-----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, SyqOEx7dr1Fz9d5jOMssyAfQ1CA2sWqKyX6a5mNYrmtnzLZAYxLkyMEDSViwsqwN uDoyjaMU+df9OsExB4NbFA== 0000950152-99-005262.txt : 19990615 0000950152-99-005262.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950152-99-005262 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990501 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABERCROMBIE & FITCH CO /DE/ CENTRAL INDEX KEY: 0001018840 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [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: 99645871 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. 10-Q 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 May 1, 1999 ----------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------ --------------------- Commission file number 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 June 1, 1999 $.01 Par Value 51,629,831 Shares -------------------- --------------------------- 2 ABERCROMBIE & FITCH CO. TABLE OF CONTENTS Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income Thirteen Weeks Ended May 1, 1999 and May 2, 1998............................. 3 Consolidated Balance Sheets May 1, 1999 and January 30, 1999........................ 4 Consolidated Statements of Cash Flows Thirteen Weeks Ended May 1, 1999 and May 2, 1998............................. 5 Notes to Consolidated Financial Statements....................... 6 Report of Independent Accountants................................ 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........... 10 Part II. Other Information Item 1. Legal Proceedings........................................... 16 Item 4. Submission of Matters to a Vote of Security Holders......... 16 Item 6. Exhibits and Reports on Form 8-K............................ 17 2 3 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ABERCROMBIE & FITCH CO. CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) (Unaudited)
Thirteen Weeks Ended -------------------- May 1, May 2, 1999 1998 -------- -------- NET SALES $188,294 $134,230 Cost of Goods Sold, Occupancy and Buying Costs 116,390 85,019 -------- -------- GROSS INCOME 71,904 49,211 General, Administrative and Store Operating Expenses 52,955 38,872 -------- -------- OPERATING INCOME 18,949 10,339 Interest Income, Net (1,887) (169) -------- -------- INCOME BEFORE INCOME TAXES 20,836 10,508 Provision for Income Taxes 8,330 4,200 -------- -------- NET INCOME $ 12,506 $ 6,308 ======== ======== NET INCOME PER SHARE: Basic $ 0.24 $ 0.12 Diluted $ 0.23 $ 0.12 ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 51,597 51,207 Diluted 54,336 52,476 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 ABERCROMBIE & FITCH CO. CONSOLIDATED BALANCE SHEETS (Thousands)
May 1, January 30, 1999 1999 ------------- ----------- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash and Equivalents $134,735 $163,564 Accounts Receivable 3,792 4,101 Inventories 59,581 43,992 Store Supplies 6,369 5,887 Other 705 691 -------- -------- TOTAL CURRENT ASSETS 205,182 218,235 PROPERTY AND EQUIPMENT, NET 87,652 89,558 DEFERRED INCOME TAXES 10,737 10,737 OTHER ASSETS 593 631 -------- -------- TOTAL ASSETS $304,164 $319,161 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable $ 24,975 $ 24,759 Accrued Expenses 62,421 63,882 Income Taxes Payable 10,813 33,587 -------- -------- TOTAL CURRENT LIABILITIES 98,209 122,228 LONG-TERM DEBT -- -- OTHER LONG-TERM LIABILITIES 11,339 10,828 SHAREHOLDERS' EQUITY: Common Stock 517 517 Paid-In Capital 138,852 144,142 Retained Earnings 55,637 43,131 -------- -------- 195,006 187,790 Less: Treasury Stock, at Average Cost (390) (1,685) -------- -------- TOTAL SHAREHOLDERS' EQUITY 194,616 186,105 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $304,164 $319,161 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 5 ABERCROMBIE & FITCH CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) (Unaudited)
Thirteen Weeks Ended ---------------------- May 1, May 2, 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 12,506 $ 6,308 Impact of Other Operating Activities on Cash Flows: Depreciation and Amortization 7,157 5,128 Noncash Charge for Deferred Compensation 1,772 3,801 Changes in Assets and Liabilities: Inventories (15,589) (2,780) Accounts Payable and Accrued Expenses (1,245) (774) Income Taxes (22,774) (14,480) Other Assets and Liabilities 194 1,021 -------- -------- NET CASH USED FOR OPERATING ACTIVITIES (17,979) (1,776) -------- -------- CASH USED FOR INVESTING ACTIVITIES Capital Expenditures (5,251) (4,341) -------- -------- FINANCING ACTIVITIES: Issuance of Common Stock -- 25,875 Decrease in Receivable from The Limited -- (10,235) Exercise of Stock Options and Other 2,941 481 Purchase of Treasury Stock (8,540) -- Repayment of Long-Term Debt -- (50,000) -------- -------- NET CASH USED FOR FINANCING ACTIVITIES (5,599) (33,879) -------- -------- NET DECREASE IN CASH AND EQUIVALENTS (28,829) (39,996) Cash and Equivalents, Beginning of Year 163,564 42,667 -------- -------- CASH AND EQUIVALENTS, END OF PERIOD $134,735 $ 2,671 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 ABERCROMBIE & FITCH CO. 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 and for the periods ended May 1, 1999 and May 2, 1998 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 1998 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 May 1, 1999 and for the thirteen week periods ended May 1, 1999 and May 2, 1998 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. EARNINGS PER SHARE Weighted Average Common Shares Outstanding (thousands):
Thirteen Weeks Ended -------------------- May 1, May 2, 1999 1998 ------- ------- Common shares issued 51,650 51,235 Treasury shares (53) (28) ------- ------- Basic shares 51,597 51,207 ------- ------- Dilutive effect of stock options and restricted shares 2,739 1,269 Diluted shares 54,336 52,476 ======= =======
6 7 3. 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. Inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns and shrinkage estimates for the total selling season. 4. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of (thousands):
May 1, January 30, 1999 1999 -------- -------- Property and equipment, at cost $157,868 $152,618 Accumulated depreciation and amortization (70,216) (63,060) -------- -------- Property and equipment, net $ 87,652 $ 89,558 ======== ========
5. INCOME TAXES For the current period, the provision for income taxes is based on the current estimate of the annual effective tax rate. During 1998 the Company was included in The Limited's consolidated federal and certain state income tax groups for income tax purposes. Under this arrangement, the Company was responsible for and paid to The Limited its proportionate share of income taxes calculated upon its federal taxable income at the estimated annual effective tax rate. Income taxes paid during the thirteen weeks ended May 1, 1999 and May 2, 1998 approximated $30.8 million and $18.1 million. 6. 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. It also contains 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 May 1, 1999. On April 15, 1998, the Company repaid $50 million of 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. 7 8 7. RELATED PARTY TRANSACTIONS Effective May 19, 1998, The Limited completed a tax-free exchange offer to establish the Company as an independent company. Subsequent to the exchange offer, the Company and The Limited entered into various service agreements for terms ranging from one to three years. By the end of April 1999, the Company had hired associates with the appropriate expertise or contracted with outside parties to replace those services which expired in May 1999. 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. The cost of these services generally is equal to The Limited's cost in providing the relevant services plus 5% of such costs. 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. Shahid & Company, Inc. has provided advertising and design services for the Company since 1995. Sam N. Shahid Jr., who serves on the Board of Directors for the Company, has been President and Creative Director of Shahid & Company, Inc. since 1993. Fees paid to Shahid & Company, Inc. for services provided during the first quarter of 1999 were approximately $.3 million. 8. SUBSEQUENT EVENT The Board of Directors declared a two-for-one stock split on the Company's Class A common stock, payable June 15, 1999 to shareholders of record at the close of business on May 25, 1999. The pro forma effect on the Company's earnings per share and balance sheet follows: As reported Pro forma ----------- --------- Basic earnings per share for the period ended May 1, 1999 $0.24 $0.12 Earnings per diluted share for the period ended May 1, 1999 $0.23 $0.12 Basic earnings per share for the period ended May 2, 1998 $0.12 $0.06 Earnings per diluted share for the period ended May 2, 1998 $0.12 $0.06 Common stock as of May 1, 1999 (thousands) $517 $1,033 Paid-in capital as of May 1, 1999 (thousands) $138,852 $138,336 8 9 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 May 1, 1999, and the related condensed consolidated statements of income and cash flows for the thirteen-weeks ended May 1, 1999 and May 2, 1998. 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 30, 1999, 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 16, 1999, 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 30, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Columbus, Ohio May 11, 1999 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS During the first quarter of 1999, net sales increased 40% to $188.3 million from $134.2 million a year ago. Operating income improved to $18.9 million in the first quarter of 1999 from $10.3 million in the first quarter of 1998. Earnings per diluted share were $.23 in the first quarter of 1999 compared to $.12 a year ago. Financial Summary - ----------------- The following summarized financial and statistical data compares the thirteen week period ended May 1, 1999 to the comparable 1998 period:
1999 1998 % CHANGE ------- ------- ---------- Increase in comparable store sales 22% 48% Retail sales increase attributable to new and remodeled stores 18% 33% Retail sales per average gross square foot $ 101 $ 86 17% Retail sales per average store (thousands) $ 928 $ 838 11% Average store size at end of 9,155 9,709 (6%) quarter (gross square feet) Gross square feet at end of quarter (thousands) 1,831 1,534 19% NUMBER OF STORES: Beginning of year 196 156 Opened 4 3 Closed -- (1) ------ ------ End of period 200 158 ====== ======
Net Sales - --------- Net sales for the first quarter of 1999 increased 40% to $188.3 million from $134.2 million in 1998. The increase was due to a comparable store sales increase of 22%, driven primarily by significantly higher transactions per store as compared to the first quarter of 1998. Comparable store sales increases were strong in both the men's and women's businesses with strong performances in knits and shorts. The A&F Quarterly, a catalogue/magazine, accounted for 2.4% of net sales in the first quarter of 1999 as compared to 2.0% last year. 10 11 Gross Income - ------------ Gross income, expressed as a percentage of net sales, increased to 38.2% during the first quarter of 1999 from 36.7% for the same period in 1998. The increase was attributable to leverage in occupancy costs due to the increase in comparable store sales. Merchandise margins (representing gross income before the deduction of buying and occupancy costs) declined slightly due to a planned increase in the markdown rate, expressed as a percentage of net sales, over last year. General, Administrative and Store Operating Expenses - ---------------------------------------------------- General, administrative and store operating expenses, expressed as a percentage of net sales, were 28.1% in the first quarter of 1999 and 29.0% for the comparable period in 1998. The improvement resulted primarily from the favorable leveraging of fixed expenses due to higher sales volume. Operating Income - ---------------- First quarter operating income, expressed as a percentage of net sales, was 10.1% in 1999, up from 7.7% for the comparable period in 1998. The improvement in operating income is a result of both higher gross income and lower general, administrative and store operating expenses, as a percentage of net sales. Interest Income/Expense - ----------------------- First quarter 1999 net interest income was $1.9 million as compared with net interest income of $169 thousand for the first quarter last year. Net interest income in 1999 was primarily from short-term investments. First quarter 1998 net interest income was primarily from short-term investments offset by interest expense on the $50 million long-term debt that was repaid during the first quarter of 1998. 11 12 FINANCIAL CONDITION Liquidity and Capital Resources - ------------------------------- Cash provided by operating activities and the Company's $150 million credit agreement provide the resources to support operations, including seasonal requirements and capital expenditures. A summary of the Company's working capital position and capitalization follows (thousands):
May 1, January 30, 1999 1999 -------- ---------- Working capital $106,973 $ 96,007 ======== ======== Capitalization: Long-term debt -- -- Shareholders' equity $194,616 $186,105 -------- -------- Total capitalization $194,616 $186,105 ======== ========
Net cash used for operating activities totaled $18.0 million for the thirteen weeks ended May 1, 1999 versus $1.8 million in the comparable period in 1998. Cash was provided primarily from the increase in net income. Cash requirements for inventory increased over the period, supporting the 40% sales growth and reflecting earlier deliveries of summer merchandise compared to last year. Additionally, cash used for income taxes increased due to the first quarter tax payments made on higher fourth quarter earnings. The Company'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 and remodeled stores. Financing activities in the first quarter of 1998 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. Pursuant to the previously authorized stock repurchase program, the Company repurchased 100,000 shares of the Company's common stock during the first quarter of 1999. Capital Expenditures - -------------------- Capital expenditures, primarily for new and remodeled stores, totaled $5.3 million for the thirteen weeks ended May 1, 1999 compared to $4.3 million for the comparable period of 1998. The Company anticipates spending $85 to $95 million in 1999 for capital expenditures, of which $45 to $50 million will be for new stores, remodeling and/or expansion of existing stores and related improvements. The balance of capital expenditures will chiefly be related to the construction of a new office and distribution center which is expected to be completed by mid-2001. The Company intends to add approximately 400,000 gross retail square feet in 1999, which will represent a 22% increase over year-end 1998. It is anticipated the increase will result from the 12 13 addition of approximately 36 new Abercrombie & Fitch stores, 20 "abercrombie" kids' stores and the remodeling and/or expansion of 11 stores. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for Abercrombie & Fitch stores opened in 1999 will approximate $710,000 per store, after giving effect to landlord allowances. In addition, inventory purchases are expected to average approximately $300,000 per store. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for "abercrombie" kids' stores opened in 1999 will approximate $450,000 per store, after giving effect to landlord allowances. In addition, inventory purchases are expected to average approximately $150,000 per store. The Company expects that substantially all future capital expenditures will be funded with cash from operations. In addition, the Company has available a $150 million credit agreement to support operations. 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. The Company 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, the Company has developed a Year 2000 plan that focuses on three areas: IT systems, facilities and distribution equipment and vendor relations. The plan 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, including validation and implementation, was substantially completed by the end of the first fiscal quarter. The Company procures its merchandise and supplies from a vast network of vendors located both within and outside the United States. The Company has identified key vendors and suppliers and made inquiries to determine their Year 2000 compliance status. The Company is currently assessing the responses from these vendors and suppliers and 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 and is in the process of assessing their Year 2000 compliance status. 13 14 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 process of developing contingency plans, such as alternative sourcing, and identifying the 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, the Company's contingency planning will focus on minimizing any significant disruptions by committing resources to respond to specific problems that may arise. 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 not expected to exceed $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 May 1, 1999, the Company has incurred expenses of approximately $3.8 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. Relationship with The Limited - ----------------------------- Effective May 19, 1998, The Limited completed a tax-free exchange offer to establish the Company as an independent company. Subsequent to the exchange offer, the Company and The Limited entered into various service agreements for terms ranging from one to three years. By the end of April 1999, the Company had hired associates with the appropriate expertise or contracted with outside parties to replace those services which expired in May 1999. 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. The cost of these services generally is equal to The Limited's cost in providing the relevant services plus 5% of such costs. 14 15 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 1999 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. 15 16 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is a defendant in 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 that had been filed against the Company by the American Textile Manufacturers Institute ("ATMI"), a textile industry trade association. The amended complaint 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 appealed to the United States Court of Appeals for the Sixth Circuit, where the matter remains pending. On June 2, 1998, the Company 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. American Eagle filed a motion for summary judgment in the lawsuit which the Company has opposed. The motion is pending before the District Court for decision. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 20, 1999, the Company held its annual meeting of shareholders at its corporate headquarters, Four Limited Parkway East, Reynoldsburg, Ohio. At such meeting, (i) Messrs. Russell M. Gertmenian and Sam N. Shahid, Jr. were elected to the Company's Board of Directors, each to serve for a three year term expiring in 2002 and (ii) amendments to the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan were approved. The votes on the foregoing matters are as follows: 16 17 (i) Elections of Messrs. Gertmenian and Shahid
For Withheld --- -------- Russell M. Gertmenian 39,864,217 5,895,423 Sam N. Shahid, Jr 40,587,711 5,171,929
(ii) Approval of the amendments to the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan
For Against Abstain --- ------- ------- 42,906,343 2,820,880 32,417
The following individuals continue to serve on the Board of Directors: Messrs. George Foos, Michael S. Jeffries, John W. Kessler, John A. Golden and Seth R. Johnson. 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 as filed with the Delaware Secretary of State on August 27, 1996, 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 Certificate of Designation of Series A Participating Cumulative Preferred Stock of the Company as filed with the Delaware Secretary of State on July 21, 1998, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended January 30, 1999. 3.3 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"). 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. 17 18 4.4 Amendment No. 1 to the Rights Agreement dated as of April 21, 1999 between Abercrombie & Fitch Co. and First Chicago Trust Company of New York, incorporated by reference to Exhibit 2 to the Company's Amendment No. 1 to Form 8-A dated April 23, 1999. 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, as amended through May 20, 1999, incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 22, 1999. 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. 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. 10.12 Employment Agreement by and between the Company and Charles W. Martin dated December 5, 1997 incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended January 30, 1999. 18 19 10.13 Description of Arrangement between Diane Chang and the Company incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended January 30, 1999. 10.14 Abercrombie & Fitch, Inc. Directors' Deferred Compensation Plan incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended January 30, 1999. 15. Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Report of Independent Accountants 27. Financial Data Schedule (b) Reports on Form 8-K. -------------------- None 19 20 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: June 14, 1999 - ---------- * Mr. Johnson is the principal financial officer and has been duly authorized to sign on behalf of the Registrant. 20 21 EXHIBIT INDEX ------------- Exhibit No. Document - ----------- -------- 15 Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Report of Independent Accountants. 27 Financial Data Schedule. EX-15 2 EXHIBIT 15 1 Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated May 11, 1999 on our review of the interim consolidated financial information of Abercrombie & Fitch Co. and Subsidiaries (the "Company") as of and for the thirteen-week period ended May 1, 1999 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 that Act. Very truly yours, /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Columbus, Ohio June 14, 1999 EX-27 3 EXHIBIT 27
5 This schedule contains summary financial information extracted from the Consolidated Financial Statements of Abercrombie & Fitch Co. for the quarter ended May 1, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS JAN-29-2000 JAN-31-1999 MAY-01-1999 134,735 0 3,792 0 59,581 205,182 157,868 70,216 304,164 98,209 0 0 0 517 194,099 304,164 188,294 188,294 116,390 116,390 52,955 0 (1,887) 20,836 8,330 12,506 0 0 0 12,506 0.24 0.23
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