SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999 ------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- --------------------- Commission file number 1-8344 ------ THE LIMITED, INC. ------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 31-1029810 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Three Limited Parkway, P.O. Box 16000, Columbus, OH 43216 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 415-7000 ----------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.50 Par Value Outstanding at August 27, 1999 - ---------------------------- ------------------------------- 214,714,109 Shares
THE LIMITED, INC. TABLE OF CONTENTS Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income Thirteen and Twenty-six Weeks Ended July 31, 1999 and August 1, 1998 ................... 3 Consolidated Balance Sheets July 31, 1999, January 30, 1999 and August 1, 1998.. 4 Consolidated Statements of Cash Flows Twenty-six Weeks Ended July 31, 1999 and August 1, 1998 ................... 5 Notes to Consolidated Financial Statements .................. 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ...... 13 Part II. Other Information Item 1. Legal Proceedings ...................................... 24 Item 6. Exhibits and Reports on Form 8-K ....................... 25 2
PART 1 - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS THE LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended --------------------------------- ------------------------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 --------------- -------------- -------------- ------------- <S> <C> <C> <C> <C> Net sales $2,267,821 $2,083,101 $4,372,619 $4,091,178 Costs of goods sold and buying and occupancy costs (1,534,094) (1,468,387) (2,978,689) (2,889,794) --------------- -------------- -------------- ------------- Gross income 733,727 614,714 1,393,930 1,201,384 General, administrative and store operating expenses (602,051) (538,336) (1,192,824) (1,068,659) Special & nonrecurring items, net (13,075) 1,651,397 (13,075) 1,740,030 --------------- -------------- -------------- ------------- Operating income 118,601 1,727,775 188,031 1,872,755 Interest expense (20,159) (16,414) (36,949) (32,155) Other income 12,509 15,595 27,840 31,748 Minority interest (13,586) (12,618) (21,011) (20,541) --------------- -------------- -------------- ------------- Income before income taxes 97,365 1,714,338 157,911 1,851,807 Provision for income taxes 45,000 30,000 72,000 88,000 --------------- -------------- -------------- ------------- Net income $52,365 $1,684,338 $85,911 $1,763,807 =============== ============== ============== ============= Net income per share: Basic $0.24 $7.13 $0.38 $6.92 =============== ============== ============== ============= Diluted $0.22 $6.93 $0.36 $6.75 =============== ============== ============== ============= Dividends per share $0.15 $0.13 $0.30 $0.26 =============== ============== ============== ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
THE LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands) <TABLE> <CAPTION> July 31, January 30, August 1, 1999 1999 1998 ------------- ------------- ------------- (Unaudited) (Unaudited) ASSETS ------ Current assets: <S> <C> <C> <C> Cash and equivalents $490,322 $870,317 $498,862 Accounts receivable 72,824 77,715 81,131 Inventories 1,238,404 1,119,670 1,144,545 Store supplies 102,901 98,797 91,187 Other 169,588 151,685 80,954 ------------- ------------- ------------- Total current assets 2,074,039 2,318,184 1,896,679 Property and equipment, net 1,400,539 1,361,761 1,375,489 Restricted cash -- 351,600 351,600 Deferred income taxes 97,271 48,782 65,613 Other assets 455,847 469,381 447,564 ------------- ------------- ------------- Total assets $4,027,696 $4,549,708 $4,136,945 ============= ============= ============= <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: <S> <C> <C> <C> Accounts payable $305,780 $289,947 $264,864 Current portion of long-term debt 200,000 100,000 -- Accrued expenses 726,275 681,515 701,746 Income taxes 44,075 176,473 14,004 ------------- ------------- ------------- Total current liabilities 1,276,130 1,247,935 980,614 Long-term debt 750,000 550,000 650,000 Other long-term liabilities 59,488 56,010 54,606 Minority interest 54,391 110,860 99,258 Contingent stock redemption agreement -- 351,600 351,600 Shareholders' equity: Common stock 189,727 180,352 180,352 Paid-in capital 164,588 157,214 151,002 Retained earnings 5,889,620 5,537,033 5,306,178 ------------- ------------- ------------- 6,243,935 5,874,599 5,637,532 Less: treasury stock, at average cost (4,356,248) (3,641,296) (3,636,665) ------------- ------------- ------------- Total shareholders' equity 1,887,687 2,233,303 2,000,867 ------------- ------------- ------------- Total liabilities and shareholders' equity $4,027,696 $4,549,708 $4,136,945 ============= ============= ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
THE LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) (Unaudited) <TABLE> <CAPTION> Twenty-six Weeks Ended ------------------------------------ July 31, August 1, 1999 1998 --------------- --------------- <S> <C> <C> Operating activities: Net income $85,911 $1,763,807 Impact of other operating activities on cash flows: Depreciation and amortization 143,751 144,362 Special and nonrecurring items, net 7,845 (1,705,030) Minority interest, net of dividends paid 10,650 7,720 Changes in assets and liabilities: Accounts receivable 4,891 1,288 Inventories (118,734) (178,542) Accounts payable and accrued expenses 46,898 34,429 Income taxes (175,657) (148,405) Other assets and liabilities 17,583 (54,818) --------------- --------------- Net cash provided from (used for) operating activities 23,138 (135,189) --------------- --------------- Investing activities: Net proceeds (expenditures) related to Easton real estate (13,348) 7,756 investment Capital expenditures (191,752) (122,932) Decrease in restricted cash 351,600 -- Proceeds from sale of interest in investee -- 131,262 --------------- --------------- Net cash provided from investing activities 146,500 16,086 --------------- --------------- Financing activities: Proceeds from floating rate notes 300,000 -- Repurchase of common stock, including transaction costs (751,482) -- Repurchase of subsidiary common stock (62,639) (47,485) Dividends paid (66,401) (65,219) Settlement of Abercrombie & Fitch intercompany account -- (47,649) Stock options and other 30,889 31,923 --------------- --------------- Net cash used for financing activities (549,633) (128,430) --------------- --------------- Net decrease in cash and equivalents (379,995) (247,533) Cash and equivalents, beginning of year 870,317 746,395 --------------- --------------- Cash and equivalents, end of period $490,322 $498,862 =============== =============== </TABLE> In 1998, noncash financing activities include the addition of $1.766 billion treasury stock as a result of the exchange of 40.5 million common shares of Abercrombie & Fitch ("A&F") previously owned by the Company for 47.1 million shares of common stock of the Company. Additional noncash financing activities include a $5.6 million dividend effected by a pro rata spin-off of the Company's remaining shares of A&F (see note 8). The accompanying notes are an integral part of these consolidated financial statements. 5
THE LIMITED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The consolidated financial statements include the accounts of The Limited, Inc. (the "Company") and all significant subsidiaries which are more than 50 percent owned and controlled. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements include the results of Abercrombie & Fitch ("A&F") through May 19, 1998, when it was established as an independent company. Investments in other entities (including joint ventures) where the Company has the ability to significantly influence operating and financial policies are accounted for on the equity method. Certain amounts on previously reported financial statement captions have been reclassified to conform with current period presentation. The consolidated financial statements as of and for the thirteen and twenty-six week periods ended July 31, 1999 and August 1, 1998 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's 1998 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (which are of a normal recurring nature except as discussed in Note 8) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year. The consolidated financial statements as of and for the thirteen and twenty-six week periods ended July 31, 1999 and August 1, 1998 included herein have been reviewed by the independent public accounting firm of PricewaterhouseCoopers LLP and the report of such firm follows the Notes to Consolidated Financial Statements. 2. Shareholders' Equity and Earnings Per Share On June 3, 1999, the Company completed an issuer tender offer by purchasing 15 million shares of its common stock at $50 per share. Additionally, on May 3, 1999, the Contingent Stock Redemption Agreement ("the Agreement") was rescinded, making the $351.6 million in restricted cash available for general corporate purposes. This cash and other available funds were used to purchase shares under the issuer tender offer. Weighted average common shares outstanding (thousands): <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended ---------------------------------- ---------------------------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Common shares issued 379,454 379,454 379,454 379,454 Treasury shares (158,425) (143,322) (155,073) (124,469) ---------------- ---------------- ---------------- ---------------- Basic shares 221,029 236,132 224,381 254,985 Dilutive effect of stock options and restricted shares 9,197 6,947 8,506 6,236 ---------------- ---------------- ---------------- ---------------- Diluted shares 230,226 243,079 232,887 261,221 ================ ================ ================ ================ </TABLE> The computation of earnings per diluted share excludes options to purchase 0.1 million shares of common stock that were outstanding at quarter-end for 1999 and 1998, because the options' exercise price was greater than the average market price of the common shares. 6
3. Inventories The fiscal year of the Company and its subsidiaries is comprised of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Valuation of finished goods inventories is based principally upon the lower of average cost or market determined on a first-in, first-out basis, using the retail method. Inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns and shrinkage estimates for the total selling season. 4. Property and Equipment, Net Property and equipment, net, consisted of (thousands): <TABLE> <CAPTION> July 31, January 30, August 1, 1999 1999 1998 -------------- -------------- -------------- <S> <C> <C> <C> Property and equipment, at cost $3,116,234 $3,014,084 $2,971,075 Accumulated depreciation and amortization (1,715,695) (1,652,323) (1,595,586) -------------- -------------- -------------- Property and equipment, net $1,400,539 $1,361,761 $1,375,489 ============== ============== ============== </TABLE> 5. Income Taxes The provision for income taxes is based on the current estimate of the annual effective tax rate. Income taxes paid during the twenty-six weeks ended July 31, 1999 and August 1, 1998 approximated $252.9 million and $199.0 million. The Internal Revenue Service (IRS) has assessed the Company for additional taxes for the years 1992 to 1994 relating to the undistributed earnings of foreign affiliates for which the Company has provided deferred taxes. On September 7, 1999, the United States Tax Court sustained the position of the IRS with respect to the 1992 tax year. In connection with an appeal of the Tax Court judgment, the Company plans to make a $50 million payment of taxes and interest that will reduce deferred tax liabilities. If the position of the IRS on this same issue is sustained for the 1993 and 1994 tax years, an additional $56 million payment would be required that would further reduce deferred tax liabilities. Management believes resolution of this matter will not have a material adverse effect on the Company's results of operations or financial condition. 6. Financing Arrangements Unsecured long-term debt consisted of (thousands): <TABLE> <CAPTION> July 31, January 30, August 1, 1999 1999 1998 -------------- -------------- -------------- <S> <C> <C> <C> 7 1/2% Debentures due March 2023 $250,000 $250,000 $250,000 7 4/5% notes due May 2002 150,000 150,000 150,000 9 1/8% notes due February 2001 150,000 150,000 150,000 8 7/8% notes due August 1999 100,000 100,000 100,000 Floating rate notes 300,000 - - -------------- -------------- -------------- 950,000 650,000 650,000 Less: current portion of long-term debt 200,000 100,000 - -------------- -------------- -------------- $750,000 $550,000 $650,000 ============== ============== ============== </TABLE> 7
In May, 1999, the Company issued $300 million of floating rate notes, consisting of three individual series of $100 million each. The notes are senior, unsecured obligations and are repayable as follows: $100 million due May 2000, $100 million due November 2000 and $100 million due May 2001. Interest is based on LIBOR and is payable quarterly in arrears. The Company, at its option, may redeem any series of notes (in its entirety) on any interest payment date. The Company maintains a $1 billion unsecured revolving credit agreement (the "Agreement"), established on September 29,1997 (the "Effective Date"). Borrowings outstanding under the Agreement are due September 28, 2002. However, the revolving term of the Agreement may be extended an additional two years upon notification by the Company on the second and fourth anniversaries of the Effective Date, subject to the approval of the lending banks. The Agreement has several borrowing options, including interest rates which are based on either the lender's "Base Rate," as defined, LIBOR, CD-based options or at a rate submitted under a bidding process. Facilities fees payable under the Agreement are based on the Company's long-term credit ratings, and currently approximate 0.1% of the committed amount per annum. The Agreement contains covenants relating to the Company's working capital, debt and net worth. No amounts were outstanding under the Agreement at July 31, 1999. The Agreement supports the Company's commercial paper program which is used from time to time to fund working capital and other general corporate requirements. No commercial paper was outstanding at July 31, 1999. Up to $250 million of debt securities and warrants to purchase debt securities may be issued under the Company's shelf registration statement. The Company periodically enters into interest rate swap agreements with the intent to manage interest rate exposure. At July 31, 1999 the Company has an interest rate swap position of $100 million notional principal amount outstanding. This contract effectively changed the Company's interest rate exposure on $100 million of variable rate debt to a fixed rate of 8.09% through July 2000. Interest paid during the twenty-six weeks ended July 31, 1999 and August 1, 1998 approximated $34.0 million and $32.4 million. 7. Segment Information The Company identifies operating segments based on a business' operating characteristics. Reportable segments were determined based on similar economic characteristics, the nature of products and services, and the method of distribution. The apparel segment derives its revenues from sales of women's, men's, and children's apparel. The Intimate Brands segment derives its revenues from sales of women's intimate and other apparel, and personal care products and accessories. Sales outside the United States were immaterial. The Company and Intimate Brands Inc. ("IBI") have entered into intercompany agreements for services that include merchandise purchases, capital expenditures, real estate management and leasing, inbound and outbound transportation and corporate services. These agreements specify that identifiable costs be passed through to IBI and that other services-related costs be allocated in accordance with the intercompany agreement. Costs are passed through and allocated to the apparel businesses in a similar manner. 8
Segment information for the thirteen weeks ended July 31, 1999 and August 1, 1998 follows (in thousands): <TABLE> <CAPTION> Apparel Intimate Reconciling 1999 Businesses Brands Other (a) Items Total - ---------------------------- ----------------- ---------------- ------------- -------------- --------------- <S> <C> <C> <C> <C> <C> Net sales $1,164,568 $1,017,109 $86,144 - $2,267,821 Intersegment sales 129,547 - - $(129,547) (b) - Operating income (loss) (14,180) 150,838 (4,982) (13,075) (c) 118,601 Total assets 1,277,476 1,166,083 1,760,503 (176,366) (e) 4,027,696 <CAPTION> Apparel Intimate Reconciling 1998 Businesses Brands Other (a) Items Total - ---------------------------- ----------------- ---------------- ------------- -------------- --------------- <S> <C> <C> <C> <C> <C> Net sales $1,132,266 $874,708 $76,127 - $2,083,101 Intersegment sales 81,440 - - $(81,440) (b) - Operating income (loss) (53,590) 124,917 5,051 1,651,397 (d) 1,727,775 Total assets 1,350,024 1,217,889 1,761,382 (192,350) (e) 4,136,945 </TABLE> (a) Included in the "Other" category are Galyan's Trading Co., Henri Bendel, A&F (through May 19, 1998), non-core real estate, and corporate, none of which are significant operating segments. (b) Represents intersegment sales elimination. (c) 1999 special and nonrecurring item: a $13.1 million second quarter charge for transaction costs related to the Limited Too spin-off, which relates to the "Other" category. (d) 1998 special and nonrecurring items: 1) a $1.651 billion second quarter tax-free gain on the split-off of A&F; 2) a $93.7 million first quarter gain from the sale of the Company's remaining interest in Brylane; and 3) a $5.1 million first quarter charge for severance and other associate termination costs related to the closing of Henri Bendel stores. These special items relate to the "Other" category. (e) Represents intersegment receivable/payable elimination. 9
Segment information for the twenty-six weeks ended July 31, 1999 and August 1, 1998 follows (in thousands): <TABLE> <CAPTION> Apparel Intimate Reconciling 1999 Businesses Brands Other (a) Items Total - ---------------------------- ---------------- ---------------- ------------- -------------- --------------- <S> <C> <C> <C> <C> <C> Net sales $2,322,844 $1,894,930 $154,845 - $4,372,619 Intersegment sales 235,864 - - $ (235,864) (b) - Operating income (loss) (22,180) 235,032 (11,746) (13,075) (c) 188,031 <CAPTION> Apparel Intimate Reconciling 1998 Businesses Brands Other (a) Items Total - ---------------------------- ----------------- ---------------- ------------- -------------- --------------- <S> <C> <C> <C> <C> <C> Net sales $2,187,567 $1,645,576 $258,035 - $4,091,178 Intersegment sales 178,161 - - $ (178,161) (b) - Operating income (loss) (81,073) 196,335 17,463 1,740,030 (d) 1,872,755 </TABLE> (a)-(d) See description under table on previous page. 8. Special and Nonrecurring Items During the second quarter of 1999, the Company recognized a $13.1 million special and nonrecurring charge for transaction costs related to the Limited Too spin-off (see Note 9). On May 19, 1998, the Company completed a tax-free exchange offer to establish A&F as an independent company. A total of 47.1 million shares of the Company's common stock were exchanged at a ratio of .86 of a share of A&F common stock for each Limited share tendered. In connection with the exchange, the Company recorded a $1.651 billion tax-free gain. This gain was measured based on the $43 5/8 per share market value of the A&F common stock at the expiration date of the exchange offer. In addition, on June 1, 1998 a $5.6 million dividend was effected through a pro rata spin-off to shareholders of the Company's remaining 3.1 million A&F shares. Limited shareholders of record as of the close of trading on May 29, 1998 received .013673 of a share of A&F for each Limited share owned at that time. During the first quarter of 1998, the Company recognized a pretax gain of $93.7 million from the sale of 2.57 million shares at $51 per share, representing its remaining interest in Brylane, Inc. This gain was partially offset by a $5.1 million pretax charge for severance and other associate termination costs related to the closing of five of six Henri Bendel stores. The severance charge was paid in 1998. As a result of a plan adopted in connection with a 1997 review of the Company's retail businesses and investments as well as implementation of initiatives intended to promote and strengthen the Company's various retail brands (including closing businesses, identification and disposal of non-core assets and identification of store locations not consistent with a particular brand), the Company recognized special and nonrecurring charges of $276 million during the fourth quarter of 1997, which included store closing and lease termination liabilities of $107 million, of which $32 million were paid in 1998 and $11 million of which were paid in 1999, leaving a $64 million liability at July 31, 1999. 10
The $64 million liability relates principally to future payments and estimated settlement amounts for store closings and downsizings and will continue until final payments to landlords are made, currently scheduled through the year 2016. Unless settlements with landlords occur before the end of such lease periods, completion will run the full lease term. In determining the provision for lease obligations, the Company considered the amount of time remaining on each store's lease and estimated the amount necessary for either buying out the lease or continuing rent payments through lease expiration. No accruals related to these charges were reversed or recorded in operating income during the first half of 1999 or fiscal year 1998. 9. Subsequent Events Effective August 31, 1999, an affiliate of Freeman, Spogli & Co. (together with Galyan's Trading Co. management) purchased a 60% interest in Galyan's Trading Co., with the Company retaining a 40% interest. In addition, the Company sold certain property for $59 million to a third party, which then leased the property to Galyan's under operating leases. The Company received total cash proceeds from these transactions of approximately $170 million, as well as subordinated debt and warrants of $20 million from Galyan's. On July 15, 1999, the Company's Board of Directors approved a formal plan to spin-off Limited Too. The record date for the spin-off was August 11, 1999, with The Limited, Inc. shareholders receiving one share of Too, Inc. (successor company to Limited Too) common stock for every seven shares of The Limited common stock held on that date. The spin-off was completed on August 23, 1999. As part of the transaction, the Company received a $50 million dividend from Too, Inc. 11
Report of Independent Accountants To the Audit Committee of The Board of Directors of The Limited, Inc. We have reviewed the condensed consolidated balance sheets of The Limited, Inc. and Subsidiaries (the "Company") at July 31, 1999 and August 1, 1998, and the related condensed consolidated statements of income for each of the thirteen and twenty-six week periods ended July 31, 1999 and August 1, 1998 and the condensed consolidated statements of cash flows for the twenty-six week periods ended July 31, 1999 and August 1, 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of January 30, 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 23, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 30, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Columbus, Ohio September 8, 1999 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net sales for the second quarter of 1999 increased 9% to $2.268 billion from $2.083 billion in 1998. Operating income was $118.6 million in 1999 and $1.728 billion in 1998. Net income was $52.4 million in 1999 and $1.684 billion in 1998, and earnings per share was $0.22 in 1999 and $6.93 in 1998. In the second quarter of 1999, the Company recognized a $13.1 million charge for transaction costs related to the Limited Too spin-off. In the second quarter of 1998, the Company recognized a $1.651 billion tax-free gain from the split-off of Abercrombie & Fitch ("A&F"). See the "Special and Nonrecurring Items" and "Other Data" sections that follow for further discussion of these items and their impact on second quarter earnings. Second quarter business highlights include the following: . Intimate Brands, Inc. ("IBI"), led by strong performances at Victoria's Secret Stores and Bath & Body Works, reported earnings per share of $0.34, compared to $0.28 in 1998. These results have been adjusted for the 5% stock dividend declared June 22, 1999. Operating income increased 21% and net income increased 17%. . Victoria's Secret Stores' sales increased 18% to $485.0 million, driven by comparable store sales growth of 13%. Second quarter performance was driven by a successful June semi-annual sale, the "never-out-of-stock" on basics inventory program and three new product launches backed by national television advertising. . Bath & Body Works' sales increased 19% to $302.7 million, driven by a comparable store sales increase of 9% and the net addition of 126 new stores. The brand realized consistent performance in all product categories with new introductions in fragrance, body care products, "Art Stuff" and home fragrance. . Express' comparable store sales increased 9%. Improved merchandise margins and buying and occupancy expense leverage led to a significant improvement in Express' operating income rate. . The remaining apparel businesses continued their first quarter improvement. Merchandise margins were up significantly and buying and occupancy expenses were leveraged by strong sales growth and closing of low productivity stores. Comparable store sales increases of 7% at Lerner, 9% at Lane Bryant, and 8% at Limited Too, also contributed to the $39.4 million improvement in operating income for the quarter. . The Company completed its "Dutch Auction" tender offer on June 3, 1999, by repurchasing 15,000,000 shares at $50 per share. Net sales for the twenty-six weeks ended July 31, 1999 were $4.373 billion, an increase of 7% from $4.091 billion in 1998. Operating income was $188.0 million in 1999 and $1.873 billion in 1998. Net income was $85.9 million in 1999 and $1.764 billion in 1998, and earnings per share was $0.36 in 1999 and $6.75 in 1998. In the first half of 1999, the Company recognized a $13.1 million charge for transaction costs related to the Limited Too spin-off. In the first half of 1998, the Company recognized a $1.651 billion tax-free gain from the split-off of A&F, a $93.7 million gain from the sale of the Company's remaining interest in Brylane, Inc., and a $5.1 million charge for severance and other associate termination costs at Henri Bendel. See the "Special and Nonrecurring Items" and "Other Data" sections that follow for further discussion of these items and their impact on year-to-date earnings. 13
Financial Summary - ----------------- The following summarized financial and statistical data compares the thirteen week and twenty-six week periods ended July 31, 1999 to the comparable 1998 periods: <TABLE> <CAPTION> Second Quarter Year - to - Date ------------------------------------------ ------------------------------------------- Change Change From From Prior Prior 1999 1998 Year 1999 1998 Year ---------- --------- ---------- --------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> Net Sales (millions): Express $302 $284 6% $604 $553 9% Lerner New York 220 216 2% 456 418 9% Lane Bryant 237 230 3% 460 441 4% The Limited 166 169 (2%) 331 340 (3%) Structure 139 131 6% 262 252 4% Limited Too 87 75 16% 182 157 16% Other (principally Mast) 14 27 N/M 28 27 N/M ---------- --------- ---------- --------- --------- ----------- Total apparel businesses $1,165 $1,132 3% $2,323 $2,188 6% ---------- --------- ---------- --------- --------- ----------- Victoria's Secret Stores $485 $413 17% $908 $775 17% Victoria's Secret Catalogue 225 202 11% 419 401 4% Bath & Body Works 303 254 19% 561 459 22% Other 4 6 N/M 7 11 N/M ---------- --------- ---------- --------- --------- ----------- Total Intimate Brands $1,017 $875 16% $1,895 $1,646 15% ---------- --------- ---------- --------- --------- ----------- Henri Bendel 8 8 0% 17 20 (15%) Galyan's Trading Co. 78 46 70% 138 81 70% Abercrombie & Fitch (a) - 22 (100%) - 156 (100%) ---------- --------- ---------- --------- --------- ----------- Total net sales $2,268 $2,083 9% $4,373 $4,091 7% ========== ========= ========== ========= ========= =========== Operating Income (millions): Apparel businesses $(14) $(53) 74% $(22) $(81) 73% Intimate Brands 151 125 21% 235 196 20% Other (5) 5 (199%) (12) 18 (167%) ---------- --------- ---------- --------- --------- ----------- Sub-total 132 77 71% 201 133 52% Special and nonrecurring items (13) (b) 1,651 (c) (101%) (13) (b) 1,740 (c) (101%) ---------- --------- ---------- --------- --------- ----------- Total operating income $119 $1,728 (93%) $188 $1,873 (90%) ========== ========= ========== ========= ========= =========== </TABLE> (a) The Abercrombie & Fitch business was split-off effective May 19, 1998 via a tax-free exchange offer. Results up to this date are included in the consolidated financial statements. (b) 1999 special and nonrecurring item: a $13.1 million second quarter charge for Limited Too spin-off transaction costs, which relates to the "Other" category. (c) 1998 special and nonrecurring items: 1) a $1.651 billion second quarter tax-free gain on the split-off of A&F; 2) a $93.7 million first quarter gain from the sale of the Company's remaining interest in Brylane; and 3) a $5.1 million first quarter charge for severance and other associate termination costs related to the closing of Henri Bendel stores. These special items relate to the "Other" category. N/M Not meaningful 14
<TABLE> <CAPTION> Second Quarter Year - to - Date -------------------------------------- --------------------------------------- 1999 1998 Change 1999 1998 Change --------- ---------- ----------- --------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Increase (Decrease) in Comparable Store Sales: Express 9% 17% 12% 18% Lerner New York 7% 13% 15% 11% Lane Bryant 9% 8% 9% 7% The Limited 10% 0% 7% (1%) Structure 8% (14%) 6% (10%) Limited Too 8% 20% 9% 21% --------- ---------- --------- ---------- Total apparel businesses 9% 10% 10% 9% --------- ---------- --------- ---------- Victoria's Secret Stores 13% 2% 13% 4% Bath & Body Works 9% 3% 11% 1% --------- ---------- --------- ---------- Total Intimate Brands 12% 2% 12% 3% --------- ---------- --------- ---------- Henri Bendel 6% (10%) 7% (21%) Galyan's Trading Co. 9% 6% 9% 2% Abercrombie & Fitch (a) - N/M - 48% --------- ---------- --------- ---------- Total other businesses 8% (3%) 9% 0% --------- ---------- --------- ---------- Total comparable store sales increase 10% 6% 11% 7% ========= ========== ========= ========== Store Data: Retail sales increase (decrease) attributable to net new and remodeled (closed) stores: Apparel businesses (4%) (2%) (3%) (2%) Intimate Brands 7% 9% 8% 9% Retail sales per average selling square foot: Apparel businesses $61 $54 13% $120 $104 15% Intimate Brands $131 $121 8% $248 $227 9% Retail sales per average store (thousands): Apparel businesses $341 $303 13% $672 $585 15% Intimate Brands $401 $375 7% $759 $703 8% Average store size at end of quarter (selling square feet): Apparel businesses 5,600 5,606 0% Intimate Brands 3,047 3,084 (1%) Retail selling square feet at end of quarter (thousands): Apparel businesses 18,789 20,339 (8%) Intimate Brands 6,048 5,549 9% Number of Stores: Beginning of period 5,358 5,599 5,382 5,640 Opened 59 59 143 123 Disposal of A&F (a) - (159) - (159) Closed (59) (58) (167) (163) ========= ========== ========= ========== End of period 5,358 5,441 5,358 5,441 ========= ========== ========= ========== </TABLE> (a) The Abercrombie & Fitch business was split-off effective May 19, 1998 via a tax-free exchange offer. Results up to this date are included in the consolidated financial statements. N/M Not meaningful 15
<TABLE> <CAPTION> Number of Stores Selling Sq. Ft. (thousands) ----------------------------------------- ----------------------------------------- Change Change July 31, Aug. 1, From July 31, Aug. 1, From 1999 1998 Prior Year 1999 1998 Prior Year ---------- ---------- ------------ ---------- ---------- ------------ <S> <C> <C> <C> <C> <C> <C> Express 690 724 (34) 4,430 4,608 (178) Lerner New York 625 687 (62) 4,831 5,289 (458) Lane Bryant 699 770 (71) 3,398 3,719 (321) The Limited 491 599 (108) 3,022 3,615 (593) Structure 518 537 (19) 2,054 2,129 (75) Limited Too 332 311 21 1,054 979 75 ---------- ---------- ------------ ---------- ---------- ------------ Total apparel businesses 3,355 3,628 (273) 18,789 20,339 (1,550) ---------- ---------- ------------ ---------- ---------- ------------ Victoria's Secret Stores 859 799 60 3,810 3,595 215 Bath & Body Works 1,126 1,000 126 2,238 1,954 284 ---------- ---------- ------------ ---------- ---------- ------------ Total Intimate Brands 1,985 1,799 186 6,048 5,549 499 ---------- ---------- ------------ ---------- ---------- ------------ Henri Bendel 1 1 0 35 35 0 Galyan's Trading Co. 17 13 4 1,196 811 385 ---------- ---------- ------------ ---------- ---------- ------------ Total stores and selling square feet 5,358 5,441 (83) 26,068 26,734 (666) ========== ========== ============ ========== ========== ============ </TABLE> Net Sales - --------- Net sales for the second quarter of 1999 increased 9% to $2.268 billion from $2.083 billion in 1998, primarily due to a 10% comparable store sales increase. At IBI, net sales for the second quarter of 1999 increased 16% to $1.017 billion from $874.7 million in 1998, primarily due to a 12% comparable store sales increase. The balance of the increase was due to the net addition of 186 new stores and an increase in catalogue sales. At the apparel businesses, net sales for the second quarter of 1999 increased 3% to $1.165 billion from $1.132 billion in 1998. The overall 9% increase in comparable store sales at the apparel businesses was partially offset by a net closure of 273 stores. Each of the apparel businesses reported a comparable store sales increase of between 7% and 10%. Year-to-date net sales increased 7% to $4.373 billion from $4.091 billion in 1998. An 11% comparable store sales increase was partially offset by the loss of A&F sales following the May 19, 1998 split-off, and by a net closure of 83 stores (primarily in the Apparel segment). Gross Income - ------------ The second quarter gross income rate (expressed as a percentage of sales) increased to 32.4% in 1999 from 29.5% in 1998. The gross income rate increased significantly at the apparel businesses, primarily due to an increase in merchandise margin rate and positive buying and occupancy expense leverage. The increased merchandise margin rate resulted from higher initial markups and reduced markdowns. The positive buying and occupancy expense leverage resulted from increased sales and the benefit of closed stores. IBI's gross income rate increased to 39.3% from 38.4%, primarily due to a decrease in the buying and occupancy rate, particularly at Victoria's Secret Stores. The 1999 year-to-date gross income rate increased 2.5% to 31.9% in 1999 from 29.4% in 1998, attributable to positive buying and occupancy expense leverage and an increase in merchandise margin rate at both the IBI and apparel businesses. 16
General, Administrative and Store Operating Expenses - ---------------------------------------------------- The second quarter general, administrative and store operating expense rate (expressed as a percentage of sales) increased to 26.5% in 1999 from 25.8% in 1998. The rate increased at IBI primarily due to relocation costs and higher operating expenses associated with moving Victoria's Secret's beauty business to New York City, as well as an increase in base infrastructure costs for the beauty business. These factors were partially offset by improved expense leverage from a 13% comparable store sales increase at Victoria's Secret Stores. The rate also increased at the apparel businesses, primarily due to investment in brand building activities, including merchandise process redesign. The 1999 year-to-date general, administrative and store operating expense rate increased to 27.3% from 26.1% in 1998. In addition to the reasons discussed above, the rate increase was driven by a shift in the mix of IBI's net sales to Bath & Body Works, which has higher general, administrative and store operating expense rates due to significantly smaller stores. Special and Nonrecurring Items - ------------------------------ During the second quarter of 1999, the Company recognized a $13.1 million special and nonrecurring charge for transaction costs related to the Limited Too spin-off (see Note 9 to the Consolidated Financial Statements). On May 19, 1998, the Company completed a tax-free exchange offer to establish A&F as an independent company. A total of 47.1 million shares of the Company's common stock were exchanged at a ratio of .86 of a share of A&F common stock for each Limited share tendered. In connection with the exchange, the Company recorded a $1.651 billion tax-free gain. This gain was measured based on the $43 5/8 per share market value of the A&F common stock at the expiration date of the exchange offer. The remaining 3.1 million A&F shares were distributed through a pro rata spin-off to Limited shareholders. During the first quarter of 1998, the Company recognized a pretax gain of $93.7 million from the sale of 2.57 million shares at $51 per share, representing its remaining interest in Brylane, Inc. This gain was partially offset by a $5.1 million pretax charge for severance and other associate termination costs related to the closing of five of six Henri Bendel stores. The severance charge was paid in 1998. As a result of a plan adopted in connection with a 1997 review of the Company's retail businesses and investments as well as implementation of initiatives intended to promote and strengthen the Company's various retail brands (including closing businesses, identification and disposal of non-core assets and identification of store locations not consistent with a particular brand), the Company recognized special and nonrecurring charges of $276 million during the fourth quarter of 1997. These charges included store closing and lease termination liabilities of $107 million, of which $32 million were paid in 1998 and $11 million of which have been paid in 1999, leaving a $64 million liability at July 31, 1999. The $64 million liability relates principally to future payments and estimated settlement amounts for store closings and downsizings and will continue until final payments to landlords are made, currently scheduled through the year 2016. Unless settlements with landlords occur before the end of such lease periods, completion will run the full lease term. In determining the provision for lease obligations, the Company considered the amount of time remaining on each store's lease and estimated the amount necessary for either buying out the lease or continuing rent payments through lease expiration. No accruals related to these charges were reversed or recorded in operating income during the first half of 1999 or fiscal year 1998. The $276 million charge also included $86 million of impairment charges, which reduced depreciation by approximately $18 million in fiscal year 1998 and will have a similar impact in fiscal year 1999. 17
Operating Income - ---------------- The second quarter operating income rate (expressed as a percentage of sales) was 5.2% in 1999, including $(13.1) million, or (0.6)%, in special and nonrecurring expense. The second quarter operating income rate was 82.9% in 1998, including $1.651 billion, or 79.3%, in special and nonrecurring income. The improvement in the operating income rate other than the special and nonrecurring items from 3.7% to 5.8% was driven by the gross income rate increase of 2.9% more than offsetting the increase in general, administrative and store operating expense rate of 0.7%. Year-to-date, the improvement in the operating income rate other than the special and nonrecurring items from 3.2% in 1998 to 4.6% in 1999 was driven by the gross income rate increase of 2.5% more than offsetting the increase in general, administrative and store operating expense rate of 1.2%. Interest Expense - ---------------- <TABLE> <CAPTION> Second Quarter Year-to-Date ------------------------ ------------------------ 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Average borrowings (millions) $1,025 $753 $914 $744 Average effective interest rate 7.87% 8.72% 8.08% 8.65% </TABLE> Compared to 1998, interest expense increased $3.7 million in the second quarter and $4.8 million year-to-date. The increases were due primarily to increased borrowings, partially offset by a lower average effective interest rate. Other Income - ------------ Compared to 1998, other income decreased $3.1 million in the second quarter and $3.9 million in the year-to-date. The decreases were due to lower average invested cash balances, principally due to the $750 million share repurchase, and lower interest rates on those balances in 1999. Other Data - ---------- The Company recorded special items in 1999 and 1998 that impacted the comparability of the Company's earnings per share data and are more fully described in the "Special and Nonrecurring Items" section herein and Note 8 to the Consolidated Financial Statements. The information included in this section is not intended to be presented in accordance with sec guidelines for pro forma financial information but is provided to assist in investors' understanding of the Company's results of operations. Excluding special and nonrecurring items in both years, second quarter net income increased 83% to $60.4 million from $32.9 million in 1998, and earnings per share doubled to $0.26 from $0.13. For the twenty-six weeks ended July 31, 1999 and August 1, 1998, net income increased 60% to $94.0 million from $58.8 million in 1998 and earnings per share increased to $0.40 from $0.22. Special and nonrecurring items were as follows: . In 1999, a $13.1 million second quarter charge for transaction costs related to the Limited Too spin-off to shareholders of record on August 11, 1999. . In 1998, a $1.651 billion second quarter tax-free gain on the split-off of A&F, a $93.7 million first quarter gain from the sale of the Company's remaining interest in Brylane and a $5.1 million first quarter charge for severance and other associate termination costs related to the closing of Henri Bendel stores. 18
FINANCIAL CONDITION The Company's consolidated balance sheet as of July 31, 1999 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 from operating activities, commercial paper backed by funds available under the committed long-term credit agreement and the Company's capital structure continue to provide the capital resources to support operations, including projected growth, seasonal requirements and capital expenditures. A summary of the Company's working capital position and capitalization follows (thousands): July 31, January 30, August 1, 1999 1999 1998 ---------- ---------- ---------- Working capital $ 797,909 $1,070,249 $ 916,065 ========== ========== ========== Capitalization: Long-term debt $ 750,000 $ 550,000 $ 650,000 Shareholders' equity 1,887,687 2,233,303 2,000,867 ---------- ---------- ---------- Total capitalization $2,637,687 $2,783,303 $2,650,867 ========== ========== ========== Additional amounts available under long-term credit agreements $1,000,000 $1,000,000 $1,000,000 ========== ========== ========== In addition, the Company may offer up to $250 million of debt securities and warrants to purchase debt securities under its shelf registration statement. Net cash provided from operating activities was $23.1 million for the twenty-six weeks ended July 31, 1999 versus $135.2 million used for operating activities last year. Significant uses of cash in both years relate to the growth of inventories for the Fall selling seasons and the timing of tax payments related to the fourth quarter of the prior year. Investing activities in 1999 and 1998 included capital expenditures, primarily for new and remodeled stores, and in 1999, the rescission of the Contingent Stock Redemption Agreement. In 1998, investing activities included proceeds from the sale of the Company's remaining investment in Brylane, Inc. Financing activities in 1999 included $300 million proceeds from floating rate notes issued in May 1999. Additionally, the rescission of the Contingent Stock Redemption Agreement made $351.6 million in restricted cash available for general corporate purposes. This cash and other available funds were used to repurchase shares under the self-tender, which was funded June 14, 1999. A total of 15 million shares of the Company's common stock were repurchased at $50 per share, resulting in a cash outflow of $750 million. Cash used for financing activities in 1999 also reflected the IBI stock repurchase initiated during January 1999. During 1999, IBI repurchased 1.5 million shares from its public shareholders for $62.6 million. Additionally, IBI repurchased 8.2 million shares from The Limited at the same weighted average per share price, which had no net cash flow impact to The Limited. Financing activities also reflected an increase in the quarterly dividend from $0.13 per share to $0.15 per share, which was offset by a lower number of outstanding shares. 19
Future Cash Flows - ----------------- Effective August 31, 1999, an affiliate of Freeman, Spogli & Co. (together with Galyan's Trading Co. management) purchased a 60% interest in Galyan's Trading Co., with the Company retaining a 40% interest. In addition, the Company sold certain property for $59 million to a third party, which then leased the property to Galyan's under operating leases. The Company received total cash proceeds from these transactions of approximately $170 million, as well as subordinated debt and warrants of $20 million from Galyan's. Capital Expenditures - -------------------- Capital expenditures totaled $191.8 million for the twenty-six weeks ended July 31, 1999, compared to $122.9 million for the same period in 1998. The Company anticipates spending $400 to $420 million for capital expenditures in 1999, of which $300 to $320 million will be for new stores and for remodeling of and improvements to existing stores. These amounts include capital expenditures related to Galyan's and Limited Too prior to their divestiture. The Company expects that 1999 capital expenditures will be funded primarily by net cash provided by operating activities. 20
INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE The Year 2000 issue arises primarily from computer programs, commercial systems and embedded chips that will be unable to properly interpret dates beyond the year 1999. The Company utilizes a variety of proprietary and third party computer technologies - both hardware and software - directly in its businesses. The Company also relies on numerous third parties and their systems' ability to address the Year 2000 issue. The Company's critical information technology (IT) functions include point-of-sale equipment, merchandise distribution, merchandise and non-merchandise procurement, credit card and banking services, transportation, and business and accounting management systems. The Company is using both internal and external resources to complete its Year 2000 initiatives. Readiness - --------- In order to address the Year 2000 issue, the Company established a program management office to oversee, monitor and coordinate the company-wide Year 2000 effort. This office has developed and is implementing a Year 2000 plan. The implementation includes five stages: . awareness, which includes identifying risks and conducting an education program regarding Year 2000 issues . assessment, which primarily includes establishing project resources, developing a Year 2000 renovation strategy, completing a company-wide inventory of information technology and determining the necessary training and testing facility requirements . renovation/development, which includes the analysis of existing information systems, the design of remediation activities and the coding of necessary remedies . validation, which primarily includes system testing . implementation, which includes the placement of renovated systems "in production" and training end users There are four areas of focus: . Renovation of legacy systems. The Company's twelve operating businesses have completed all five stages of Year 2000 implementation for renovation of legacy systems. . Installation of new software packages to replace selected legacy systems at five of the Company's twelve operating businesses. Replacement of significant legacy systems with new software packages is complete. . Assessment of Year 2000 readiness at key vendors and suppliers. A vast network of vendors, suppliers and service providers located both within and outside the United States provide the Company with merchandise for resale, supplies for operational purposes and services. The Company has identified key vendors, suppliers and service providers, and is making efforts to determine their Year 2000 status. As a result, the Company obtained completed Year 2000 surveys from approximately 360 of its third-party vendors to determine an estimated compliance date. Of the 360 third-party vendors surveyed, approximately half have indicated that they are Year 2000 compliant. The majority of the remaining vendors have indicated they will be compliant prior to year-end. Based upon the results of the surveys, the Company selected twenty-one vendors for on-site visits to further assess the vendors' progress and estimated compliance dates. The Company will continue to monitor the status of the vendors' estimated compliance dates in order to identify potential delays. . Evaluating facilities and distribution equipment with embedded computer technology. The Company uses various facilities and distribution equipment with embedded computer technology, such as conveyors, elevators, and security systems, fire protection systems and energy management systems. All our remediation efforts are complete. 21
Cost to Address the Year 2000 Issue - ----------------------------------- Total expenditures incurred through July 31, 1999 related to remediation, testing, conversion, replacement and upgrading system applications were $79 million. Incremental expenses totaled $14 million in the first half of 1999. Total costs included expenditures associated with the development of an internal testing center, which has enabled the Company to perform comprehensive testing of newly renovated systems by processing transactions as if they had occurred in the Year 2000. This internal testing process was used to develop the risk and cost estimates described in the "Year 2000 Readiness" section of the Form 10-Q. In addition to the previously described costs, significant internal payroll costs (not separately identified) were incurred relating to the Company's Year 2000 initiatives. These payroll costs include the efforts by approximately 500 employees of the Company's information technology division, representing approximately three-fourths of the total information technology budgeted hours for the Year 2000 project. In addition, the Company engaged external consultants to assist it with program management and new software package implementation, which represent the remaining hours. The Company has allocated approximately 15% of its information technology budget for the period from Fall 1997 through Fall 1999 toward Year 2000 remediation efforts. Total remaining expenditures are expected to range from $6 to $11 million during 1999 and 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 during 1999 and 2000. Reasonably Likely Worst Case Scenario and Contingency Plans - ----------------------------------------------------------- The Company believes that the reasonably likely worst case scenario would involve short-term disruption of systems affecting its supply and distribution channels. The Company is in the process of developing contingency plans, such as alternative sourcing and accelerated delivery of merchandise from foreign suppliers, and identifying the actions needed if critical systems or service providers were not Year 2000 compliant. The Company expects to finalize these contingency plans in the second half of 1999. At the present time, the Company is not aware of any Year 2000 issues that are expected to affect materially its products, services, competitive position or financial performance. Additionally, the Company has not postponed any significant information technology projects due to the Year 2000 project. Thus, the Company does not believe that the delay of any projects has had a material impact on its financial condition and results of operations. However, despite the Company's significant efforts to make its systems, facilities and equipment Year 2000 compliant, the compliance of third party service providers and vendors (including, for instance, governmental entities and utility companies) is beyond the Company's control. Accordingly, the Company can give no assurances that the failure of technology infrastructure of the United States, foreign nations or other companies on which the Company's systems rely, or the failure of key suppliers or other third parties to comply with Year 2000 requirements, will not have a material adverse effect on the Company. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION 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 Form 10-Q or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Among other things, certain of the foregoing statements as to costs and dates relating to the Year 2000 effort are forward-looking and are based on the Company's current best estimates that may be proven incorrect as additional information becomes available. The Company's Year 2000-related forward-looking statements are also based on assumptions about many 22
important factors, including the technical skills of employees and independent contractors, the representations and preparedness of third parties, the ability of vendors to deliver merchandise or perform services required by the Company and the collateral effects of the Year 2000 issues on the Company's business partners and customers. While the Company believes its assumptions are reasonable, it cautions that it is impossible to predict factors that could cause actual costs or timetables to differ materially from the expected results. In addition to Year 2000 issues, the following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results and could cause actual results for 1999 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this Form 10-Q or otherwise made by management: 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. 23
PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is a defendant in a variety of lawsuits arising in the ordinary course of business. On November 13, 1997, the United States District Court for the Southern District of Ohio, Eastern Division, dismissed with prejudice an amended complaint that had been filed against the Company and certain of its 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 declarations to the U.S. Customs Service. On November 26, 1997, ATMI served a motion to alter or amend judgment and a motion to disqualify the presiding judge and to vacate the order of dismissal. The motion to disqualify was denied on December 22, 1997, but as a matter of his personal discretion, the presiding judge elected to recuse himself from further proceedings and this matter was transferred to a judge of the United States District Court for the Southern District of Ohio, Western Division. On May 21, 1998, this judge denied all pending motions seeking to alter, amend or vacate the judgment that had been entered in favor of the Company. On June 5, 1998, ATMI appealed to the United States Court of Appeals for the Sixth Circuit (the "Sixth Circuit"). On August 12, 1999, the Sixth Circuit heard arguments from both sides, and the matter remains pending. On January 13, 1999, two complaints were filed against the Company and its subsidiary, Lane Bryant, Inc., as well as other defendants, including many national retailers. Both complaints relate to labor practices allegedly employed on the island of Saipan, Commonwealth of the Northern Mariana Islands, by apparel manufacturers unrelated to the Company (some of which have sold goods to the Company) and seek injunctions, unspecified monetary damages, and other relief. One complaint, on behalf of a class of unnamed garment workers, filed in the United States District Court for the Central District of California, Western Division, alleges violations of federal statutes, the United States Constitution, and international law. On March 29, 1999, a motion was filed to transfer this action to the United States District Court located on Saipan, and on April 12, 1999, a motion to dismiss the complaint for failure to state a claim upon which relief can be granted was filed. Both motions remain pending. The second complaint, filed by a national labor union and other organizations in the Superior Court of the State of California, San Francisco County, alleges unfair business practices under California law. On March 29, 1999, a motion seeking dismissal of this complaint was filed. That motion also remains pending. In May and June 1999, alleged shareholders of the Company filed three purported derivative actions in the Court of Chancery of the State of Delaware, naming the members of the Company's board of directors as defendants and the Company as nominal defendant. The three actions have been consolidated. The operative complaint in the consolidated action generally alleges that the rescission of the Contingent Stock Redemption Agreement constituted a waste of corporate assets and a breach of the board members' fiduciary duties, and that the issuer tender offer completed on June 3, 1999 was a "wasteful transaction in its own right." The complaint seeks monetary damages in an unspecified amount from the members of the Company's board of directors. On July 30, 1999, the defendants moved to dismiss the complaint. Plaintiffs have not yet responded to that motion. 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. 24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. -------- 4.1 Indenture and Global Security representing the Company's Series A Floating Rate Note due May 2000 4.2 Indenture and Global Security representing the Company's Series B Floating Rate Note due November 2000 4.3 Indenture and Global Security representing the Company's Series C Floating Rate Note due May 2001 11. Statement re: Computation of Per Share Earnings. 12. Statement re: Computation of Ratio of Earnings to Fixed Charges. 15. Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Report of Independent Accountants. 27. Financial Data Schedule. (b) Reports on Form 8-K. ------------------- On May 18, 1999 the Company filed a report on Form 8-K which disclosed that a legal action had been filed by an alleged shareholder of the Company, naming as defendants the members of the Company's Board of Directors and naming the Company as a nominal defendant. 25
SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LIMITED, INC. (Registrant) By /s/ V. Ann Hailey ---------------------------------- V. Ann Hailey, Executive Vice President and Chief Financial Officer* Date: September 13, 1999 - ----------------------------------------- *Ms. Hailey is the principal financial officer and has been duly authorized to sign on behalf of the Registrant. 26