-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KiYFnObAytvHW15WJ1J0z2AtyZXoq/scD4vzhLZsbNKf2Mo+AP+OeWuJxCXiXoAy FnWLqgezhf0Nvdlzow48Gw== 0000950152-98-009552.txt : 19990309 0000950152-98-009552.hdr.sgml : 19990309 ACCESSION NUMBER: 0000950152-98-009552 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABERCROMBIE & FITCH CO /DE/ CENTRAL INDEX KEY: 0001018840 STANDARD INDUSTRIAL CLASSIFICATION: 5651 IRS NUMBER: 311469076 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12107 FILM NUMBER: 98768975 BUSINESS ADDRESS: STREET 1: FOUR LIMITED PARKWAY EAST CITY: REYNOLDSBURG STATE: OH ZIP: 43068 BUSINESS PHONE: 6145776500 MAIL ADDRESS: STREET 1: FOUR LIMITED PARKWAY EAST CITY: COLUMBUS STATE: OH ZIP: 43068 10-Q 1 ABERCROMBIE & FITCH CO. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission file number 1-12107 ABERCROMBIE & FITCH CO. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 31-1469076 - - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Four Limited Parkway East, Reynoldsburg, OH 43068 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 577-6500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Common Stock Outstanding at December 1, 1998 ------------------------ ------------------------------------ $.01 Par Value 51,401,826 Shares 2 ABERCROMBIE & FITCH CO. TABLE OF CONTENTS
Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income Thirteen and Thirty-nine Weeks Ended October 31, 1998 and November 1, 1997..................3 Consolidated Balance Sheets October 31, 1998 and January 31, 1998..................4 Consolidated Statements of Cash Flows Thirty-nine Weeks Ended October 31, 1998 and November 1, 1997..................5 Notes to Consolidated Financial Statements......................6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.........11 Part II. Other Information Item 1. Legal Proceedings.........................................18 Item 6. Exhibits and Reports on Form 8-K..........................18
2 3 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ABERCROMBIE & FITCH CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) (Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------------- -------------------------- October 31, November 1, October 31, November 1, 1998 1997 1998 1997 ---------- ----------- ---------- ------------ NET SALES $ 229,869 $148,516 $ 511,226 $309,472 Cost of Goods Sold, Occupancy and Buying Costs 140,425 95,526 317,377 204,755 --------- -------- --------- -------- GROSS INCOME 89,444 52,990 193,849 104,717 General, Administrative and Store Operating Expenses 48,661 34,581 125,629 79,738 --------- -------- --------- -------- OPERATING INCOME 40,783 18,409 68,220 24,979 Interest (Income)/Expense, Net (780) 1,076 (1,519) 3,278 --------- -------- --------- -------- INCOME BEFORE INCOME TAXES 41,563 17,333 69,739 21,701 Provision for Income Taxes 16,620 6,930 27,890 8,680 --------- -------- --------- -------- NET INCOME $ 24,943 $ 10,403 $ 41,849 $ 13,021 ========= ======== ========= ======== NET INCOME PER SHARE: Basic $ .48 $ .20 $ .81 $ .26 ========= ======== ========= ======== Diluted $ .47 $ .20 $ .79 $ .25 ========= ======== ========= ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 51,509 51,007 51,450 51,012 ========= ======== ========= ======== Diluted 53,046 51,594 52,879 51,328 ========= ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 ABERCROMBIE & FITCH CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands)
October 31, January 31, 1998 1998 ------------ ----------- (Unaudited) ASSETS CURRENT ASSETS: Cash & Equivalents $ 74,728 $ 42,667 Accounts Receivable 2,675 1,695 Inventories 75,340 33,927 Store Supplies 5,815 5,592 Intercompany Receivable -- 23,785 Other 693 1,296 --------- --------- TOTAL CURRENT ASSETS 159,251 108,962 PROPERTY AND EQUIPMENT, NET 74,991 70,517 DEFERRED INCOME TAXES 3,792 3,759 OTHER ASSETS 668 -- --------- --------- TOTAL ASSETS $ 238,702 $ 183,238 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $ 38,574 $ 15,968 Accrued Expenses 61,966 35,143 Income Taxes Payable 4,986 15,851 --------- --------- TOTAL CURRENT LIABILITIES 105,526 66,962 LONG-TERM DEBT -- 50,000 OTHER LONG-TERM LIABILITIES 17,125 7,501 SHAREHOLDERS' EQUITY: Common Stock 517 511 Paid-In Capital 143,933 117,972 Retained Deficit (17,082) (58,931) --------- --------- 127,368 59,552 Less: Treasury Stock, at Average Cost (11,317) (777) --------- --------- TOTAL SHAREHOLDERS' EQUITY 116,051 58,775 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 238,702 $ 183,238 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4 5 ABERCROMBIE & FITCH CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) (Unaudited)
Thirty-nine Weeks Ended -------------------------- October 31, November 1, 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 41,849 $ 13,021 Impact of Other Operating Activities on Cash Flows: Depreciation and Amortization 14,603 11,764 Non-Cash Charge for Deferred Compensation 8,905 4,258 Changes in Assets and Liabilities: Inventories (41,413) (20,640) Accounts Payable and Accrued Expenses 49,429 24,874 Income Taxes (10,898) (3,520) Other Assets and Liabilities 1,367 (4,409) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 63,842 25,348 -------- -------- CASH USED FOR INVESTING ACTIVITIES Capital Expenditures (20,993) (19,892) -------- -------- FINANCING ACTIVITIES: Issuance of Common Stock 25,875 -- Settlement of Intercompany Balance, Net 23,785 -- Stock Options and Other 792 -- Decrease in Intercompany Balance -- (3,976) Other Equity Changes -- (802) Purchase of Treasury Stock (11,240) -- Repayment of Long-Term Debt (50,000) -- -------- -------- NET CASH USED FOR FINANCING ACTIVITIES (10,788) (4,778) -------- -------- NET INCREASE IN CASH AND EQUIVALENTS 32,061 678 Cash and Equivalents, Beginning of Year 42,667 1,945 -------- -------- CASH AND EQUIVALENTS, END OF PERIOD $ 74,728 $ 2,623 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 ABERCROMBIE & FITCH CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Abercrombie & Fitch Co. (the "Company") is a specialty retailer of high quality, casual apparel for men and women with an active, youthful lifestyle. The consolidated financial statements include the accounts of the Company and all significant subsidiaries which are more than 50 percent owned and controlled. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements as of October 31, 1998 and for the thirteen and thirty-nine week periods ended October 31, 1998 and November 1, 1997 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's 1997 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year. The consolidated financial statements as of October 31, 1998, and for the thirteen and thirty-nine week periods ended October 31, 1998 and November 1, 1997 included herein have been reviewed by the independent accounting firm of PricewaterhouseCoopers LLP and the report of such firm follows the notes to consolidated financial statements. 2. ADOPTION OF ACCOUNTING STANDARDS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires that certain external costs and internal payroll and payroll related costs be capitalized during the application development stage of a software development project and amortized over the software's useful life. The Company will adopt the SOP in the first quarter of 1999. The Company does not anticipate the adoption of this SOP will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities," was issued in April 1998. This SOP requires that entities expense start-up costs and organization costs as they are incurred. This SOP is effective in the first quarter of 1999. The Company 6 7 currently expenses all start-up costs and does not anticipate an impact on the Company's financial condition related to this SOP. 3. CONSUMMATION OF EXCHANGE OFFER On May 19, 1998, The Limited, Inc. ("The Limited") completed a tax-free exchange offer to establish the Company as an independent company. The Limited accepted 47,075,052 shares of its common stock that were exchanged at a ratio of .86 of a share of Abercrombie & Fitch stock for each Limited share accepted for exchange. In addition, on June 1, 1998, The Limited effected a pro rata spin-off to its shareholders of its remaining 3,115,455 Abercrombie & Fitch shares. Limited shareholders of record at the close of trading on May 29, 1998 received .013673 of a share of Abercrombie & Fitch stock for each Limited share owned at that time. 4. EARNINGS PER SHARE Weighted Average Common Shares Outstanding (thousands):
Thirteen Weeks Ended ------------------------------ October 31, November 1, 1998 1997 ------------ ----------- Common shares issued 51,650 51,050 Treasury shares (141) (43) --------- --------- Basic shares 51,509 51,007 Dilutive effect of stock options and restricted shares 1,537 587 --------- --------- Diluted shares 53,046 51,594 ========= ========= Thirty-nine Weeks Ended ------------------------------ October 31, November 1, 1998 1997 ----------- ----------- Common shares issued 51,511 51,050 Treasury shares (61) (38) -------- --------- Basic shares 51,450 51,012 Dilutive effect of stock options and restricted shares 1,429 316 -------- --------- Diluted shares 52,879 51,328 ======== =========
5. INVENTORIES The fiscal year of the Company and its subsidiaries is comprised of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Valuation of finished goods inventories is based principally upon the lower of average cost or market determined on a first-in, first-out basis utilizing the retail method. 7 8 Inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns and shrinkage estimates for the total selling season. 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of (thousands):
October 31, January 31, 1998 1998 --------------- --------------- Property and equipment, at cost $131,708 $124,000 Accumulated depreciation and amortization (56,717) (53,483) ---------- ---------- Property and equipment, net $ 74,991 $ 70,517 ========== ==========
7. INCOME TAXES The Company was included in The Limited's consolidated federal and certain state income tax groups for income tax reporting purposes through the completion of the split-off. Under this arrangement, the Company is responsible for its proportionate share of income taxes calculated upon its federal taxable income at a current estimate of the Company's annual effective tax rate. Income taxes paid during the thirty-nine weeks ended October 31, 1998 and November 1, 1997 approximated $41.1 million and $12.2 million respectively. 8. LONG-TERM DEBT The Company entered into a $150 million syndicated unsecured credit agreement (the "Agreement"), on April 30, 1998 (the "Effective Date"). Borrowings outstanding under the Agreement are due April 30, 2003. The Agreement has several borrowing options, including interest rates that are based on the bank agent's "Alternate Base Rate", a LIBO Rate or a rate submitted under a bidding process. Facility fees payable under the Agreement are based on the Company's ratio (the "leverage ratio") of the sum of total debt plus 800% of forward minimum rent commitments to trailing four-quarters EBITDAR and currently accrues at .275% of the committed amount per annum. The Agreement contains limitations on debt, liens, restricted payments (including dividends), mergers and acquisitions, sale-leaseback transactions, investments, acquisitions, hedging transactions, and transactions with affiliates and financial covenants requiring a minimum ratio of EBITDAR to interest expense and minimum rent and a maximum leverage ratio. No amounts were outstanding under the Agreement at October 31, 1998. Long-term debt at January 31, 1998 consisted of a 7.80% unsecured note in the amount of $50 million that represented the Company's proportionate share of certain long-term debt of The Limited. The interest rate and maturity of the note paralleled that of corresponding debt of The Limited. 8 9 During the first quarter of 1998, the Company repaid the $50 million long-term note owed to The Limited, Inc. by issuing 600,000 shares of Class A common stock at a price of $43.125 per share and paid $24,125,000 in cash. 9. RELATIONSHIP WITH THE LIMITED Subsequent to the exchange offer, The Limited continues to provide various services to the Company including, but not limited to, information technology, tax, store planning/design, transportation and import and shipping services. The cost of these services generally is equal to The Limited's cost in providing the relevant services plus 5% of such costs. The Limited will cease to provide a substantial majority of these services on May 19, 1999 (the first anniversary of the closing of the exchange offer establishing the Company as an independent company). Prior to the completion of the exchange offer, cash activity was provided through The Limited's centralized cash management systems and was reflected in the Company's intercompany account. On May 19, 1998, all intercompany balances were settled. 9 10 REPORT OF INDEPENDENT ACCOUNTANTS To the Audit Committee of The Board of Directors of Abercrombie & Fitch Co. We have reviewed the condensed consolidated balance sheet of Abercrombie & Fitch Co. and Subsidiaries (the Company) at October 31, 1998, and the related condensed consolidated statements of income and cash flows for the thirteen-week and thirty-nine-week periods ended October 31, 1998 and November 1, 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of January 31, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 20, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Columbus, Ohio November 10, 1998 10 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS During the third quarter of 1998, net sales increased 55% to $229.9 million from $148.5 million a year ago. Operating income improved to $40.8 million in the third quarter of 1998 from $18.4 million in the third quarter of 1997. Earnings per diluted share were $.47 in the third quarter of 1998 compared to $.20 a year ago. Year-to-date earnings per diluted share were $.79 in 1998 compared to $.25 in 1997. Financial Summary - - ----------------- The following summarized financial and statistical data compares the thirteen and thirty-nine week periods ended October 31, 1998 to the comparable 1997 periods:
THIRD QUARTER YEAR - to - DATE -------------------------------- ----------------------------- 1998 1997 CHANGE 1998 1997 CHANGE -------- -------- -------- -------- ------- -------- Increase in comparable store 35% 25% 41% 19% sales Retail sales increase 20% 44% 24% 39% attributable to new and remodeled stores Retail sales per average selling $ 174 $ 130 34% $ 395 $ 283 40% square foot Retail sales per average store $1,301 $1,031 26% $3,017 $2,243 35% (thousands) Average store size at end of 7,418 7,906 (6%) quarter (selling square feet) Selling square feet at end of 1,313 1,178 11% quarter (thousands) Number of stores: Beginning of period 171 139 156 127 Opened 6 10 23 22 Closed -- -- (2) -- ------ ------ ----- ------ End of period 177 149 177 149 ====== ====== ===== ======
11 12 Net Sales - - --------- Net sales for the third quarter of 1998 increased 55% to $229.9 million from $148.5 million in 1997. The increase was due to a comparable store sales increase of 35%, driven primarily by significantly higher transactions per store as compared to the third quarter of 1997. Comparable store sales increases were strong in both the men's and women's businesses with strong performances in tops, bottoms and accessories. Additionally, the A&F Quarterly accounted for 1.5% of net sales in the third quarter of 1998. Year-to-date net sales were $511.2 million, an increase of 65%, from $309.5 million for the same period in 1997. Sales growth resulted from a comparable store sales increase of 41% and the net addition of 28 new stores. Net retail sales per average selling square foot for the Company increased 40%, principally from an increase in the number of transactions per store. The A&F Quarterly represented 1.7% of 1998 year-to-date net sales. Gross Income - - ------------ Gross income, expressed as a percentage of net sales, increased to 38.9% for the third quarter of 1998 from 35.7% for the same period in 1997. The increase was attributable to significant leverage in buying and occupancy costs, as a percentage of net sales, associated with increased comparable store sales as well as improved merchandise margins (representing gross income before the deduction of buying and occupancy costs). The 1998 year-to-date gross income, expressed as a percentage of net sales, increased to 37.9% from 33.8% for the comparable period in 1997. Merchandise margins increased as a percentage of net sales due to higher initial markups (IMU) while buying and occupancy costs declined due to leverage achieved from comparable store sales increases. General, Administrative and Store Operating Expenses - - ---------------------------------------------------- General, administrative and store operating expenses, expressed as a percentage of net sales, were 21.2% in the third quarter of 1998 as compared to 23.3% for the same period in 1997. The improvement resulted primarily from expense leverage associated with the strong comparable store sales growth. General, administrative and store operating expenses, expressed as a percentage of net sales, were 24.6% and 25.8% for the year-to-date periods in 1998 and 1997, respectively. The improvement resulted from management's continued emphasis on expense control and the favorable leveraging of expenses, primarily store expenses, over higher sales volume. Operating Income - - ---------------- Third quarter and year-to-date operating income, expressed as a percentage of net sales, were 17.7% and 13.3%, in 1998, up from 12.4% and 8.1% for the comparable periods in 1997. The improvement in operating income in these periods is a result of higher gross income and lower general, administrative and store operating expenses, expressed as a percentage of net sales. 12 13 Interest Expense - - ---------------- Third quarter and year-to-date 1998 net interest income was $780 thousand and $1,519 thousand as compared with net interest expense of $1.1 million and $3.3 million for the comparable periods last year. Net interest income in 1998 was primarily from short-term investments. Interest expense in 1997 consisted of $975 thousand per quarter on the $50 million long-term debt that was repaid during the first quarter of 1998 in addition to interest on short-term borrowings. FINANCIAL CONDITION Liquidity and Capital Resources - - ------------------------------- Cash provided from operating activities and the Company's $150 million credit agreement provide the resources to support operations, including projected growth, seasonal requirements and capital expenditures. A summary of the Company's working capital position and long-term ongoing capitalization follows (thousands):
October 31, January 31, 1998 1998 ----------- ---------- Working capital $ 53,725 $ 42,000 ======== ======== Capitalization: Long-term debt -- $ 50,000 Shareholders' equity $116,051 58,775 -------- -------- Total capitalization $116,051 $108,775 ======== ========
Net cash provided by operating activities totaled $63.8 million for the thirty-nine weeks ended October 31, 1998 versus $25.3 million in the comparable period in 1997. The improvement in cash provided by operating activities was largely due to increases in net income and accounts payable and accrued expenses. Cash requirements for inventory increased over the period, supporting the 65% sales growth from a year ago. Correspondingly, accounts payable and accrued expenses increased, supporting the growth in inventories and sales. Abercrombie & Fitch's operations are seasonal in nature and typically peak during the back-to-school and Christmas selling periods. Accordingly, cash requirements for inventory expenditures are highest during these periods. Investing activities were all for capital expenditures, which are primarily for new stores. In 1998, financing activities consisted primarily of the repayment of $50 million long-term debt to The Limited. This occurred through the issuance of 600,000 shares of Class A common stock to The Limited with the remaining balance paid with cash from operations. Additionally, 13 14 settlement of the intercompany balance between the Company and The Limited occurred as of the split-off date. On July 16, 1998, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Company's common stock for general corporate purposes. During the third quarter, the Company repurchased 245 thousand shares of common stock. Capital Expenditures - - -------------------- Capital expenditures, primarily for new and remodeled stores, totaled $21.0 million for the thirty-nine weeks ended October 31, 1998 compared to $19.9 million for the comparable period of 1997. During the third quarter, the Company opened four Abercrombie & Fitch stores and two "abercrombie" kids stores. The Company anticipates spending $40-$43 million in 1998 for capital expenditures, of which $33-$35 million will be for new stores, remodeling and/or expansion of existing stores and related improvements. The Company intends to add approximately 200,000 net selling square feet in 1998, which will represent a 16% increase over year-end 1997. It is anticipated that the increase will result from the addition of 30 new Abercrombie & Fitch stores and the remodeling and/or expansion of three stores. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for Abercrombie & Fitch stores opened in 1998 will approximate $710,000 per store, after giving effect to landlord allowances. In addition, inventory purchases are expected to average approximately $275,000 per store. Additionally, the Company plans to open 14 "abercrombie" stores by the end of fiscal year 1998. The planned store size is approximately 3,300 selling square feet and the average cost for leasehold improvements and furniture and fixtures will be approximately $530,000. The Company expects capital expenditures will be funded principally by net cash provided by operating activities. Information Systems and "Year 2000" Compliance; Year 2000 Readiness Disclosures - - ------------------------------------------------------------------------------- Potential Year 2000 issues will arise primarily from computer programs which only have a two-digit date field, rather than four, to define the applicable year of business transactions. Because such computer programs will be unable to properly interpret dates beyond the year 1999, a systems failure or other computer errors may ensue. Abercrombie & Fitch relies on computer-based technology and utilizes a variety of proprietary and third party hardware and software. The Company's critical information technology (IT) functions include point-of-sale equipment, merchandise and non-merchandise procurement, and business and accounting management. In order to address the Year 2000 issue for Abercrombie & Fitch, the Company has developed a Year 2000 plan that focuses on three areas; IT systems, facilities and 14 15 distribution equipment, and vendor relations. The implementation includes five stages, including (i) awareness, (ii) assessment, (iii) renovation, (iv) validation, and (v) implementation. In addition to renovation of legacy systems, new financial software packages are being implemented. The Company is using both internal and external resources to complete its Year 2000 initiatives. Year 2000 remediation of existing systems and implementation of new systems is expected to be complete by the end of fiscal year 1998. The Company expects to be fully compliant with Year 2000, including validation and implementation, by the end of the current fiscal year. The Company procures its merchandise and supplies from a vast network of vendors located both within and outside the United States. The Company is in the process of identifying key vendors and suppliers and will be making inquiries prior to the end of fiscal year 1998 to determine their Year 2000 compliance status. The Company is looking to obtain appropriate assurances from these vendors regarding their Year 2000 compliance status. The Company also utilizes various facilities, distribution equipment, and transportation and logistic services from The Limited, Inc. and is in the process of assessing their Year 2000 compliance status. The Company believes that the most likely worst case scenario is that there will be some minor disruption of systems that will affect the supply and distribution channels on a short-term basis rather than impacting the Company in the long-term. The Company is in the early stages of developing contingency plans, such as alternative sourcing, and identifying the necessary actions that would need to be taken if critical systems or service providers were not Year 2000 compliant. Given the uncertainty as to the exact nature and extent of problems that may arise and the incomplete status of the Company's inquiries to its key vendors, the Company's contingency planning will focus on minimizing any significant disruptions by committing resources to respond to specific problems that may arise. The Company expects to finalize these plans, where needed, by the end of the first quarter of 1999. At the present time, the Company is not aware of any Year 2000 issues that it expects might materially affect its products, services, competitive position or financial performance. However, despite the Company's significant efforts to make its systems and facilities Year 2000 compliant, the ability of third party service providers, vendors and certain other third parties, including governmental entities and utility companies to be Year 2000 compliant is beyond the Company's control. Accordingly, the Company can give no assurances that the failure of systems of other companies on which the Company's systems rely or that the failure of key suppliers or other third parties to comply with Year 2000 requirements will not have a material adverse effect on the Company. Total expenditures related to remediation, testing, conversion, replacement and upgrading system applications are expected to range from $3.7 to $4.0 million. Of the total, approximately $1.0 million will be expenses associated with remediation and testing of existing systems. Total incremental expenses, including depreciation and amortization of new package systems, remediation to bring current systems into compliance and writing off legacy systems are not expected to have a material impact on the Company's financial condition in any year during the conversion process through 2000. As of October 31, 1998, the Company has incurred expenses of approximately $3.6 million, consisting of internal staff costs as well as outside consulting and other expenditures. In 1998, a significant amount of total internal staff resources were directed towards Year 2000 projects. In 1999, internal resources and costs are not expected to change significantly but will be redirected from Year 2000 projects to other Company initiatives. 15 16 Relationship with The Limited - - ----------------------------- Subsequent to the split-off, the Company and The Limited entered into service agreements which include among other things, tax, information technology and store design and construction. These agreements are generally for a term of one year. Service agreements were also entered into for the continued use by the Company of its distribution and home office space and transportation and logistic services. These agreements are generally for a term of three years. Costs for these services will generally be the costs and expenses incurred by The Limited plus five percent of such amounts. Upon expiration of these agreements with The Limited, the Company may bring certain services in-house, contract with other outside parties or take other actions the Company deems appropriate at that time. The Company does not anticipate that costs associated with these service agreements or costs to be incurred upon their expiration will have a material adverse impact on its financial condition. Adoption of Accounting Standards - - -------------------------------- In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires that certain external costs, internal payroll and payroll related costs be capitalized during the application development stage of a software development project and amortized over the software's useful life. The Company will adopt the SOP in the first quarter of 1999. The Company does not anticipate the adoption of this SOP will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities," was issued in April 1998. This SOP requires that entities expense start-up costs and organization costs as they are incurred. This SOP is effective in the first quarter of 1999. The Company currently expenses all start-up costs and does not anticipate an impact on the Company's financial condition related to this SOP. 16 17 Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 - - -------------------------------------------------------------------------------- The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Report or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors. The foregoing statements as to costs and dates relating to the Year 2000 effort are forward looking and are based on the Company's best estimates that may be updated as additional information becomes available. The Company's forward looking statements are also based on assumptions about many important factors, including the technical skills of employees and independent contractors, the representations and preparedness of third parties, the failure of vendors to deliver merchandise or perform services required by the Company and the collateral effects of the Year 2000 issues on the Company's business partners and customers. While the Company believes its assumptions are reasonable, it cautions that it is impossible to predict the impact of certain factors that could cause actual costs or timetables to differ materially from the expected results. In addition to Year 2000 issues, the following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results and could cause actual results for 1998 and beyond to differ materially from those expressed or implied in any such forward-looking statements: changes in consumer spending patterns, consumer preferences and overall economic conditions, the impact of competition and pricing, changes in weather patterns, political stability, currency and exchange risks and changes in existing or potential duties, tariffs or quotas, availability of suitable store locations at appropriate terms, ability to develop new merchandise and ability to hire and train associates. 17 18 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is a defendant in a variety of lawsuits arising in the ordinary course of business. On November 13, 1997, the United States District Court for the Southern District of Ohio, Eastern Division, dismissed with prejudice an amended complaint previously transferred to that court by the United States District Court for the Central District of California. The amended complaint, which had been filed against the Company, The Limited, and certain of The Limited's other subsidiaries by the American Textile Manufacturers Institute ("ATMI"), a textile industry trade association, alleged that the defendants violated the federal False Claims Act by submitting false country of origin records to the U.S. Customs Service. On November 26, 1997, ATMI served a motion to alter or amend judgment and a motion to disqualify the presiding judge and to vacate the order of dismissal. The motion to disqualify was denied on December 22, 1997, but as a matter of his personal discretion, the presiding judge elected to recuse himself from further proceedings and this matter was transferred to a judge of the United States District Court for the Southern District of Ohio, Western Division. On May 21, 1998, this judge denied all pending motions seeking to alter, amend or vacate the judgment that had been entered in favor of the Company. On June 5, 1998, ATMI filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit. On June 2, 1998, Abercrombie & Fitch filed suit against American Eagle Outfitters alleging an intentional and systematic copying of the Abercrombie & Fitch Brand, its images and business practices, including the design and look of the Company's merchandise, marketing and catalogue/magazine. The lawsuit was filed in Federal District Court in Columbus, Ohio and seeks to enjoin American Eagle's practices, recover lost profits and obtain punitive damages. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, the foregoing proceedings are not expected to have a material adverse effect on the Company's financial position or results of operations. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -------- 3. Articles of Incorporation and Bylaws 3.1 Amended and Restated Certificate of Incorporation of the Company incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 3.2 Bylaws of the Company incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 4. Instruments Defining the Rights of Security Holders 4.1 Specimen Certificate of Class A Common Stock of the Company incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-8231) (the "Form S-1"). 18 19 4.2 Credit Agreement dated as of April 30, 1998 among Abercrombie & Fitch Stores, Inc., as Borrower, the Company, as Guarantor, the Lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, and Chase Securities, Inc., as Arranger, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 30, 1998. 4.3 Rights Agreement dated as of July 16, 1998 between Abercrombie & Fitch Co. and First Chicago Trust Company of New York, incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-A dated July 21, 1998. 10. Material Contracts 10.1 Abercrombie & Fitch Co. Incentive Compensation Performance Plan incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 14, 1997. 10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1998. 10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors incorporated by reference to Exhibit B to the Company's Proxy Statement dated May 29, 1998. 10.4 Employment Agreement by and between the Company and Michael S. Jeffries dated as of May 13, 1997 with exhibits and amendment incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 1, 1997. 10.5 Employment Agreement by and between the Company and Michele Donnan-Martin dated December 5, 1997 incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-4 (File No. 333-46423) (the "Form S-4"). 10.6 Employment Agreement by and between the Company and Seth R. Johnson dated December 5, 1997 incorporated by reference to Exhibit 10.10 to the Form S-4. 10.7 Tax Disaffiliation Agreement dated as of May 19, 1998 between The Limited, Inc. and the Company incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. 10.8 Amended and Restated Services Agreement dated as of May 19, 1998 between The Limited, Inc. and the Company incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. 10.9 Shared Facilities Agreement dated September 27, 1996 by and between the Company and The Limited, Inc. incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 10.10 Sublease Agreement by and between Victoria's Secret Stores, Inc. and the Company, dated June 1, 1995 (the "Sublease Agreement") incorporated by reference to Exhibit 10.3 to the Form S-1. 19 20 10.11 Amendment No. 1 to the Sublease Agreement dated as of May 19, 1998 incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. 15. Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Independent Accountants' Report 27. Financial Data Schedule (b) Reports on Form 8-K ------------------- None 19 21 SIGNATURE 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. ABERCROMBIE & FITCH CO. (Registrant) By /S/ Seth R. Johnson ------------------------- Seth R. Johnson, Vice President and Chief Financial Officer* Date: December 11, 1998 - - ---------------- * Mr. Johnson is the principal financial officer and has been duly authorized to sign on behalf of the Registrant. 20 22 EXHIBIT INDEX Exhibit No. Document ---------- ---------------------- 15 Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Independent Accountants' Report. 27 Financial Data Schedule. EX-15 2 EXHIBIT 15 1 Exhibit 15 Securities and Exchange Commission 450 5th Street, N.W. Judiciary Plaza Washington, D.C. 20549 We are aware that our report dated November 10, 1998, on our review of the interim consolidated financial information of Abercrombie & Fitch Co. and Subsidiaries for the thirteen-week and thirty-nine-week periods ended October 31, 1998 and included in this Form 10-Q is incorporated by reference in the Company's registration statements on Form S-8, Registration Nos. 333-15941, 333-15943, 333-15945, 333-60189 and 333-60203. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statement prepared or certified by us within the meaning of Sections 7 and 11 of this Act. PricewaterhouseCoopers LLP Columbus, Ohio December 11, 1998 EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OF ABERCROMBIE & FITCH CO. AND SUBSIDIARIES FOR THE QUARTER ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-30-1999 FEB-01-1998 OCT-31-1998 74,728 0 2,675 0 75,340 159,251 131,708 (56,717) 238,702 105,526 0 0 0 517 115,534 238,702 229,869 229,869 140,425 140,425 48,661 0 (780) 41,563 16,620 24,943 0 0 0 24,943 .48 .47
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