30 days of the date of termination. To the extent that any provisions of the Agreement do not comply with Section 409A, which would cause Executive to incur any additional tax or interest under Section 409A, such terms of the Agreement shall be deemed to be modified, to the extent reasonably possible to do so, and applied by the Company in a manner to be consistent with Section 409A.

 

Ms. Nealz is employed pursuant to an employment letter dated March 31, 2004. In the event of a non-cause termination by the Company, this letter provides for a lump-sum severance payment equal to one year of base salary.

 

Ms. Hilson is employed pursuant to an employment letter dated July 18, 2005. It provides for severance payments equal to up to one year of base salary in the form of salary continuation during a non-compete period.

 

Prior to August 2008, Ms. McGalla was employed pursuant to an employment agreement dated March 1, 2007. Pursuant to this agreement, Ms. McGalla was employed as President and Chief Merchandising Officer of the Company through January 31, 2009. During June 2008, Ms. McGalla advised the Company that she would not be renewing her employment agreement. On August 27, 2008, the Company entered into a Separation Agreement and Release (the ‘‘McGalla Separation Agreement”) with Ms. McGalla related to her separation from employment with the Company. Pursuant to the McGalla Separation Agreement, in exchange for a twenty-four month non-solicitation arrangement and a general release of any claims against the Company, Ms. McGalla shall receive:

 

 

 

Prior to January 2009, Ms. Savitt was employed pursuant to an employment letter dated January 3, 2006. On January 20, 2009, the Company entered into a Separation Agreement and Release (the “Savitt Separation Agreement”) with Ms. Savitt related to her separation from employment with the Company. Pursuant to the Savitt Separation Agreement, in exchange for a general release of any claims against the Company, Ms. Savitt shall receive the following:

 

 

For Mr. O’Donnell, Ms. Nealz and Ms. Hilson, the following tables set forth the expected benefit to be received by each of the respective NEO’s in the event of his or her termination resulting from various scenarios, assuming a termination date of January 31, 2009 and a stock price of $9.01, our closing stock price on January 30, 2009. The tables do not include the payment of the aggregate balance of the NEO’s nonqualified deferred compensation that is disclosed in the Nonqualified Deferred Compensation table above.

 

James V. O’Donnell