-----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, EzuiYpsa3O9824fVcg/HnpKMmBx3bgIjSMqgcmjVRTMpOG5epSTL/z2gLcpgzsKO nr4GGwCxiIn6dxWUSjzVUA== 0000950109-98-002824.txt : 19990309 0000950109-98-002824.hdr.sgml : 19990309 ACCESSION NUMBER: 0000950109-98-002824 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980429 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-K SEC ACT: SEC FILE NUMBER: 001-12107 FILM NUMBER: 98604278 BUSINESS ADDRESS: STREET 1: FOUR LIMITED PARKWAY EAST CITY: REYNOLDSBURG STATE: OH ZIP: 43068 BUSINESS PHONE: 6144797101 MAIL ADDRESS: STREET 1: THREE LIMITED PARKWAY CITY: COLUMBUS STATE: OH ZIP: 43230 10-K 1 ABERCROMBIE & FITCH CO SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ___________ FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended January 31, 1998 ---------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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, P.O. Box 182168 Reynoldsburg, OH 43218 - - ----------------------------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 577-6500 -------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered ------------------- ----------------------------------------- Class A Common Stock, $.01 Par Value The New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. 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 and (2) has been subject to the filing requirements for the past 90 days. Yes X No _____ --------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X - Aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant as of April 17, 1998: $334,574,662. ------------ Number of shares outstanding of the registrant's Common Stock as of April 17, 1998: 8,025,779 shares of Class A common stock; 43,000,000 shares of Class B --------- common stock. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's proxy statement for the next Annual Meeting of Shareholders are incorporated by reference into Part III. PART I ITEM 1. BUSINESS. General. Abercrombie & Fitch Co., a Delaware corporation (the "Company"), is principally engaged in the purchase, distribution and sale of men's and women's casual apparel. The Company's retail activities are conducted under the Abercrombie & Fitch trade name through retail stores bearing the Company name. Merchandise is targeted to appeal to customers in specialty markets who have distinctive consumer characteristics. Description of Operations. General. - - ------- The Company was incorporated on June 26, 1996, and on July 15, 1996 acquired the stock of Abercrombie & Fitch Holdings, the parent company of the Abercrombie & Fitch business and A&F Trademark, Inc., in exchange for 43 million shares of Class B common stock issued to The Limited, Inc. ("The Limited"). An initial public offering of 8.05 million shares of the Company's Class A common stock was consummated on October 1, 1996 and, as a result, approximately 84% of the outstanding common stock of the Company is owned by The Limited. On February 17, 1998, a registration statement was filed with the Securities and Exchange Commission in connection with a plan to establish the Company as a fully independent company via a tax-free exchange offer pursuant to which The Limited shareholders will be given an opportunity to exchange shares of The Limited for shares of the Company. The Limited currently owns 43 million shares of the Company's shares. The following table shows the changes in the number of retail stores operated by the Company for the past five fiscal years:
Fiscal Beginning Year of Year Opened Closed End of Year ---- ------- ------ ------ ----------- 1993 40 9 49 1994 49 20 (2) 67 1995 67 33 100 1996 100 29 (2) 127 1997 127 30 (1) 156
During fiscal year 1997, the Company purchased merchandise from approximately 58 suppliers and factories located throughout the world. The Company sourced approximately 41% of its apparel merchandise through Mast Industries, Inc., a wholly-owned contract manufacturing subsidiary of The Limited. In addition to 2 purchases from Mast, the Company purchases merchandise directly in foreign markets, with additional merchandise purchased in the domestic market, some of which is manufactured overseas. No more than 15% of goods purchased originated from any single third party manufacturer. Most of the merchandise and related materials for the Company's stores is shipped to a distribution center owned by The Limited in Reynoldsburg, Ohio, where the merchandise is received and inspected. The Limited uses common and contract carriers to distribute merchandise and related materials to the Company's stores. The Company pays outbound freight for stores to The Limited based on cartons shipped. The Company's policy is to maintain sufficient quantities of inventory on hand in its retail stores and distribution center so that it can offer customers a full selection of current merchandise. The Company emphasizes rapid turnover and takes markdowns where required to keep merchandise fresh and current with fashion trends. The Company views the retail apparel market as having two principal selling seasons, Spring and Fall. As is generally the case in the apparel industry, the Company experiences its peak sales activity during the Fall season. This seasonal sales pattern results in increased inventory during the back-to-school and Christmas holiday selling periods. During fiscal year 1997, the highest inventory level approximated $60.7 million at the July 1997 month-end and the lowest inventory level approximated $31.0 million at the April 1997 month-end. Merchandise sales are paid for in cash or by personal check, credit cards issued by third parties or The Limited's 40% owned credit card processing venture, Alliance Data Systems ("ADS"). ADS was formed in part from World Financial Network National Bank ("WFNNB"), a wholly-owned subsidiary of The Limited prior to January 1996, when a 60% interest was sold to a New York investment firm, resulting in the formation of a venture that provides private-label and bank card transaction processing and database management services to retailers, including the Company's private-label credit card operations. The Company offers its customers a liberal return policy stated as "No Sale is Ever Final." The Company believes that certain of its competitors offer similar credit card and service policies. The following is a brief description of the Company, including its respective target markets. Abercrombie & Fitch is a specialty retailer of quality, casual, classic American sportswear, targeted to men and women approximately 15-50 years of age. The Abercrombie & Fitch brand was established in 1892 and became well known as a supplier of rugged, high-quality outdoor gear who placed a premium on complete customer satisfaction with each item sold. The Company was acquired by The Limited in 1988 and in 1992 Abercrombie & Fitch was repositioned as a more fashion-oriented casual apparel business directed at men and women with a youthful lifestyle. In re-establishing the Abercrombie & Fitch brand, the Company combined its historical image for quality with a new emphasis on casual American style and youthfulness. Additional information about the Company's business, including its revenues and profits for the last three years, plus selling square footage is set forth under the caption "Management's Discussion and Analysis" in ITEM 7. 3 Competition. The sale of apparel and personal care products through retail stores is a highly competitive business with numerous competitors, including individual and chain fashion specialty stores and department stores. Fashion, price, service, selection and quality are the principal competitive factors in retail store sales. The Company is unable to estimate the number of competitors or its relative competitive position due to the large number of companies selling apparel and personal care products at retail, both through stores and catalogues. Associate Relations. On January 31, 1998, the Company employed approximately 6,700 associates (none of whom were members of a collective bargaining agreement), 5,500 of whom were part-time. In addition, temporary associates are hired during peak periods, such as the Holiday season. ITEM 2. PROPERTIES. The Company's headquarters and support functions (consisting of office, distribution and shipping facilities) are located in Reynoldsburg, Ohio. The distribution and shipping facilities are owned by The Limited and are leased by the Company under 15 year leases, with options to renew. The Company expects that the term of the lease covering such distribution and shipping facilities will be reduced to three years after the Company's split-off from The Limited. Substantially all of the retail stores operated by the Company are located in leased facilities, primarily in shopping centers throughout the continental United States. The leases expire at various dates principally between 1997 and 2010 and generally have renewal options. Typically, when space is leased for a retail store in a shopping center, all improvements, including interior walls, floors, ceilings, fixtures and decorations, are supplied by the tenant. In certain cases, the landlord of the property may provide a construction allowance to fund all or a portion of the cost of improvements. The cost of improvements varies widely, depending on the size and location of the store. Rental terms for new locations usually include a fixed minimum rent plus a percentage of sales in excess of a specified amount. Certain operating costs such as common area maintenance, utilities, insurance, and taxes are typically paid by tenants. ITEM 3. 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 that 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. The amended complaint alleged that the defendants violated the federal False Claims Act by submitting false country of origin records to the US 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 4 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 has been transferred to another judge of the United States District Court for the Southern District of Ohio. On January 8, 1998, ATMI filed a second motion to vacate and a motion for leave to file a second amended complaint. The Company has vigorously opposed all of the pending motions. 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. Not applicable. SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below is certain information regarding the executive officers of the Company as of January 31, 1998. Leslie H. Wexner, 60, has been Chairman of the Board of the Company since 1996. Mr. Wexner has been President and Chief Executive Officer of The Limited since he founded The Limited in 1963 and has been Chairman of the Board of Directors of The Limited for more than five years. Kenneth B. Gilman, 51, has been Vice Chairman of the Company since 1996. Mr. Gilman has been Vice Chairman, Chief Administrative Officer of The Limited since August 1997 and was Vice Chairman and Chief Financial Officer from June 1993 to August 1997. He was Executive Vice President and Chief Financial Officer of The Limited for five years prior thereto. Michael S. Jeffries, 53, has been President and Chief Executive Officer since February 1992. Michelle S. Donnan-Martin, 34, has been Vice President-General Merchandising Manager-Women's since February 1996. For three and one-half years prior thereto, Ms. Donnan-Martin held the position of Vice President Women's Merchandising. Seth R. Johnson, 44, has been Vice President-Chief Financial Officer since June 1992. All of the above officers serve at the pleasure of the Board of Directors of the Company. 5 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The following is a summary of market price since the Company was originally listed on the New York Stock Exchange ("ANF") on September 26, 1996:
Market Price --------------------------------------------- High Low -------------------- --------------------- Fiscal Year End 1997 ------------------------------------------ 4th Quarter $34 11/16 $25 11/16 3rd Quarter $ 27 1/4 $ 19 1/4 2nd Quarter $ 20 1/2 $ 15 3/4 1st Quarter $ 17 5/8 $ 12 7/8 Fiscal Year End 1996 ------------------------------------------ 4th Quarter $ 23 3/4 $ 12 5/8 3rd Quarter $ 26 1/4 $ 21 3/4
On January 31, 1998, there were approximately 180 shareholders of record. However, when including active associates who participate in the Company's stock purchase plan, associates who own shares through Company sponsored retirement plans and others holding shares in broker accounts under street name, the Company estimates the shareholder base at approximately 3,300. 6 ITEM 6. SELECTED FINANCIAL DATA. ABERCROMBIE & FITCH CO. FINANCIAL SUMMARY (Thousands except per share and per square foot amounts, ratios and store and associate data)
FISCAL YEAR 1997 1996 1995* 1994 1993 1992 1991 - - ------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net Sales $ 521,617 $ 335,372 $235,659 $165,463 $110,952 $ 85,301 $ 62,583 - - ------------------------------------------------------------------------------------------------------------------------- Gross Income $ 201,080 $ 123,766 $ 79,794 $ 56,820 $ 30,562 $ 13,413 $ 9,665 - - ------------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) $ 84,125 $ 45,993 $ 23,798 $ 13,751 $ (4,064) $(10,190) $(11,603) - - ------------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) as a Percentage of Sales 16.1% 13.7% 10.1% 8.3% (3.7%) (11.9%) (18.5%) - - ------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 48,322 $ 24,674 $ 14,298 $ 8,251 $ (2,464) $ (6,090) $ (7,003) - - ------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) as a Percentage of Sales 9.3% 7.4% 6.1% 5.0% (2.2%) (7.1%) (11.2%) - - ------------------------------------------------------------------------------------------------------------------------- PER SHARE RESULTS Net Income (Loss) Per Basic Share $ .95 $ .54 $ .33 $ .19 $ (.06) $ (.14) $ (.16) - - ------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) Per Dilutive Share $ .94 $ .54 $ .33 $ .19 $ (.06) $ (.14) $ (.16) - - ------------------------------------------------------------------------------------------------------------------------- Weighted Average Diluted Shares Outstanding 51,478 45,760 43,000 43,000 43,000 43,000 43,000 - - ------------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL INFORMATION Total Assets $ 183,238 $ 105,761 $ 87,693 $ 58,018 $ 48,882 $ 61,626 $ 47,967 - - ------------------------------------------------------------------------------------------------------------------------- Return on Average Assets 33% 26% 20% 15% (4%) (11%) - - - ------------------------------------------------------------------------------------------------------------------------- Capital Expenditures $ 29,486 $ 24,323 $ 24,526 $ 12,603 $ 4,694 $ 10,351 $ 7,931 - - ------------------------------------------------------------------------------------------------------------------------- Long-Term Debt $ 50,000 $ 50,000 - - - - - - - ------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity (Deficit) $ 58,775 $ 11,238 $(22,622) $(37,070) $(45,341) $(42,877) $(36,787) - - ------------------------------------------------------------------------------------------------------------------------- Comparable Store Sales Increase 21% 13% 5% 15% 6% 8% 10% - - ------------------------------------------------------------------------------------------------------------------------- Retail Sales per Average Selling Square Foot $ 462 $ 373 $ 354 $ 350 $ 301 $ 276 $ 261 - - ------------------------------------------------------------------------------------------------------------------------- STORES AND ASSOCIATES AT END OF YEAR Total Number of Stores Open 156 127 100 67 49 40 36 - - ------------------------------------------------------------------------------------------------------------------------- Selling Square Feet 1,234,000 1,006,000 792,000 541,000 405,000 332,000 287,000 - - ------------------------------------------------------------------------------------------------------------------------- Number of Associates 6,700 4,900 3,000 2,300 1,300 900 700 - - ------------------------------------------------------------------------------------------------------------------------- *Fifty-three week fiscal year.
7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Net sales for the fourth quarter were $212.1 million, an increase of 52% from $139.2 million for the fourth quarter a year ago. Operating income was $59.1 million, up 67% compared to $35.3 million last year. Earnings per diluted share were $.68, up 70%, from $.40 last year. Net sales for the fiscal year ended January 31, 1998, increased 56% to $521.6 million from $335.4 million last year. Operating income for the year increased 83% to $84.1 million from $46.0 million in 1996. Earnings per diluted share were $.94 compared to $.48 on an adjusted basis a year ago, an increase of 96%. The results of operations shown below are adjusted for both the historical number of shares outstanding to reflect post-initial public offering shares outstanding and interest expense to reflect the Company's ongoing capital structure and seasonal borrowings. The following assumptions were used to derive the adjusted amounts: 1) 51.05 million post-initial public offering shares outstanding for the periods presented; prior to the initial public offering on October 1, 1996, there were 43 million shares outstanding; 2) interest expense on the Company's seasonal borrowings which were funded from The Limited's intercompany cash management system; prior to July 11, 1996, the intercompany cash management account was noninterest bearing; and 3) interest expense on the Company's ongoing capital structure which included interest expense on a $50 million mirror note distributed to The Limited prior to the initial public offering but excluded interest expense on the Company's $150 million credit agreement, entered into on July 2, 1996, and repaid in the fourth quarter of 1996.
Year Ended -------------------------------------------------------- Actual Adjusted Actual January 31, February 1, February 1, 1998 1997 1997 ------------------ -------------- ------------- Operating income $84,125 $45,993 $45,993 Interest expense, net 3,583 5,016 4,919 ------------------ ------------- -------------- Income before income taxes 80,542 40,977 41,074 Provision for income taxes 32,220 16,400 16,400 ------------------ ------------- -------------- Net income $48,322 $24,577 $24,674 ================== ============= ============== Net income per share: Basic $ .95 $ .48 $ .54 ================== ============= ============== Diluted $ .94 $ .48 $ .54 ================== ============= ============== Weighted average shares outstanding: Basic 51,011 51,050 45,749 ================== ============= ============== Diluted 51,478 51,050 45,760 ================== ============= ==============
8 FINANCIAL SUMMARY The following summarized financial data compares 1997 to the comparable periods for 1996 and 1995:
% Change --------------------------------- 1997 1996 1995 1997-1996 1996-1995 --------------- --------------- -------------- --------------- --------------- Net sales (millions) $521.6 $335.4 $235.7 56% 42% Increase in comparable store sales 21% 13% 5% Retail sales increase attributable to new and remodeled stores 34% 29% 37% Retail sales per average selling square foot $ 462 $ 373 $ 354 24% 5% Retail sales per average store (thousands) $3,653 $2,955 $2,823 24% 5% Average store size at year-end (selling square feet) 7,910 7,921 7,920 0% 0% Selling square feet at year-end (thousands) 1,234 1,006 792 23% 27% Number of Stores: Beginning of year 127 100 67 Opened 30 29 33 Closed (1) (2) - --------------- --------------- -------------- End of year 156 127 100 =============== =============== ==============
NET SALES Fourth quarter 1997 net sales as compared to net sales for the fourth quarter 1996 increased 52% to $212.1 million, due to a 23% increase in comparable store sales and sales attributable to new and remodeled stores. Comparable store sales increases were strong in both the men's and women's businesses as both were driven by a very strong knit business. Additionally, fourth quarter 1997 net sales included results from the first Holiday issue of the A&F Quarterly, a catalogue/magazine, which accounted for 1.7% of total net sales. Thirteen-week fourth quarter 1996 net sales as compared to net sales for the fourteen-week fourth quarter 1995 increased 31% to $139.2 million, due to an 8% increase in comparable store sales and sales attributable to new and remodeled stores. Comparable store sales increases were strong in both the men's and women's businesses. Sweaters were the best performing category in each business. Net sales for 1997 increased 56% to $521.6 million over the same period in 1996. The sales increase was attributable to the net addition of 29 stores and a 21% comparable store sales increase. Comparable store sales increases were equally strong in both men's and women's businesses and their performance strength was broadly based across all major merchandise categories. Net sales per selling square foot for the total Company increased 24%, driven principally by an increase in the number of transactions per store. 9 Net sales for 1996 increased 42% to $335.4 million over the fifty-three week 1995 fiscal year. The sales increase was attributable to the net addition of 27 stores and a 13% comparable store sales increase. Consistent with the Company's strategy, the women's business continued to increase as a proportion of the total business, with sweaters and pants the strongest performing categories. The men's business also achieved significant growth with its strongest categories being sweaters, pants and denim. Net sales per selling square foot for the total Company increased 5%. GROSS INCOME Gross income increased, expressed as a percentage of net sales, to 45.4% for the fourth quarter of 1997 from 43.0% for the same period in 1996. The increase was attributable to improved merchandise margins (representing gross income before the deduction of buying and occupancy costs) resulting from higher initial markups (IMU) and a lower markdown rate. As a result of improved inventory turnover fewer markdowns, expressed as a percentage of net sales, were needed in the fourth quarter of 1997 to clear season-end merchandise as compared to the same period in 1996. Gross income increased, expressed as a percentage of net sales, to 43.0% for the fourth quarter of 1996 from 37.4% for the same period in 1995. The increase was due to a significant increase in merchandise margins and a reduction in buying and occupancy costs, expressed as a percentage of net sales. The increase in merchandise margins was the result of higher IMU. The decrease in buying and occupancy costs was primarily attributable to higher sales productivity associated with the 8% increase in comparable store sales. For the year, the gross income rate increased to 38.5% in 1997 from 36.9% in 1996. The improvement was the result of higher merchandise margins, expressed as a percentage of net sales. Improved IMU, in both the men's and women's businesses drove the increase in merchandise margins. Buying and occupancy costs, expressed as a percentage of net sales, declined slightly due to leverage achieved from comparable store sales increases. In 1996, the gross income rate increased to 36.9% from 33.9% in 1995. Merchandise margins, expressed as a percentage of net sales, improved due to a higher IMU in both the men's and women's businesses. Buying and occupancy costs, expressed as a percentage of net sales, declined due to a 13% increase in comparable store sales, including a 5% increase in net sales per selling square foot. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES General, administrative and store operating expenses, expressed as a percentage of net sales, were 17.5% in the fourth quarter of 1997 and 17.6% in the comparable period in 1996. The improvement resulted primarily from favorable leveraging of expenses due to higher sales volume. Included in these expenses for the fourth quarter of 1997 was approximately $2.6 million of compensation expense associated with restricted stock grants awarded to key executives of the Company. For the year, general, administrative and store operating expenses, expressed as a percentage of net sales, were 22.4%, 23.2% and 23.8% for 1997, 1996 and 1995. The improvement during the three-year period resulted from management's continued emphasis on expense control and favorable leveraging of expenses, primarily stores expenses, due to higher sales volume. 10 OPERATING INCOME Operating income, expressed as a percentage of net sales, was 27.9%, 25.4% and 19.8% for the fourth quarter of 1997, 1996 and 1995 and 16.1%, 13.7% and 10.1% for fiscal years 1997, 1996 and 1995. The improvement was the result of higher merchandise margins coupled with lower general, administrative and store operating expenses, expressed as a percentage of net sales. Sales volume and gross income have increased at a faster rate than general, administrative and store operating expenses as the Company continues to emphasize cost controls. INTEREST EXPENSE Fourth quarter 1997 net interest expense of $305 thousand improved $820 thousand from 1996 fourth quarter net interest expense of $1.1 million. Interest expense in the fourth quarter of 1997 and 1996 included $975 thousand associated with $50 million of long-term debt. The balance represented net interest income from temporary investments in the fourth quarter of 1997, while net interest expense in the fourth quarter of 1996 was primarily due to higher borrowing levels. The Company's year-to-date interest expense was $3.6 million, down $1.3 million from $4.9 million in 1996 due primarily to lower average borrowing levels. FINANCIAL CONDITION The Company's continuing growth in operating income provides evidence of financial strength and flexibility. A more detailed discussion of liquidity, capital resources and capital requirements follows. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities and cash funding from The Limited's centralized cash management system provided the resources to support operations, including seasonal requirements and capital expenditures. A summary of the Company's working capital position and capitalization follows (thousands):
1997 1996 1995 ---------------- --------------- --------------- Cash provided by operating activities $100,195 $46,836 $ 12,714 Working capital $ 42,000 $ 1,288 $(70,940) Capitalization Long-term debt $ 50,000 $50,000 - Shareholders' equity (deficit) 58,775 11,238 $(22,622) ---------------- --------------- --------------- Total Capitalization $108,775 $61,238 $(22,622) ================ =============== ===============
11 The Company considers the following to be measures of liquidity and capital resources:
1997 1996 1995 ---------------- --------------- --------------- Debt-to-capitalization ratio (long-term debt divided by total capitalization) 46% 82% n/m Cash flow to capital investment (net cash provided by operating activities divided by capital expenditures) 340% 193% 52% n/m = not meaningful
Net cash provided by operating activities totaled $100.2 million, $46.8 million and $12.7 million for 1997, 1996 and 1995. In 1997, the $100.2 million net cash provided by operating activities increased from the comparable period last year due primarily to the increase in net income before depreciation and amortization. Accounts payable and accrued expenses increased in 1997 as a result of the increases of $7.8 million in merchandise payables due to the timing of receipts for Spring goods and $2.3 million of accrued rent. Cash requirements for inventory decreased in 1997 consistent with the Company's strategy to improve inventory turnover. Investing activities were for capital expenditures, which were primarily for new stores. Financing activities in 1997 consisted primarily of activity through The Limited's centralized cash management system. Financing activities in 1996 include $150 million in proceeds from borrowings under a bank credit agreement, which, along with the $8.6 million working capital note, were later repaid with funds made available from the IPO and cash flow from operations. Proceeds of the $150 million bank credit agreement were used to repay $91 million of intercompany debt and $32 million of trademark obligations and fund a $27 million dividend to The Limited. Other financing activities were due to intercompany and cash management account activity (see Note 8). In connection with the plan to establish Abercrombie & Fitch as a fully independent company (see Note 11), the Company is in the process of negotiating credit facilities that will be separate and independent of The Limited. CAPITAL EXPENDITURES Capital expenditures, primarily for new and remodeled stores, amounted to $29.5 million, $24.3 million and $24.5 million for 1997, 1996 and 1995. The Company anticipates spending $40 to $50 million in 1998 for capital expenditures, of which $35 to $42 million will be for new stores, remodeling and/or expansion of existing stores and related improvements. The Company intends to add approximately 235,000 selling square feet in 1998, which will represent a 19% increase over year end 1997. It is anticipated the increase will result from the addition of 30 new stores and the remodeling and/or expansion of four stores. The Company estimates that the average cost for leasehold improvements, furniture and fixtures for stores opened in 1998 will approximate $750,000 per store, after 12 giving effect to landlord allowances. In addition, inventory purchases are expected to average approximately $275,000 per store. Additionally, the Company plans to open 10 to 15 children's stores in 1998. The planned store size is approximately 3,200 selling square feet and the average cost for leasehold improvements, furniture and fixtures will be approximately $470,000. The Company expects that substantially all future capital expenditures will be funded by net cash provided by operating activities. INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE The Company recently completed a comprehensive review of its information systems and is involved in a program to update computer systems and applications in preparation for the year 2000. The Company will incur internal staff costs as well as outside consulting and other expenditures related to this initiative. Total expenditures related to remediation, testing, conversion, replacement and upgrading system applications are expected to range from $3.0 to $4.0 million from 1997 through 2000. 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 from 1997 through 2000. The Company is attempting to contact vendors and others on whom it relies to ensure that their systems will be converted in a timely fashion. However, there can be no assurance that the systems of other companies on which the Company's systems rely will also be converted in a timely fashion or that any such failure to convert by another company would not have an adverse effect on the Company's systems. Furthermore, no assurance can be given that any or all of the Company's systems are or will be Year 2000 compliant, or that the ultimate costs required to address the Year 2000 issue or the impact of any failure to achieve substantial Year 2000 compliance will not have a material adverse effect on the Company's financial condition. REGISTRATION STATEMENT FOR EXCHANGE OFFER The Company and The Limited will enter into certain service agreements upon the consummation of the Exchange Offer (see Note 11) which will include among other things, tax, information technology and store design and construction. These agreements generally will be for a term of one year. Service agreements will also be entered into for the continued use by the Company of its distribution and home office space and transportation and logistic services. These agreements generally will be for a term of three years. Costs for these services will generally be the costs and expenses incurred by The Limited plus 5% 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 impact on its financial condition. 13 IMPACT OF INFLATION The Company's results of operations and financial condition are presented based upon historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, the Company believes that the effects of inflation, if any, on its results of operations and financial condition have been minor. ADOPTION OF NEW ACCOUNTING STANDARDS During the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which requires the Company to disclose earnings per basic and diluted share for all periods presented. 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, the Company's Form 10-K or made by management of the Company involve risks and uncertainties, and are subject to change based on various important factors. 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. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ABERCROMBIE & FITCH CO. CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts) 1997 1996 1995 --------------- ------------- ------------- NET SALES $521,617 $335,372 $235,659 Costs of Goods Sold, Occupancy and Buying Costs 320,537 211,606 155,865 --------------- ------------- ------------- GROSS INCOME 201,080 123,766 79,794 General, Administrative and Store Operating Expenses 116,955 77,773 55,996 --------------- ------------- ------------- OPERATING INCOME 84,125 45,993 23,798 Interest Expense, Net 3,583 4,919 - --------------- ------------- ------------- INCOME BEFORE INCOME TAXES 80,542 41,074 23,798 Provision for Income Taxes 32,220 16,400 9,500 --------------- ------------- ------------- NET INCOME $ 48,322 $ 24,674 $ 14,298 =============== ============= ============= NET INCOME PER SHARE: BASIC $ .95 $ .54 $ .33 =============== ============= ============= DILUTED $ .94 $ .54 $ .33 =============== ============= =============
The accompanying Notes are an integral part of these Consolidated Financial Statements. 15 ABERCROMBIE & FITCH CO. CONSOLIDATED BALANCE SHEETS
(Thousands) January 31, February 1, 1998 1997 ---------------- ---------------- ASSETS ------ CURRENT ASSETS: Cash and Equivalents $ 42,667 $ 1,945 Accounts Receivable 1,695 2,102 Inventories 33,927 34,943 Store Supplies 5,592 5,300 Intercompany Receivable 23,785 - Other 1,296 588 ---------------- ---------------- TOTAL CURRENT ASSETS 108,962 44,878 PROPERTY AND EQUIPMENT, NET 70,517 58,992 DEFERRED INCOME TAXES 3,759 1,885 OTHER ASSETS - 6 ---------------- ---------------- TOTAL ASSETS $183,238 $ 105,761 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable $ 15,968 $ 6,414 Accrued Expenses 35,143 22,388 Income Taxes Payable 15,851 9,371 Intercompany Payable - 5,417 ---------------- ---------------- TOTAL CURRENT LIABILITIES 66,962 43,590 LONG-TERM DEBT 50,000 50,000 OTHER LONG-TERM LIABILITIES 7,501 933 SHAREHOLDERS' EQUITY: Common Stock 511 511 Paid-In Capital 117,972 117,980 Retained Earnings (Deficit) (58,931) (107,253) 59,552 11,238 Less: Treasury Stock, at Cost (777) - ---------------- ---------------- TOTAL SHAREHOLDERS' EQUITY 58,775 11,238 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $183,238 $ 105,761 ================ ================
The accompanying Notes are an integral part of these Consolidated Financial Statements. 16 ABERCROMBIE & FITCH CO. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Thousands) Common Stock ------------------------------- Total Retained Treasury Shareholders' Shares Par Paid-In Earnings Stock, Equity Outstanding Value Capital (Deficit) at Cost (Deficit) --------------- ------------ ------------ ------------- ---------- -------------- Balance, January 28, 1995 43,000 - $ 155 $ (37,225) - $(37,070) Net Income - - - 14,298 - 14,298 Other - - 150 - - 150 --------------- ------------ ------------ ------------- ---------- -------------- Balance, February 3, 1996 43,000 - $ 305 $ (22,927) - $(22,622) Transfer of Equity to Debt ($50,000 Long-Term Debt and $32,000 Short-Term Borrowings) - - - (82,000) - (82,000) Cash Dividend to Parent Prior to Initial Public Offering - - - (27,000) - (27,000) Sale of Common Stock in Initial Public Offering 8,050 $511 117,667 - - 118,178 Net Income - - - 24,674 - 24,674 Other - - 8 - - 8 --------------- ------------ ------------ ------------- ---------- -------------- Balance, February 1, 1997 51,050 $511 $117,980 $(107,253) - $ 11,238 Purchase of Treasury Stock (50) - - - $(929) (929) Net Income - - - 48,322 - 48,322 Exercise of Stock Options and 9 - (8) - 152 144 Other --------------- ------------ ------------ ------------- ------------ -------------- Balance, January 31, 1998 51,009 $511 $117,972 $ (58,931) $(777) $ 58,775 =============== ============ ============ ============ ============= =============
The accompanying Notes are an integral part of these Consolidated Financial Statements. 17 ABERCROMBIE & FITCH CO. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands) 1997 1996 1995 ---------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 48,322 $ 24,674 $ 14,298 Impact of Other Operating Activities on Cash Flows Depreciation and Amortization 16,342 11,759 9,104 Noncash Charge for Deferred Compensation 6,219 - - Change in Assets and Liabilities: Inventories 1,016 (4,555) (13,837) Accounts Payable and Accrued Expenses 22,309 9,943 4,069 Income Taxes 4,606 4,218 (2,525) Other Assets and Liabilities 1,381 797 1,605 ---------------- ---------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 100,195 46,836 12,714 ---------------- ---------------- ---------------- CASH USED FOR INVESTING ACTIVITIES Capital Expenditures (29,486) (24,323) (24,526) ---------------- ---------------- ---------------- FINANCING ACTIVITIES Increase (Decrease) in Intercompany Balance (29,202) 18,988 11,944 Dividend Paid to Parent - (27,000) - Net Proceeds from Issuance of Common Stock - 118,178 - Proceeds from Credit Agreement - 150,000 - Repayment of Credit Agreement - (150,000) - Repayment of Trademark Obligations - (32,000) - Repayment of Intercompany Debt - (91,000) - Repayment of Working Capital Note - (8,616) - Purchase of Treasury Stock (929) - - Other Changes in Shareholders' Equity 144 8 150 NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ---------------- ---------------- ---------------- (29,987) (21,442) 12,094 ---------------- ---------------- ---------------- NET INCREASE IN CASH AND EQUIVALENTS 40,722 1,071 282 Cash and Equivalents, Beginning of Year 1,945 874 592 ---------------- ---------------- ---------------- CASH AND EQUIVALENTS, END OF YEAR $ 42,667 $ 1,945 $ 874 ================ ================ ================
In 1996, noncash financing activities included the distribution of a note representing preexisting obligations of the Company's operating subsidiary in respect of certain trademarks in the amount of $32 million by the Company's trademark subsidiary to The Limited, Inc., distribution of the $50 million in long-term debt and the conversion of $8.6 million of intercompany debt into a working capital note. The accompanying Notes are an integral part of these Consolidated Financial Statements. 18 ABERCROMBIE & FITCH CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Abercrombie & Fitch Co. (the "Company") was incorporated on June 26, 1996, and on July 15, 1996 acquired the stock of Abercrombie & Fitch Holdings, the parent company of the Abercrombie & Fitch business, and A&F Trademark, Inc., in exchange for 43 million shares of Class B common stock issued to The Limited, Inc. ("The Limited"). The Company is a specialty retailer of high quality, casual apparel for men and women with an active, youthful lifestyle. The business was established in 1892 and subsequently acquired by The Limited in 1988. An initial public offering (the "Offering") of 8.05 million shares of the Company's Class A common stock, including the sale of 1.05 million shares pursuant to the exercise by the underwriters of their options to purchase additional shares, was consummated on October 1, 1996. As a result of the Offering, 84.2% of the outstanding common stock of the Company is owned by The Limited. The net proceeds received by the Company from the Offering, approximating $118.2 million, and cash from operations were used to repay the borrowings under a $150 million credit agreement. The accompanying consolidated financial statements include the historical financial statements of, and transactions applicable to the Company and its subsidiaries and reflect the assets, liabilities, results of operations and cash flows on a historical cost basis. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all significant subsidiaries that are more than 50% owned and controlled. All significant intercompany balances and transactions have been eliminated in consolidation. FISCAL YEAR The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the financial statements and notes by the calendar year in which the fiscal year commences. The results for fiscal years 1997 and 1996 represent the fifty-two week periods ended January 31, 1998 and February 1, 1997. The results for fiscal year 1995 represent the fifty-three week period ended February 3, 1996. CASH AND EQUIVALENTS Cash and equivalents include amounts on deposit with financial institutions and investments with maturities of less than 90 days. 19 INVENTORIES Inventories are principally valued at the lower of average cost or market, on a first-in first-out basis, utilizing the retail method. STORE SUPPLIES The initial inventory of supplies for new stores including, but not limited to, hangers, signage, security tags and point-of-sale supplies are capitalized at the store opening date. Subsequent shipments are expensed except for new merchandise presentation programs which are capitalized. PROPERTY AND EQUIPMENT Depreciation and amortization of property and equipment are computed for financial reporting purposes on a straight-line basis, using service lives ranging principally from 10-15 years for building improvements and 3-10 years for other property and equipment. Beneficial leaseholds represent the present value of the excess of fair market rent over contractual rent of existing stores at the 1988 purchase of the Company by The Limited and are being amortized over the lives of the related leases. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend service lives are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that full recoverability is questionable. Factors used in the valuation include, but are not limited to, management's plans for future operations, recent operating results and projected cash flows. INCOME TAXES Income taxes are calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the use of the liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the years in which those temporary differences are expected to reverse. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company is included in The Limited's consolidated federal and certain state income tax groups for income tax reporting purposes and is responsible for its proportionate share of income taxes calculated upon its federal taxable income at a current estimate of the annual effective tax rate. SHAREHOLDERS' EQUITY At January 31, 1998, there were 150 million of $.01 par value Class A shares authorized, of which 8.01 million and 8.05 million shares were outstanding at January 31, 1998 and February 1, 1997 and 150 million of $.01 par value Class B shares authorized, of which 43 million shares were 20 issued and outstanding. In addition there were 15 million of $.01 par value preferred shares authorized, none of which have been issued. Holders of Class A common stock generally have identical rights to holders of Class B common stock, except that holders of Class A common stock are entitled to one vote per share while holders of Class B common stock are entitled to three votes per share on all matters submitted to a vote of shareholders. Each share of Class B common stock is convertible while held by The Limited or any of its subsidiaries into one share of Class A common stock (see Note 11). REVENUE RECOGNITION Sales are recorded upon purchase by customers. CATALOGUE AND ADVERTISING COSTS Costs related to the A&F Quarterly, which premiered in 1997, primarily consist of catalogue production and mailing costs and are expensed as incurred. Advertising costs consist of in-store photographs and advertising in selected national publications and are expensed when the photographs or publications first appear. Catalogue and advertising costs amounted to $13.7 million in 1997, $4.1 million in 1996 and $3.1 million in 1995. STORE PREOPENING EXPENSES Preopening expenses related to new store openings are charged to operations as incurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded values of current assets and current liabilities, including accounts receivable and accounts payable, approximate fair value due to the short maturity and because the average interest rate approximates current market origination rates. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturity. The estimated fair value of the Company's long-term debt was $52.2 million at January 31, 1998 and $50.6 million at February 1, 1997. EARNINGS PER SHARE Net income per share is computed in accordance with SFAS No. 128, "Earnings Per Share," which the Company adopted in the fourth quarter of 1997. Earnings per basic share are computed based on the weighted average number of outstanding common shares. Earnings per diluted share include the weighted average effect of dilutive stock options and restricted stock. The common stock issued to The Limited (43 million Class B shares) in connection with the incorporation of the Company is assumed to have been outstanding for all periods. 21 PAGE>
Weighted Average Common Shares Outstanding (thousands): 1997 1996 1995 ------------ ------------ ----------- Common shares issued 51,050 45,749 43,000 Treasury shares (39) - - ------------ ------------ ----------- Basic shares 51,011 45,749 43,000 Dilutive effect of options and restricted shares 467 11 - ------------ ------------ ----------- Diluted shares 51,478 45,760 43,000 ============ ============ ===========
Options to purchase 228,000 and 240,000 shares of common stock were outstanding at year-end 1997 and 1996 but were not included in the computation of earnings per diluted share because the options' exercise price was greater than the average market price of the common shares. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. RECLASSIFICATIONS Certain amounts in previously reported financial statement captions have been reclassified to conform with current year presentation. 3. PROPERTY AND EQUIPMENT Property and equipment, at cost, consisted of (thousands):
1997 1996 ---------------- -------------- Furniture, fixtures and equipment $104,671 $ 88,248 Beneficial leaseholds 7,349 7,925 Leasehold improvements 11,615 5,565 Construction in progress 365 181 ---------------- -------------- Total $124,000 $101,919 Less: accumulated depreciation and amortization 53,483 42,927 ---------------- -------------- Property and equipment, net $ 70,517 $ 58,992 ================ ==============
22 4. LEASED FACILITIES AND COMMITMENTS Annual store rent is comprised of a fixed minimum amount, plus contingent rent based on a percentage of sales exceeding a stipulated amount. Store lease terms generally require additional payments covering taxes, common area costs and certain other expenses. Rent expense also includes charges from The Limited and its subsidiaries for space under formal agreements which approximate market rates (see Note 8). A summary of rent expense for 1997, 1996 and 1995 follows (thousands):
1997 1996 1995 -------------------- ----------------- ------------------- Store rent: Fixed minimum $34,402 $24,599 $17,465 Contingent 2,138 1,620 1,322 -------------------- ----------------- ------------------- Total store rent $36,540 $26,219 $18,787 Buildings, equipment and other 1,400 1,229 1,058 -------------------- ----------------- ------------------- Total rent expense $37,940 $27,448 $19,845 ==================== ================= ===================
At January 31, 1998, the Company was committed to noncancelable leases with remaining terms of one to fifteen years. These commitments include store leases with initial terms ranging primarily from ten to fifteen years and offices and a distribution center leased from an affiliate of The Limited with an initial term of fifteen years. A majority of the Company's store leases are guaranteed by The Limited. A summary of minimum rent commitments under noncancelable leases follows (thousands): 1998 $ 40,775 1999 41,747 2000 41,866 2001 42,170 2002 42,254 Thereafter 181,769 5. ACCRUED EXPENSES Accrued expenses consisted of the following (thousands):
1997 1996 --------------- --------------- Rent and landlord charges $ 8,105 $ 5,624 Compensation and benefits 8,357 4,638 Catalogue and advertising costs 4,012 1,449 Interest 986 2,162 Taxes, other than income 1,827 1,761 Other 11,856 6,754 Total $35,143 $22,388 =============== ===============
23 6. INCOME TAXES The provision for income taxes consisted of (thousands):
1997 1996 1995 ------------------- ----------------- ------------------- Currently Payable: Federal $29,620 $13,800 $6,900 State 3,470 1,300 1,700 ------------------- ----------------- ------------------- $33,090 $15,100 $8,600 ------------------- ----------------- ------------------- Deferred: Federal (3,200) (400) 700 State 2,330 1,700 200 ------------------- ----------------- ------------------- $ (870) $ 1,300 $ 900 ------------------- ----------------- ------------------- Total provision $32,220 $16,400 $9,500 =================== ================= ===================
A reconciliation between the statutory Federal income tax rate and the effective income tax rate follows:
1997 1996 1995 ------------------ ---------------- ----------------- Federal income tax rate 35.0% 35.0% 35.0% State income tax, net of Federal income tax effect 4.7% 4.7% 5.2% Other items, net 0.3% 0.2% (0.3)% ------------------ ---------------- ----------------- Total 40.0% 39.9% 39.9% ================== ================ =================
Income taxes payable included net current deferred tax assets of $2.3 million and $1.2 million at January 31, 1998 and February 1, 1997. Current income tax obligations are treated as having been settled through the intercompany accounts as if the Company were filing its income tax returns on a separate company basis. Such amounts were $27.6 million, $10.6 million and $7.5 million in 1997, 1996 and 1995. The effect of temporary differences which give rise to net deferred income tax assets was as follows (thousands):
1997 1996 ----------------- ----------------- Depreciation and amortization $1,540 $1,480 Rent 1,510 (413) Accrued expenses 3,450 1,343 Other, net (450) 683 ----------------- ----------------- Total deferred income taxes $6,050 $3,093 ================= =================
24 No valuation allowance has been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future. 7. LONG-TERM DEBT Long-term debt consists of a 7.80% unsecured note in the amount of $50 million that matures May 15, 2002, and represents the Company's proportionate share of certain long-term debt of The Limited. The interest rate and maturity of the note parallels that of corresponding debt of The Limited. The note is to be automatically prepaid concurrently with any prepayment of the corresponding debt of The Limited. 8. RELATED PARTY TRANSACTIONS Transactions between the Company, The Limited, and its subsidiaries and affiliates commonly occur in the normal course of business and principally consist of the following: Merchandise purchases Real estate management and leasing Capital expenditures Inbound and outbound transportation Corporate services Information with regard to these transactions is as follows: Significant purchases are made from Mast, a wholly-owned subsidiary of The Limited. Purchases are also made from Gryphon, an indirect subsidiary of The Limited. Mast is a contract manufacturer and apparel importer, while Gryphon is a developer of fragrance and personal care products and also a contract manufacturer. Prices are negotiated on a competitive basis by merchants of the Company with Mast, Gryphon and the manufacturers. The Company's real estate operations, including all aspects of lease negotiations and ongoing dealings with landlords and developers, are handled centrally by the Real Estate Division of The Limited ("Real Estate Division"). Real Estate Division expenses are allocated to the Company based on a combination of new and remodeled store construction projects and open selling square feet. The Company's store design and construction operations are coordinated centrally by the Store Planning Division of The Limited ("Store Planning Division"). The Store Planning Division facilitates the design and construction of the stores and upon completion transfers the stores to the Company at actual cost. Store Planning Division expenses are charged to the Company based on a combination of new and remodeled store construction projects and open selling square feet. The Company's inbound and outbound transportation expenses are managed centrally by Limited Distribution Services ("LDS"), a wholly-owned subsidiary of The Limited. Inbound freight is charged to the Company based on actual receipts, while outbound freight is charged on a percentage of cartons shipped basis. 25 The Limited provides certain services to the Company including, among other things, aircraft, tax, treasury, legal, corporate secretary, accounting, auditing, corporate development, risk management, associate benefit plan administration, human resource and compensation, government affairs and public relation services. Identifiable costs are charged directly to the Company. All other services-related costs not specifically attributable to the business have been allocated to the Company based upon a percentage of sales. The Company participates in The Limited's centralized cash management system whereby cash received from operations is transferred to The Limited's centralized cash accounts and cash disbursements are funded from the centralized cash accounts on a daily basis. Prior to the initial capitalization of the Company, the intercompany cash management account was noninterest bearing. After the initial capitalization of the Company on July 11, 1996, the intercompany cash management account became an interest earning asset or interest bearing liability of the Company depending upon the level of cash receipts and disbursements. Interest on the intercompany cash management account is calculated based on 30-day commercial paper rates for "AA" rated companies as reported in the Federal Reserve's H.15 statistical release. The average outstanding balance of the noninterest bearing intercompany payable to The Limited in the twenty-six week period ending August 3, 1996 and fifty-three weeks ended February 3, 1996 approximated $64.5 million and $89.8 million. A summary of the intercompany payment activity during the noninterest bearing periods follows:
Twenty-six weeks Fifty-three weeks ended August 3, ended February 3, 1996 1996 -------------------- ---------------------- Balance at beginning of period $ 86,045 $ 74,101 Mast and Gryphon purchases 23,178 35,167 Other transactions with related parties 9,667 33,546 Centralized cash management (16,417) (64,269) Settlement of current period income taxes 5,700 7,500 Payment to The Limited (91,000) - Conversion to Working Capital Note (8,616) - ---------------------- ---------------------- Balance at end of period $ 8,557 $ 86,045 ====================== ======================
The Company is charged rent expense, common area maintenance charges and utilities for stores shared with other consolidated subsidiaries of The Limited. The charges are based on square footage and represent the proportionate share of the underlying leases with third parties. The Company is also charged rent expense and utilities for the distribution and home office space occupied (which approximates fair market value). The Company and The Limited have entered into intercompany agreements that establish the provision of services in accordance with the terms described above. The prices charged to the Company for services provided under these agreements may be higher or lower than prices that may be charged by third parties. It is not practicable, therefore, to estimate what these costs would be if The Limited were not providing these services and the Company was required to purchase 26 these services from outsiders or develop internal expertise. Management believes the charges and allocations described above are fair and reasonable. The following table summarizes the related party transactions between the Company and The Limited and its subsidiaries, for the years indicated (thousands):
1997 1996 1995 -------------- -------------- ------------- Mast and Gryphon purchases $ 89,892 $61,776 $35,167 Capital expenditures 27,012 20,839 20,280 Inbound and outbound transportation 5,524 3,326 2,869 Corporate charges 6,857 3,989 4,019 Store leases and other occupancy, net 1,184 1,509 1,397 Distribution center, IT and home office expenses 3,102 2,696 2,564 Centrally managed benefits 3,596 3,136 2,417 Interest charges 3,583 2,190 - -------------- -------------- ------------- $140,750 $99,461 $68,713 ============== ============== =============
The Company and The Limited are parties to a corporate agreement under which the Company granted to The Limited a continuing option to purchase, under certain circumstances, additional shares of Class B Common Stock or shares of nonvoting capital stock of the Company. The Company has no arrangements with The Limited which result in the Company's guarantee, pledge of assets or stock to provide security for The Limited's debt obligations. The Company's proprietary credit card processing is performed by Alliance Data Systems which is approximately 40% owned by The Limited. 9. STOCK OPTIONS AND RESTRICTED STOCK Under the Company's stock plan, associates may be granted up to a total of 3.5 million restricted shares and options to purchase the Company's common stock at the market price on the date of grant. In 1997, associates of the Company were granted approximately 1.7 million options, most of which are expected to vest on a graduated basis over six years, subject to certain performance goals. The remaining options generally vest 25% per year over the first four years of the grant. A total of 12,000 shares have been issued to nonassociate directors, all of which vest over four years. All options have a maximum term of ten years. The Company adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," effective with the 1996 financial statements, but elected to continue to measure compensation expense in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense for stock options has been recognized. If compensation expense had been determined based on the estimated fair value of options granted in 1997 and 1996, consistent with the methodology in SFAS No. 123, the pro forma effect on net income and earnings per diluted share would have been a reduction of approximately $1.7 million, or $.03 per share in 1997. In 1996, the pro forma effect would have had no impact on net income and earnings per diluted share. The weighted-average fair value of all options granted during fiscal 1997 and 1996 was $8.50 and $6.67. The fair value of each option was estimated using the Black-Scholes option-pricing model with the following weighted-average 27 assumptions for 1997 and 1996: no expected dividends, price volatility of 35%, risk-free interest rates of 6.0% and 6.25%, assumed forfeiture rates of 10% and expected lives of 6.5 and 5 years. The pro forma effect on net income for 1997 and 1996 is not representative of the pro forma effect on net income in future years because it takes into consideration pro forma compensation expense related only to those grants made subsequent to the Company's initial public offering. A summary of option activity for 1997 and 1996 follows:
1997 1996 -------------------------------------- --------------------------------- Weighted Weighted Average Average Shares Option Price Shares Option Price ----------------- ----------------- ------------- ----------------- Outstanding at beginning of year 240,000 $16.00 - - Granted 1,669,000 18.03 240,000 $16.00 Exercised (4,000) 16.00 - - Canceled (21,000) 16.00 - - ----------------- ----------------- ------------- ----------------- Outstanding at end of year 1,884,000 $17.81 240,000 $16.00 ================= ================= ============= ================= Options exercisable at year end 35,000 $16.00 - ================= ================= =============
Approximately 88% of the options outstanding at year-end are at $16 per share. Most of the remaining options outstanding are at $31 per share. A total of 547,000 restricted shares were granted in 1997, with a total market value at grant date of $8.7 million. Of this total, 500,000 shares were subject to performance requirements and a defined vesting schedule over six years. The remaining restricted stock grants generally vest either on a graduated scale over four years or 100% at the end of a fixed vesting period, principally five years. The market value of restricted stock, subject to adjustment at the measurement date for shares with performance requirements, is being amortized as compensation expense over the vesting period, generally four to six years. Compensation expenses related to restricted stock awards amounted to $6.2 million, $0.5 million and $0.4 million in 1997, 1996 and 1995. 10.RETIREMENT BENEFITS The Company participates in a qualified defined contribution retirement plan and a nonqualified supplemental retirement plan sponsored by The Limited. Participation in the qualified plan is available to all associates who have completed 1,000 or more hours of service with the Company during certain 12- month periods and attained the age of 21. Participation in the nonqualified plan is subject to service and compensation requirements. The Company's contributions to these plans are based on a percentage of associates' eligible annual compensation. The cost of these plans was $1.6 million in 1997, $753 thousand in 1996 and $564 thousand in 1995. 11.REGISTRATION STATEMENT FOR EXCHANGE OFFER On February 17, 1998, a registration statement was filed with the Securities and Exchange Commission in connection with a plan to establish the Company as a fully independent company 28 via a tax-free exchange offer pursuant to which The Limited shareholders will be given an opportunity to exchange shares of The Limited for shares of the Company. At year-end, The Limited owned 43 million of the Company's shares. 29 12. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial results for 1997 and 1996 follow (thousands except per share amounts):
Quarter First Second Third Fourth --------------------------------------------- -------------- -------------- -------------- -------------- 1997 ---- Net sales $74,316 $86,640 $148,516 $212,145 Gross income 23,941 27,786 52,990 96,363 Net income 565 2,053 10,403 35,301 Net income per basic share $ .01 $ .04 $ .20 $ .69 Net income per diluted share $ .01 $ .04 $ .20 $ .68 1996 ---- Net sales $51,020 $57,431 $ 87,688 $139,233 Gross income 14,894 18,052 30,957 59,863 Net income (loss) (199) 374 3,982 20,517 Net income (loss) per basic share $ .00 $ .01 $ .09 $ .40 Net income (loss) per diluted share $ .00 $ .01 $ .09 $ .40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding directors of the Company is set forth under the captions "ELECTION OF DIRECTORS - Nominees and Directors", "- Business Experience", "- Information Concerning the Board of Directors" and "- Security Ownership of Directors and Management" in the Company's proxy statement for the Annual Meeting of Shareholders to be held in 1998 (the "Proxy Statement") and is incorporated herein by reference. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is set forth under the caption "EXECUTIVE COMPENSATION-Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information regarding executive compensation is set forth under the caption "EXECUTIVE COMPENSATION" in the Proxy Statement and is incorporated herein by reference. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K. 30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding the security ownership of certain beneficial owners and management is set forth under the captions "ELECTION OF DIRECTORS - Security Ownership of Directors and Management" in the Proxy Statement and "PRINCIPAL HOLDERS OF VOTING SECURITIES" in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding certain relationships and related transactions is set forth under the caption "ELECTION OF DIRECTORS - Business Experience" on page 2 of the Proxy Statement and "RELATIONSHIP AND TRANSCATIONS WITH THE LIMITED" on pages 16 through 19 of the Proxy Statement. Information regarding executive officers is set forth herein under the caption "SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I and is incorporated herein by reference. The Company's Certificate of Incorporation includes provisions relating to potential conflicts of interest that may arise between the Company and The Limited. Such provisions were adopted in light of the fact that the Company and The Limited and its subsidiaries are engaged in retail businesses and may pursue similar opportunities in the ordinary course of business. Among other things, these provisions generally eliminate the liability of directors and officers of the Company with respect to certain matters involving The Limited and its subsidiaries, including matters that may constitute corporate opportunities of The Limited, its subsidiaries or the Company. Any person purchasing or acquiring an interest in shares of capital stock of the Company will be deemed to have consented to such provisions relating to conflicts of interest and corporate opportunities, and such consent may restrict such person's ability to challenge transactions carried out in compliance with such provisions. Investors should review the Company's Certificate of Incorporation before making any investment in shares of the Company's capital stock. 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) List of Financial Statements. ---------------------------- The following consolidated financial statements of Abercrombie & Fitch Co. and subsidiaries and the related notes are filed as a part of this report pursuant to ITEM 8: Consolidated Statements of Income for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996. Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997. Consolidated Statements of Shareholders' Equity (Deficit) for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996. Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996. Notes to Consolidated Financial Statements. Report of Independent Accountants. (a)(2) List of Financial Statement Schedules. ------------------------------------- All schedules are omitted because the required information is either presented in the financial statements or notes thereto, or is not applicable, required or material. (a)(3) List of 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. 33-92568) (the "Form S-1"). 32 4.2. Certificate of Incorporation of The Limited, Inc. incorporated by reference to Exhibit 4.2 to the Company's Form S-1. 4.3. Bylaws of The Limited, Inc. incorporated by reference to Exhibit 4.3 to the Company's Form S-1. 10. Material Contracts. 10.1. Services Agreement by and between Abercrombie & Fitch Co. and The Limited, Inc., dated September 27, 1996 incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 10.2. Shared Facilities Agreement, dated September 27, 1996, by and between Abercrombie & Fitch Co. and The Limited, Inc. incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 10.3. Shared Facilities Agreement, dated September 27, 1996, by and between Abercrombie & Fitch Co. 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. 10.4. Corporate Agreement by and between Abercrombie & Fitch Co. and The Limited, Inc., dated October 1, 1996 incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 10.5. Tax Sharing Agreement by and between Abercrombie & Fitch Co. and The Limited, Inc., dated September 27, 1996 incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 10.6. Sublease Agreement by and between Victoria's Secret Stores, Inc. and Abercrombie & Fitch Co., dated June 1, 1995 incorporated by reference to Exhibit 10.3 to the Company's Form S-1. 10.7. Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan incorporated by reference to Exhibit B to the Proxy Statement dated April 14, 1997. 33 10.8. Abercrombie & Fitch Co. Incentive Compensation Performance Plan incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 14, 1997. 10.9. Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors incorporated by reference to Exhibit C to the Company's Proxy Statement dated April 14, 1997. 10.10. Form of Indemnification Agreement between the Company and the directors and officers of the Company incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended February 1, 1997. 10.11. Employment Agreement by and between Abercrombie & Fitch Co. and Michael S. Jeffries dated 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. 10.12 Employment Agreement by and between Abercrombie & Fitch Co. and Michele Donnan-Martin dated December 5, 1997 incorporated by reference to Exhibit 10.9 to Abercrombie & Fitch Co.'s Form S-4. 10.13 Employment Agreement by and between Abercrombie & Fitch Co. and Seth R. Johnson dated December 5, 1997 incorporated by reference to Exhibit 10.10 to Abercrombie & Fitch Co.'s Form S-4. 21. Subsidiaries of the Registrant. 23. Consent of Independent Accountants. 24. Powers of Attorney. 27. Financial Data Schedule. 99. Annual Report of the Limited, Inc. Savings and Retirement Plan. (b) Reports on Form 8-K. ------------------- The Company filed a Form 8-K on February 18, 1998 relating to the issuance of a press release announcing its fourth quarter results and the proposed exchange offer to be conducted by its parent, The Limited, a Delaware corporation. The Limited will be offering to exchange shares of the Company for shares of The Limited, subject to the terms and conditions of such exchange offer. The Company also filed a Registration Statement on Form S-4 relating to the shares of the Company to be issued pursuant to The Limited's proposed Exchange Offer. The February 17, 1998 press release was included in the Form 8-K filing. (c) Exhibits. -------- The exhibits to this report are listed in section (a)(3) of Item 14 above. (d) Financial Statement Schedules. ----------------------------- Not applicable. 34 SIGNATURES Pursuant to the requirements of Section 13 or l5(d) 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. Date: April 29, 1998 ABERCROMBIE & FITCH CO. (registrant) By /s/ Seth R. Johnson ------------------- Seth R. Johnson, Vice President - Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 29, 1998: Signature Title --------- ----- /s/ Leslie H. Wexner* Chairman of the Board of Directors - - -------------------------- Leslie H. Wexner /s/ Kenneth B. Gilman* Vice Chairman - - --------------------------- Kenneth B. Gilman /s/ Michael S. Jeffries* Director - - --------------------------- Michael S. Jeffries /s/ Roger D. Blackwell* Director - - --------------------------- Roger D. Blackwell /s/ E. Gordon Gee* Director - - --------------------------- E. Gordon Gee /s/ Donald B. Shackelford* Director - - --------------------------- Donald B. Shackelford *The undersigned, by signing his name hereto, does hereby sign this report on behalf of each of the above-indicated directors of the registrant pursuant to powers of attorney executed by such directors. By /s/ Kenneth B. Gilman --------------------- Kenneth B. Gilman Attorney-in-fact 35 [LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Abercrombie & Fitch Co. We have audited the accompanying consolidated balance sheets of Abercrombie & Fitch Co. and Subsidiaries as of January 31, 1998 and February 1, 1997, and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for each of the three fiscal years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Abercrombie & Fitch Co. and Subsidiaries as of January 31, 1998 and February 1, 1997 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Columbus, Ohio February 20, 1998 36 EXHIBIT INDEX ------------- Exhibit No. Document - - ----------- --------------------------- 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants. 24 Powers of Attorney. 27 Financial Data Schedule. 99 Annual Report of The Limited, Inc. Savings and Retirement Plan EX-21 2 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ---------- SUBSIDIARIES OF THE REGISTRANT Jurisdiction Subsidiaries (a) of Incorporation ------------ ---------------- Abercrombie & Fitch Service Corporation (b) Delaware Abercrombie & Fitch Stores, Inc. (b) Delaware (a) The names of certain subsidiaries are omitted since such unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of January 31, 1998. (b) Wholly-owned subsidiary of Abercrombie & Fitch Holding Corporation, a Delaware corporation and a wholly-owned subsidiary of the registrant. EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 ---------- [LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE] CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Abercrombie & Fitch Co. on Form S-4, Registration No. 333-46423 and Form S-8, Registration Nos. 333-15941, 333-15943 and 333-15945 of our report dated February 20, 1998, on our audits of the consolidated financial statements of Abercrombie & Fitch Co. and Subsidiaries as of January 31, 1998, and February 1, 1997, and for the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996, which report is included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Columbus, Ohio April 28, 1998 EX-24 4 POWER OF ATTORNEY EXHIBIT 24 ---------- POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ABERCROMBIE & FITCH CO. The undersigned officer and/or director of Abercrombie & Fitch Co., a Delaware corporation, which anticipates filing an Annual Report on Form 10-K for its 1997 fiscal year under the provisions of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Leslie H. Wexner and Kenneth B. Gilman and Michael S. Jeffries, and each of them, with full powers of substitution and resubstitution, as attorney to sign for the undersigned in any and all capacities such Annual Report on Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report on Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED as of the 30th day of January, 1998. /s/ LESLIE H. WEXNER -------------------- Leslie H. Wexner POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ABERCROMBIE & FITCH CO. The undersigned officer and/or director of Abercrombie & Fitch Co., a Delaware corporation, which anticipates filing an Annual Report on Form 10-K for its 1997 fiscal year under the provisions of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Leslie H. Wexner and Kenneth B. Gilman and Michael S. Jeffries, and each of them, with full powers of substitution and resubstitution, as attorney to sign for the undersigned in any and all capacities such Annual Report on Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report on Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED as of the 30th day of January, 1998. /s/ KENNETH B. GILMAN --------------------- Kenneth B. Gilman POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ABERCROMBIE & FITCH CO. The undersigned officer and/or director of Abercrombie & Fitch Co., a Delaware corporation, which anticipates filing an Annual Report on Form 10-K for its 1997 fiscal year under the provisions of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Leslie H. Wexner and Kenneth B. Gilman and Michael S. Jeffries, and each of them, with full powers of substitution and resubstitution, as attorney to sign for the undersigned in any and all capacities such Annual Report on Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report on Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED as of the 30th day of January, 1998. /s/ MICHAEL S. JEFFRIES ----------------------- Michael S. Jeffries POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ABERCROMBIE & FITCH CO. The undersigned officer and/or director of Abercrombie & Fitch Co., a Delaware corporation, which anticipates filing an Annual Report on Form 10-K for its 1997 fiscal year under the provisions of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Leslie H. Wexner and Kenneth B. Gilman and Michael S. Jeffries, and each of them, with full powers of substitution and resubstitution, as attorney to sign for the undersigned in any and all capacities such Annual Report on Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report on Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED as of the 30th day of January, 1998. /s/ DONALD B. SHACKELFORD ------------------------- Donald B. Shackelford POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ABERCROMBIE & FITCH CO. The undersigned officer and/or director of Abercrombie & Fitch Co., a Delaware corporation, which anticipates filing an Annual Report on Form 10-K for its 1997 fiscal year under the provisions of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Leslie H. Wexner and Kenneth B. Gilman and Michael S. Jeffries, and each of them, with full powers of substitution and resubstitution, as attorney to sign for the undersigned in any and all capacities such Annual Report on Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report on Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED as of the 30th day of January, 1998. /s/ E. GORDON GEE ----------------- E. Gordon Gee POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ABERCROMBIE & FITCH, CO. The undersigned officer and/or director of Abercrombie & Fitch Co., Delaware corporation, which anticipates filing an Annual Report on Form 10-K for its 1997 fiscal year under the provisions of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Leslie H. Wexner and Kenneth B. Gilman and Michael S. Jeffries, and each of them, with full powers of substitution and resubstitution, as attorney to sign for the undersigned in any and all capacities such Annual Report on Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report on Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED as of the 30th day of January, 1998. /s/ ROGER D. BLACKWELL ---------------------- Roger D. Blackwell EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ABERCROMBIE & FITCH CO. AND SUBSIDIARIES FOR THE YEAR ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-31-1998 FEB-02-1997 JAN-31-1998 42,667 0 1,695 0 33,927 108,962 124,000 53,483 183,238 66,962 50,000 511 0 0 58,264 183,238 521,617 521,617 320,537 320,537 116,955 0 3,583 80,542 32,220 48,322 0 0 0 48,322 .95 .94
EX-99 6 SAVINGS AND RETIREMENT PLAN Exhibit 99 ---------- Ary, Earman and Roepcke Certified Public Accountants REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Plan Administrator of The Limited, Inc. Savings and Retirement Plan: We have audited the accompanying statements of net assets available for benefits of The Limited, Inc. Savings and Retirement Plan (the "Plan") as of December 31, 1997 and 1996, and the related statements of changes in net assets available for benefits for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 1997 and 1996, and the changes in net assets available for benefits for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ary, Earman and Roepcke Columbus, Ohio, March 24, 1998. 2929 Kenny Road, Suite 280, Columbus, Ohio 43221 (614) 459-3868 FAX (614) 459-0219 THE LIMITED, INC. SAVINGS AND RETIREMENT PLAN --------------------------------------------- STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS ---------------------------------------------- DECEMBER 31, 1997 -----------------
Limited Fixed Index-500 U.S. Growth Wellington ASSETS TOTAL Stock Fund Income Fund Fund Fund Fund - - ------ ------- ----------- ----------- ----------- ----------- ----------- Investments, at Fair Value: Determined by Quoted Market Price: Common Stock: The Limited, Inc. (Cost $30,208,630) $ 68,513,782 $68,513,782 $ - $ - $ - $ - Intimate Brands, Inc. (Cost $2,541,834) 3,027,342 - - - - - Shares of Registered Investment Company: Vanguard Investment Contract Trust (Cost $88,164,291) 88,164,291 - 88,164,291 - - - Vanguard Index Trust - 500 Portfolio (Cost $49,301,042) 75,764,074 - - 75,764,074 - - Vanguard U.S. Growth Portfolio (Cost $46,374,763) 62,996,962 - - - 62,996,962 - Vanguard Wellington Fund (Cost $17,415,133) 19,115,007 - - - - 19,115,007 Temporary Investments (Cost Approximates Fair Value) 308 241 - - - - ------------ ----------- ----------- ----------- ----------- ----------- Total Investments 317,581,766 68,514,023 88,164,291 75,764,074 62,996,962 19,115,007 Contribution Receivable from Employers 22,644,974 1,372,671 10,275,136 4,632,422 3,993,277 1,928,218 Receivable from Employers for Withheld Participants' Contributions 1,395,711 91,947 391,319 391,168 333,773 156,157 Due from Brokers 1,655,464 1,543,543 - - - - Interfund Transfers - 858,585 (35,679) 3,698 (2,722) (828,447) Cash 417,865 - 368,110 49,755 - - Accrued Interest and Dividends 4,297 693 1,410 1,086 769 166 Other 2,470 - 2,470 - - - ------------ ----------- ----------- ----------- ----------- ----------- Total Assets 343,702,547 72,381,462 99,167,057 80,842,203 67,322,059 20,371,101 ------------ ----------- ----------- ----------- ----------- ----------- LIABILITIES - - ----------- Cash Overdraft 418,897 - - - 36,843 382,054 Administrative Fees Payable 218,952 85,121 - - 127,701 5,551 ------------ ----------- ----------- ----------- ----------- ----------- Total Liabilities 637,849 85,121 - - 164,544 387,605 ------------ ----------- ----------- ----------- ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $343,064,698 $72,296,341 $99,167,057 $80,842,203 $67,157,515 $19,983,496 ============ =========== =========== =========== =========== =========== Intimate Brands ASSETS Stock Fund - - ------ ----------- Investments, at Fair Value: Determined by Quoted Market Price: Common Stock: The Limited, Inc. (Cost $30,208,630) $ - Intimate Brands, Inc. (Cost $2,541,834) 3,027,342 Shares of Registered Investment Company: Vanguard Investment Contract Trust (Cost $88,164,291) - Vanguard Index Trust - 500 Portfolio (Cost $49,301,042) - Vanguard U.S. Growth Portfolio (Cost $46,374,763) - Vanguard Wellington Fund (Cost $17,415,133) - Temporary Investments (Cost Approximates Fair Value) 67 ----------- Total Investments 3,027,409 Contribution Receivable from Employers 443,250 Receivable from Employers for Withheld Participants' Contributions 31,347 Due from Brokers 111,921 Interfund Transfers 4,565 Cash - Accrued Interest and Dividends 173 Other - ----------- Total Assets 3,618,665 ----------- LIABILITIES - - ----------- Cash Overdraft - Administrative Fees Payable 579 ----------- Total Liabilities 579 ----------- NET ASSETS AVAILABLE FOR BENEFITS $ 3,618,086 ===========
The accompanying notes are an integral part of this financial statement. F-1 THE LIMITED, INC. SAVINGS AND RETIREMENT PLAN --------------------------------------------- STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS ---------------------------------------------- DECEMBER 31, 1996 -----------------
Limited Fixed Index-500 U.S. Growth Wellington ASSETS TOTAL Stock Fund Income Fund Fund Fund Fund - - ------ ------------ ------------ ----------- ----------- ----------- ----------- Investments, at Fair Value: Determined by Quoted Market Price: Common Stock: The Limited, Inc. (Cost $34,108,707) $ 60,824,705 $60,824,705 $ - $ - $ - $ - Intimate Brands, Inc. (Cost $1,037,101) 976,468 - - - - - Shares of Registered Investment Company: Vanguard Investment Contract Trust (Cost $82,389,513) 82,389,513 - 82,389,513 - - - Vanguard Index Trust - 500 Portfolio (Cost $38,949,927) 53,136,984 - - 53,136,984 - - Vanguard U.S. Growth Portfolio (Cost $36,722,202) 46,268,660 - - - 46,268,660 - Vanguard Wellington Fund (Cost $9,986,245) 10,453,023 - - - - 10,453,023 Temporary Investments (Cost Approximates Fair Value) 30,946 873 18,039 5,684 3,824 329 ------------ ----------- ----------- ----------- ----------- ----------- Total Investments 254,080,299 60,825,578 82,407,552 53,142,668 46,272,484 10,453,352 Contribution Receivable from Employers 20,704,066 2,147,770 7,190,373 5,136,265 4,396,598 1,667,242 Receivable from Employers for Withheld Participants' Contributions 1,183,352 118,433 391,432 298,971 255,519 108,647 Due from Brokers 311,530 311,530 - - - - Interfund Transfers - 4,686 (12,473) 12,645 (4,213) (2,507) Accrued Interest and Dividends 4,553 1,089 1,772 847 682 131 ------------ ----------- ----------- ----------- ----------- ----------- Total Assets 276,283,800 63,409,086 89,978,656 58,591,396 50,921,070 12,226,865 ------------ ----------- ----------- ----------- ----------- ----------- LIABILITIES - - ----------- Due to Brokers 122,686 - - - - - Administrative Fees Payable 278,885 114,176 29,286 15,828 109,033 10,562 ------------ ----------- ----------- ----------- ----------- ----------- Total Liabilities 401,571 114,176 29,286 15,828 109,033 10,562 ------------ ----------- ----------- ----------- ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $275,882,229 $63,294,910 $89,949,370 $58,575,568 $50,812,037 $12,216,303 ============ =========== =========== =========== =========== =========== Intimate Brands ASSETS Stock Fund - - ------ ----------- Investments, at Fair Value: Determined by Quoted Market Price: Common Stock: The Limited, Inc. (Cost $34,108,707) $ - Intimate Brands, Inc. (Cost $1,037,101) 976,468 Shares of Registered Investment Company: Vanguard Investment Contract Trust (Cost $82,389,513) - Vanguard Index Trust - 500 Portfolio (Cost $38,949,927) - Vanguard U.S. Growth Portfolio (Cost $36,722,202) - Vanguard Wellington Fund (Cost $9,986,245) - Temporary Investments (Cost Approximates Fair Value) 2,197 ----------- Total Investments 978,665 Contribution Receivable from Employers 165,818 Receivable from Employers for Withheld Participants' Contributions 10,350 Due from Brokers - Interfund Transfers 1,862 Accrued Interest and Dividends 32 ----------- Total Assets 1,156,727 ----------- LIABILITIES - - ----------- Due to Brokers 122,686 Administrative Fees Payable - ----------- Total Liabilities 122,686 ----------- NET ASSETS AVAILABLE FOR BENEFITS $ 1,034,041 ===========
The accompanying notes are an integral part of this financial statement. F-2 THE LIMITED, INC. SAVINGS AND RETIREMENT PLAN ---------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS --------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1997 ------------------------------------
Limited Fixed Index-500 U.S. Growth Wellington Total Stock Fund Income Fund Fund Fund Fund ------------ ----------- ----------- ----------- ----------- ------------ Investment Income: Increase in Net Unrealized Appreciation $ 32,720,107 $11,589,154 $ - $12,275,975 $ 7,075,741 $ 1,233,096 Realized Gain on Sale of Securities 17,867,974 8,862,376 - 5,135,799 3,381,580 398,590 Interest 5,334,197 10,449 5,286,565 18,262 14,531 2,544 Dividends 1,474,398 1,422,393 - - - - Mutual Funds' Earnings 5,548,382 - - 1,569,334 2,443,033 1,536,015 ------------ ----------- ----------- ----------- ----------- ----------- Total Investment Income 62,945,058 21,884,372 5,286,565 18,999,370 12,914,885 3,170,245 ------------ ----------- ----------- ----------- ----------- ----------- Contributions: Employers 32,697,039 1,963,696 15,507,190 6,371,651 5,370,568 2,879,631 Participants 18,024,880 1,322,245 5,226,156 4,897,686 4,290,800 1,963,375 ------------ ----------- ----------- ----------- ----------- ----------- Total Contributions 50,721,919 3,285,941 20,733,346 11,269,337 9,661,368 4,843,006 ------------ ----------- ----------- ----------- ----------- ----------- Interfund Transfers - (6,914,328) (1,840,989) 3,344,531 2,288,479 1,827,162 ------------ ----------- ----------- ----------- ----------- ----------- Administrative Expense (892,874) (204,971) (261,763) (203,185) (174,289) (42,505) ------------ ----------- ----------- ----------- ----------- ----------- Benefits to Participants (45,591,634) (9,049,583) (14,699,472) (11,143,418) (8,344,965) (2,030,715) ------------ ----------- ----------- ----------- ----------- ----------- Increase in Net Assets Available for Benefits 67,182,469 9,001,431 9,217,687 22,266,635 16,345,478 7,767,193 Beginning Net Assets Available for Benefits 275,882,229 63,294,910 89,949,370 58,575,568 50,812,037 12,216,303 ------------ ----------- ----------- ----------- ----------- ----------- Ending Net Assets Available for Benefits $343,064,698 $72,296,341 $99,167,057 $80,842,203 $67,157,515 $19,983,496 ============ =========== =========== =========== =========== =========== Intimate Brands Stock Fund ------------ Investment Income: Increase in Net Unrealized Appreciation $ 546,141 Realized Gain on Sale of Securities 89,629 Interest 1,846 Dividends 52,005 Mutual Funds' Earnings - ----------- Total Investment Income 689,621 ----------- Contributions: Employers 604,303 Participants 324,618 ----------- Total Contributions 928,921 ----------- Interfund Transfers 1,295,145 ----------- Administrative Expense (6,161) ----------- Benefits to Participants (323,481) ----------- Increase in Net Assets Available for Benefits 2,584,045 Beginning Net Assets Available for Benefits 1,034,041 ----------- Ending Net Assets Available for Benefits $ 3,618,086 ===========
The accompanying notes are an integral part of this financial statement. F-3 THE LIMITED, INC. SAVINGS AND RETIREMENT PLAN ---------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS --------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------------------------
Limited Fixed Index-500 U.S. Growth Wellington Total Stock Fund Income Fund Fund Fund Fund ------------ ---------- ----------- ----------- ----------- ----------- Investment Income: Increase (Decrease) in Net Unrealized Appreciation $ 2,868,839 $(6,465,140) $ - $ 5,621,065 $ 3,428,551 $ 344,996 Realized Gain (Loss) on Sale of Securities 17,166,139 12,343,083 - 2,732,990 2,001,323 90,165 Interest 4,977,925 17,980 4,888,501 6,109 4,933 60,295 Dividends 1,400,891 1,395,032 - - - - Mutual Funds' Earnings 5,229,593 - - 1,139,142 3,420,290 670,161 ------------ ----------- ----------- --------- --------- ----------- Total Investment Income (Loss) 31,643,387 7,290,955 4,888,501 9,499,306 8,855,097 1,165,617 ------------ ----------- ----------- ----------- ----------- ----------- Contributions: Employers 30,145,525 3,087,453 10,664,673 7,443,415 6,287,166 2,489,055 Participants 16,172,183 1,802,993 5,382,468 4,063,595 3,449,162 1,412,169 ------------ ----------- ----------- ----------- ----------- ----------- Total Contributions 46,317,708 4,890,446 16,047,141 11,507,010 9,736,328 3,901,224 ------------ ----------- ----------- ----------- ----------- ----------- Interfund Transfers - (13,040,074) (3,485,681) 5,016,481 6,476,961 4,164,295 ------------ ----------- ----------- ----------- ----------- ----------- Transfer of Participants' Account Balances to Former Affiliate's Plan (10,235,572) (2,073,801) (2,722,848) (3,193,351) (2,040,825) (204,747) ------------ ----------- ----------- ----------- ----------- ----------- Administrative Expense (935,202) (258,452) (320,918) (125,949) (207,292) (22,591) ------------ ----------- ----------- ----------- ----------- ----------- Benefits to Participants (29,417,363) (6,076,610) (12,983,786) (5,442,433) (4,315,844) (585,243) ------------ ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets Available for Benefits 37,372,958 (9,267,536) 1,422,409 17,261,064 18,504,425 8,418,555 Beginning Net Assets Available for Benefits 238,509,271 72,562,446 88,526,961 41,314,504 32,307,612 3,797,748 ------------ ----------- ----------- ----------- ----------- ----------- Ending Net Assets Available for Benefits $275,882,229 $63,294,910 $89,949,370 $58,575,568 $50,812,037 $12,216,303 ============ =========== =========== =========== =========== =========== Intimate Brands Stock Fund ------------ Investment Income: Increase (Decrease) in Net Unrealized Appreciation $ (60,633) Realized Gain (Loss) on Sale of Securities (1,422) Interest 107 Dividends 5,859 Mutual Funds' Earnings - ----------- Total Investment Income (Loss) (56,089) ----------- Contributions: Employers 173,763 Participants 61,796 ----------- Total Contributions 235,559 ----------- Interfund Transfers 868,018 ----------- Transfer of Participants' Account Balances to Former Affiliate's Plan - ----------- Administrative Expense - ----------- Benefits to Participants (13,447) ----------- Increase (Decrease) in Net Assets Available for Benefits 1,034,041 Beginning Net Assets Available for Benefits - ----------- Ending Net Assets Available for Benefits $ 1,034,041 ===========
The accompanying notes are an integral part of this financial statement. F-4 THE LIMITED, INC. SAVINGS AND RETIREMENT PLAN ---------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS --------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1995 ------------------------------------
Limited Fixed Index-500 U.S. Growth Wellington Total Stock Fund Income Fund Fund Fund Fund ------------ ------------ ------------ ------------ ------------ ------------ Investment Income: Increase (Decrease) in Net Unrealized Appreciation $ 3,582,066 $ (9,559,767) $ - $ 7,535,683 $ 5,484,368 $ 121,782 Realized Gain on Sale of Securities 7,412,552 5,426,833 - 1,096,390 877,023 12,306 Interest 4,771,693 10,190 4,752,866 4,761 3,726 150 Dividends 1,632,728 1,632,728 - - - - Mutual Funds' Earnings 2,054,249 - - 832,487 1,151,646 70,116 ------------ ------------ ------------ ------------ ------------ ------------ Total Investment Income (Loss) 19,453,288 (2,490,016) 4,752,866 9,469,321 7,516,763 204,354 ------------ ------------ ------------ ------------ ------------ ------------ Contributions: Employers 29,943,002 4,142,615 13,472,869 6,246,002 4,928,087 1,153,429 Participants 13,909,162 2,380,938 4,899,509 3,466,763 2,694,626 467,326 ------------ ------------ ------------ ------------ ------------ ------------ Total Contributions 43,852,164 6,523,553 18,372,378 9,712,765 7,622,713 1,620,755 ------------ ------------ ------------ ------------ ------------ ------------ Interfund Transfers - (775,658) (1,604,380) (28,051) 378,900 2,029,189 ------------ ------------ ------------ ------------ ------------ ------------ Administrative Expense (1,017,651) (384,338) (357,753) (153,254) (117,880) (4,426) ------------ ------------ ------------ ------------ ------------ ------------ Benefits to Participants (24,679,806) (7,721,019) (9,758,147) (3,959,696) (3,188,820) (52,124) ------------ ------------ ------------ ------------ ------------ ------------ Increase (Decrease) in Net Assets Available for Benefits 37,607,995 (4,847,478) 11,404,964 15,041,085 12,211,676 3,797,748 Beginning Net Assets Available for Benefits 200,901,276 77,409,924 77,121,997 26,273,419 20,095,936 - ------------ ------------ ------------ ------------ ------------ ------------ Ending Net Assets Available for Benefits $238,509,271 $ 72,562,446 $ 88,526,961 $ 41,314,504 $ 32,307,612 $ 3,797,748 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of this financial statement. F-5 THE LIMITED, INC. SAVINGS AND RETIREMENT PLAN --------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (1) DESCRIPTION OF THE PLAN ----------------------- General ------- The Limited, Inc. Savings and Retirement Plan (the "Plan") is a defined contribution plan covering certain employees of The Limited, Inc. and its affiliates (the "Employers") who are at least 21 years of age and have completed 1,000 or more hours of service during their first consecutive twelve months of employment or any calendar year beginning in or after their first consecutive twelve months of employment. Certain employees of the Employers, who are covered by a collective bargaining agreement, are not eligible to participate in the Plan. At December 31, 1997, there were 31,412 participants in the Plan. Effective January 1, 1997, the Plan allows for the associates of Galyans Trading Company, Inc. who have met the eligibility requirements of the Plan to participate in the Plan for purposes of electing voluntary tax-deferred contributions only and will not be eligible to receive allocations of Employers' contributions as noted below. Effective October 1, 1997, the Plan's enrollment dates were changed from quarterly to monthly. On January 31, 1996, The Limited, Inc. sold 60% of its interest in World Financial Network National Bank and transferred the assets and liabilities allocated to the employees of World Financial Network National Bank and its affiliates to the World Financial Network National Bank Savings and Retirement Plan. The following description of the Plan provides only general information. Participants should refer to the Plan document for a more complete description of the Plan's provisions. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) as amended. Contributions ------------- Employer Contributions: The Employers may provide a non-service related retirement contribution of 4% of annual compensation up to the Social Security wage base and 7% of annual compensation after that and a service related retirement contribution of 1% of annual compensation for participants who have completed five or more years of vesting service as of the last day of the Plan year. Participants who complete 500 hours of service during the Plan year and are participants on the last day of the Plan year are eligible. The annual compensation of each participant taken into account under the Plan is limited to the maximum amount permitted under Section 401(a)(17) of the Internal Revenue Code. The annual compensation limit for the Plan year ended December 31, 1997, was $160,000. The Employers may provide a matching contribution of 100% of the participant's voluntary contributions up to 3% of the participant's total annual compensation. Participant Voluntary Contributions: A participant may elect to make a voluntary tax-deferred contribution of 1% to 6% of his or her annual compensation up to the maximum permitted under Section 402(g) of the Internal Revenue Code adjusted annually ($9,500 at December 31, 1997). This voluntary tax-deferred contribution may be limited by Section 401(k) of the Internal Revenue Code. F-6 Vesting ------- A participant is fully and immediately vested for voluntary and rollover contributions and is credited with a year of vesting service in the Employers' contributions for each Plan year that they are credited with at least 500 hours of service. A summary of vesting percentages in the Employers' contributions follows:
Years of Vested Service Percentage -------------------------- ----------- Less than 3 years 0% 3 years 20 4 years 40 5 years 60 6 years 80 7 years 100
Payment Of Benefits ------------------- The full value of participants' accounts becomes payable upon retirement, disability, or death. Upon termination of employment for any other reason participants' accounts, to the extent vested, become payable. Those participants with vested account balances greater than $5,000 ($3,500 prior to January 1, 1997) have the option of leaving their accounts invested in the Plan until age 65. All benefits will be paid as a lump-sum distribution. Those participants holding shares of Employer Securities will have the option of receiving such amounts in whole shares of Employer Securities and cash for any fractional shares. Participants have the option of having their benefit paid directly to an eligible retirement plan specified by the participant. A participant who is fully vested in his or her account and who has participated in the Plan for at least seven years may obtain an in- service withdrawal from their account based on the percentage amounts designated by the Plan. A participant may also request a hardship distribution due to an immediate and heavy financial need based on the terms of the Plan. Amounts Allocated to Participants Withdrawn from the Plan --------------------------------------------------------- The vested portion of net assets available for benefits allocated to participants withdrawn from the plan as of December 31, 1997 and 1996, is set forth below:
1997 1996 ---------- ---------- Limited Stock Fund $ 377,704 $ 914,636 Fixed Income Fund 645,142 1,171,143 Index-500 Fund 489,489 371,539 U.S. Growth Fund 409,316 338,708 Wellington Fund 128,102 77,814 Intimate Brands Stock Fund 12,002 165 ---------- ---------- $2,061,755 $2,874,005 ========== ==========
Forfeitures ----------- Forfeitures are used to reduce the Employers' required contributions. Utilized forfeitures for 1997, 1996 and 1995, are set forth below:
1997 1996 1995 ---------- ---------- ---------- Limited Stock Fund $ 345,937 $ 309,429 $ 268,411 Fixed Income Fund 2,715,821 3,178,025 1,691,327 Index-500 Fund 1,240,275 743,916 352,056 U.S. Growth Fund 1,028,955 692,299 295,948 Wellington Fund 269,006 36,468 - Intimate Brands Stock Fund 9,983 - - ---------- ---------- ---------- $5,609,977 $4,960,137 $2,607,742 ========== ========== ==========
F-7 Expenses -------- Brokerage fees, transfer taxes, and other expenses incurred in connection with the investment of the Plan's assets will be added to the cost of such investments or deducted from the proceeds thereof, as the case may be. Administrative expenses of the Plan will be paid from the Plan from earnings not allocated to participants' accounts. The remainder will be paid by the Employers, unless the Employers elect to pay more or all of such costs. Tax Determination ----------------- The Plan obtained its latest determination letter on January 30, 1995, in which the Internal Revenue Service stated that the Plan, as amended and restated January 1, 1992 was in compliance with the applicable requirements of the Internal Revenue Code. The Plan has been amended since receiving the determination letter. However, the Plan administrator and the Plan's tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the Internal Revenue Code. Accordingly, the following Federal income tax rules will apply to the Plan: Voluntary tax-deferred contributions made under the Plan by a participant and contributions made by the Employers to participant accounts are generally not taxable until such amounts are distributed. The participants are not subject to Federal income tax on interest, dividends, or gains in their particular accounts until distributed. The foregoing is only a brief summary of certain tax implications and applies only to Federal tax regulations currently in effect. (2) SUMMARY OF ACCOUNTING POLICIES ------------------------------ The Plan's financial statements are prepared on the accrual basis of accounting. Assets of the Plan are valued at fair value. If available, quoted market prices are used to value investments. The amounts for investments that have no quoted market price are shown at their estimated fair value, which is determined based on yields equivalent for such securities or for securities of comparable maturity, quality, and type as obtained from market makers. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Realized gains or losses on the distribution or sale of securities represent the difference between the average cost of such securities held and the fair value on the date of distribution or sale. Reclassification of Prior Year Information ------------------------------------------ Certain prior year information has been reclassified to conform with current year presentation. Estimates --------- The preparation of financial statements in conformity with generally accepted accounting principles requires the Plan administrator to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates. F-8 (3) INVESTMENTS ----------- Net unrealized appreciation, equal to the difference between cost and fair value of all investments held at the applicable valuation dates, is recognized in determining the value of each fund. The unrealized appreciation (depreciation) as of December 31, 1997, 1996 and 1995 is set forth below:
1997 1996 1995 ----------- ------------ ----------- Limited Stock Fund $38,305,152 $26,715,998 $33,181,138 Fixed Income Fund - - - Index-500 Fund 26,463,032 14,187,057 8,565,992 U.S. Growth Fund 16,622,199 9,546,458 6,117,907 Wellington Fund 1,699,874 466,778 121,782 Intimate Brands Stock Fund 485,508 (60,633) - ----------- ----------- ----------- $83,575,765 $50,855,658 $47,986,819 =========== =========== ===========
The following is a summary of the net gain (loss) on securities sold or distributed during the periods ended December 31, 1997, 1996 and 1995:
Realized Proceeds Cost Gain (Loss) ----------- ----------- ------------ Period Ended December 31, 1997 Limited Stock Fund $18,999,960 $10,137,584 $ 8,862,376 Fixed Income Fund 26,199,812 26,199,812 - Index-500 Fund 15,205,435 10,069,636 5,135,799 U.S. Growth Fund 12,450,768 9,069,188 3,381,580 Wellington Fund 3,458,363 3,059,773 398,590 Intimate Brands Stock Fund 792,401 702,772 89,629 ----------- ----------- ----------- $77,106,739 $59,238,765 $17,867,974 =========== =========== =========== Period Ended December 31, 1996 Limited Stock Fund $24,864,301 $12,521,218 $12,343,083 Fixed Income Fund 31,802,226 31,802,226 - Index-500 Fund 11,800,336 9,067,346 2,732,990 U.S. Growth Fund 8,582,452 6,581,129 2,001,323 Wellington Fund 1,842,744 1,752,579 90,165 Intimate Brands Stock Fund 11,229 12,651 (1,422) ----------- ----------- ----------- $78,903,288 $61,737,149 $17,166,139 =========== =========== =========== Period Ended December 31, 1995 Limited Stock Fund $ 9,577,761 $ 4,150,928 $ 5,426,833 Fixed Income Fund 21,155,451 21,155,451 - Index-500 Fund 6,616,037 5,519,647 1,096,390 U.S. Growth Fund 4,986,144 4,109,121 877,023 Wellington Fund 266,558 254,252 12,306 ----------- ----------- ----------- $42,601,951 $35,189,399 $ 7,412,552 =========== =========== ===========
Contributions under the Plan are invested in one of six investment funds: (1) The Limited Stock Fund, consisting of common stock of The Limited, Inc., a Delaware corporation (the "Issuer") and parent company of the Employers, (2) the Fixed Income Fund, which is invested in the Vanguard Investment Contract Trust, and prior to January 1996, was also invested in other guaranteed investment contracts issued by insurance companies, (3) the Index-500 Fund, which is invested in the Vanguard Index - 500 Portfolio, (4) the U.S. Growth Fund, which is invested in the Vanguard U.S. Growth Portfolio, (5) the Wellington Fund, which is invested in the Vanguard Wellington Fund, and (6) the Intimate Brands Stock Fund, consisting of common stock of Intimate Brands, Inc., a Delaware corpora- tion and an eighty-three percent owned subsidiary of The Limited, Inc. Prior to July 1, 1995 the Wellington Fund was not an investment option and prior to October 1, 1996 the Intimate Brands Stock Fund was not an investment option. F-9 Participants' voluntary and Employers' contributions may be invested in any one or more of the funds, at the election of the participant. There are 5,216 participants in the Limited Stock Fund, 19,220 in the Fixed Income Fund, 10,330 in the Index-500 Fund, 8,625 in the U.S. Growth Fund, 5,854 in the Wellington Fund, and 1,602 in the Intimate Brands Stock Fund at December 31, 1997. Participants may make or change an investment direction as of the first day of any month of the Plan year. (4) PLAN ADMINISTRATION ------------------- The Plan is administered by a Committee, the members of which are appointed by the Board of Directors of the Employers. (5) PLAN TERMINATION ---------------- Although the Employers have not expressed any intent to do so, the Employers have the right under the Plan to discontinue their contributions at any time. The Limited, Inc. has the right at any time, by action of its Board of Directors, to terminate the Plan subject to provisions of ERISA. Upon Plan termination or partial termination, participants will become fully vested in their accounts. F-10 -----END PRIVACY-ENHANCED MESSAGE-----