1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 1, 1998 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission file number 1-12107 ABERCROMBIE & FITCH CO. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 31-1469076 - - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Four Limited Parkway East, Reynoldsburg, OH 43068 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 577-6500 ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Common Stock Outstanding at September 1, 1998 - - -------------------- -------------------------------- $.01 Par Value 51,644,187 Shares
2 ABERCROMBIE & FITCH CO. TABLE OF CONTENTS <TABLE> <CAPTION> Page No. -------- <S> <C> Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income Thirteen and Twenty-six Weeks Ended August 1, 1998 and August 2, 1997..........................................................3 Consolidated Balance Sheets August 1, 1998 and January 31, 1998........................................................4 Consolidated Statements of Cash Flows Twenty-six Weeks Ended August 1, 1998 and August 2, 1997..........................................................5 Notes to Consolidated Financial Statements..........................................................6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.............................................11 Part II. Other Information Item 1. Legal Proceedings.............................................................................17 Item 4. Submission of Matters to a Vote of Security Holders...........................................17 Item 6. Exhibits and Reports on Form 8-K..............................................................18 </TABLE> 2
3 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ABERCROMBIE & FITCH CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended ------------------------- ------------------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 -------- ------- --------- -------- <S> <C> <C> <C> <C> NET SALES $147,127 $86,640 $281,357 $160,956 Cost of Goods Sold, Occupancy and Buying Costs 91,933 58,854 176,952 109,229 -------- ------- -------- -------- GROSS INCOME 55,194 27,786 104,405 51,727 General, Administrative and Store Operating Expenses 38,096 23,196 76,968 45,157 -------- ------- -------- -------- OPERATING INCOME 17,098 4,590 27,437 6,570 Interest (Income)/Expense, Net (570) 1,167 (739) 2,202 -------- ------- -------- -------- INCOME BEFORE INCOME TAXES 17,668 3,423 28,176 4,368 Provision for Income Taxes 7,070 1,370 11,270 1,750 -------- ------- -------- -------- NET INCOME $ 10,598 $ 2,053 $ 16,906 $ 2,618 ======== ======= ======== ======== NET INCOME PER SHARE: Basic $.21 $.04 $.33 $.05 ======== ======= ======== ======== Diluted $.20 $.04 $.32 $.05 ======== ======= ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 51,635 51,005 51,421 51,014 ======== ======= ======== ======== Diluted 53,116 51,322 52,796 51,195 ======== ======= ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
4 ABERCROMBIE & FITCH CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands) <TABLE> <CAPTION> August 1, January 31, 1998 1998 -------- -------- (Unaudited) ASSETS ------ <S> <C> <C> CURRENT ASSETS: Cash & Equivalents $ 45,855 $ 42,667 Accounts Receivable 3,681 1,695 Inventories 75,889 33,927 Store Supplies 5,916 5,592 Intercompany Receivable - 23,785 Other 950 1,296 -------- -------- TOTAL CURRENT ASSETS 132,291 108,962 PROPERTY AND EQUIPMENT, NET 73,987 70,517 DEFERRED INCOME TAXES 4,239 3,759 OTHER ASSETS 706 - -------- -------- TOTAL ASSETS $211,223 $183,238 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable $ 36,085 $ 15,968 Accrued Expenses 55,377 35,143 Income Taxes Payable 3,201 15,851 -------- -------- TOTAL CURRENT LIABILITIES 94,663 66,962 LONG-TERM DEBT - 50,000 OTHER LONG-TERM LIABILITIES 14,502 7,501 SHAREHOLDERS' EQUITY: Common Stock 517 511 Paid-In Capital 143,891 117,972 Retained Deficit (42,025) (58,931) -------- -------- 102,383 59,552 Less: Treasury Stock, at Average Cost (325) (777) -------- -------- TOTAL SHAREHOLDERS' EQUITY 102,058 58,775 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $211,223 $183,238 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
5 ABERCROMBIE & FITCH CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) (Unaudited) <TABLE> <CAPTION> Twenty-six Weeks Ended ----------------------------- August 1, August 2, 1998 1997 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 16,906 $ 2,618 Impact of Other Operating Activities on Cash Flows: Depreciation and Amortization 9,952 7,080 Non-Cash Charge for Deferred Compensation 6,573 - Changes in Assets and Liabilities: Inventories (41,962) (25,743) Accounts Payable and Accrued Expenses 40,351 13,566 Income Taxes (13,130) (9,452) Other Assets and Liabilities (310) (2,462) -------- -------- NET CASH PROVIDED BY/(USED FOR) OPERATING ACTIVITIES 18,380 (14,393) -------- -------- CASH USED FOR INVESTING ACTIVITIES Capital Expenditures (15,354) (12,790) -------- -------- FINANCING ACTIVITIES: Issuance of Common Stock 25,875 - Settlement of Intercompany Balance 23,785 - Increase in Intercompany Balance - 28,391 Purchase of Treasury Stock - (852) Stock Options and Other 502 16 Repayment of Long-Term Debt (50,000) - -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 162 27,555 -------- -------- NET INCREASE IN CASH AND EQUIVALENTS 3,188 372 Cash and Equivalents, Beginning of Year 42,667 1,945 -------- -------- CASH AND EQUIVALENTS, END OF PERIOD $ 45,855 $ 2,317 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
6 ABERCROMBIE & FITCH CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Abercrombie & Fitch Co. (the "Company") is a specialty retailer of high quality, casual apparel for men and women with an active, youthful lifestyle. The consolidated financial statements include the accounts of the Company and all significant subsidiaries which are more than 50 percent owned and controlled. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements as of August 1, 1998 and for the thirteen and twenty-six week periods ended August 1, 1998 and August 2, 1997 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's 1997 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year. The consolidated financial statements as of August 1, 1998, and for the thirteen and twenty-six week periods ended August 1, 1998 and August 2, 1997 included herein have been reviewed by the independent accounting firm of PricewaterhouseCoopers LLP and the report of such firm follows the notes to consolidated financial statements. 2. ADOPTION OF ACCOUNTING STANDARDS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires that certain external costs, internal payroll and payroll related costs be capitalized during the application development stage of a software development project and amortized over the software's useful life. The Company will adopt the SOP in the first quarter of 1999. 6
7 3. CONSUMMATION OF EXCHANGE OFFER On May 19, 1998, The Limited, Inc. ("The Limited") completed a tax-free exchange offer to establish the Company as an independent company. The Limited accepted 47,075,052 shares of its common stock that were exchanged at a ratio of .86 of a share of Abercrombie & Fitch stock for each Limited share accepted for exchange. In addition, on June 1, 1998, The Limited effected a pro rata spin-off to its shareholders of its remaining 3,115,455 Abercrombie & Fitch shares. Limited shareholders of record at the close of trading on May 29, 1998 received .013673 of a share of Abercrombie & Fitch stock for each Limited share owned at that time. 4. EARNINGS PER SHARE Weighted Average Common Shares Outstanding (thousands): <TABLE> <CAPTION> Thirteen Weeks Ended -------------------------- August 1, August 2, 1998 1997 ------ ------ <S> <C> <C> Common shares issued 51,650 51,050 Treasury shares (15) (45) ------ ------ Basic shares 51,635 51,005 Dilutive effect of options and restricted shares 1,481 317 ------ ------ Diluted shares 53,116 51,322 ====== ====== Twenty-six Weeks Ended -------------------------- August 1, August 2, 1998 1997 ------ ------ Common shares issued 51,442 51,050 Treasury shares (21) (36) ------ ------ Basic shares 51,421 51,014 Dilutive effect of options and restricted shares 1,375 181 ------ ------ Diluted shares 52,796 51,195 ====== ====== </TABLE> 5. INVENTORIES The fiscal year of the Company and its subsidiaries is comprised of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Valuation of finished goods inventories is based principally upon the lower of average cost or market determined on a first-in, first-out basis utilizing the retail method. Inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns and shrinkage estimates for the total selling season. 7
8 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of (thousands): <TABLE> <CAPTION> August 1, January 31, 1998 1998 -------- -------- <S> <C> <C> Property and equipment, at cost $126,203 $124,000 Accumulated depreciation and amortization (52,216) (53,483) -------- -------- Property and equipment, net $ 73,987 $ 70,517 ======== ======== </TABLE> 7. INCOME TAXES The Company is included in The Limited's consolidated federal and certain state income tax groups for income tax reporting purposes through the completion of the split-off. Under this arrangement, the Company is responsible for its proportionate share of income taxes calculated upon its federal taxable income at a current estimate of the Company's annual effective tax rate. Income taxes paid during the twenty-six weeks ended August 1, 1998 and August 2, 1997 approximated $24.4 million and $12.2 million, respectively. 8. LONG-TERM DEBT The Company entered into a $150 million syndicated unsecured credit agreement (the "Agreement"), on April 30, 1998 (the "Effective Date"). Borrowings outstanding under the Agreement are due April 30, 2003. The Agreement has several borrowing options, including interest rates that are based on the bank agent's "Alternate Base Rate", a LIBO Rate or a rate submitted under a bidding process. Facility fees payable under the Agreement are based on the Company's ratio (the "leverage ratio") of the sum of total debt plus 800% of forward minimum rent commitments to trailing four-quarters EBITDAR and currently accrues at .275% of the committed amount per annum. The Agreement contains limitations on debt, liens, restricted payments (including dividends), mergers and acquisitions, sale-leaseback transactions, investments, acquisitions, hedging transactions, and transactions with affiliates and financial covenants requiring a minimum ratio of EBITDAR to interest expense and minimum rent and a maximum leverage ratio. No amounts were outstanding under the Agreement at August 1, 1998. Long-term debt at January 31, 1998 consisted of a 7.80% unsecured note in the amount of $50 million that represented the Company's proportionate share of certain long-term debt of The Limited. The interest rate and maturity of the note paralleled that of corresponding debt of The Limited. During the first quarter of 1998, the Company repaid the $50 million long-term note owed to The Limited, Inc. by issuing 600,000 shares of Class A common stock at a price of $43.125 per share and paid $24,125,000 in cash. 8
9 9. RELATIONSHIP WITH THE LIMITED Subsequent to the exchange offer, The Limited continues to provide various services to the Company including, but not limited to, information technology, tax, store planning/design, transportation and import and shipping services. The cost of these services generally is equal to The Limited's cost in providing the relevant services plus 5% of such costs. The Limited will cease to provide a substantial majority of these services on May 19, 1999 (the first anniversary of the closing of the exchange offer establishing the Company as an independent company). Prior to the completion of the exchange offer, cash activity was provided through The Limited's centralized cash management systems and was reflected in the Company's intercompany account. On May 19, 1998, all intercompany balances were settled. 9
10 [PRICEWATERHOUSECOOPERS LOGO] REPORT OF INDEPENDENT ACCOUNTANTS To the Audit Committee of The Board of Directors of Abercrombie & Fitch Co. We have reviewed the condensed consolidated balance sheet of Abercrombie & Fitch Co. and Subsidiaries (the Company) at August 1, 1998, and the related condensed consolidated statements of income and cash flows for the thirteen-week and twenty-six-week periods ended August 1, 1998 and August 2, 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of January 31, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 20, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ PRICEWATERHOUSECOOPERS LLP PRICEWATERHOUSECOOPERS LLP Columbus, Ohio August 11, 1998 10
11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS During the second quarter of 1998, net sales increased 70% to $147.1 million from $86.6 million a year ago. Operating income improved to $17.1 million in the second quarter of 1998 from $4.6 million in the second quarter of 1997. Earnings per diluted share were $.20 in the second quarter of 1998 compared to $.04 a year ago. Year-to-date earnings per diluted share were $.32 in 1998 compared to $.05 in 1997. Financial Summary The following summarized financial and statistical data compares the thirteen and twenty-six week periods ended August 1, 1998 to the comparable 1997 periods: <TABLE> <CAPTION> SECOND QUARTER YEAR-TO-DATE ------------------------------------------ ------------------------------------------ 1998 1997 CHANGE 1998 1997 CHANGE ---- ----- ----- ------ ------ ----- <S> <C> <C> <C> <C> <C> <C> Increase in comparable store 45% 15% 46% 14% sales Retail sales increase 25% 36% 29% 34% attributable to new and remodeled stores Retail sales per average selling $114 $81 41% $218 $153 42% square foot Retail sales per average store $878 $639 37% $1,688 $1,210 40% (thousands) Average store size at end of 7,561 7,921 (5)% quarter (selling square feet) Selling square feet at end of 1,293 1,101 17% quarter (thousands) Number of stores: Beginning of period 158 132 156 127 Opened 14 7 17 12 Closed (1) - (2) - ----- ----- ------ ------ End of period 171 139 171 139 ===== ===== ====== ====== </TABLE> 11
12 Net Sales Net sales for the second quarter of 1998 increased 70% to $147.1 million from $86.6 million in the year earlier period. The increase was due to a comparable store sales increase of 45%, driven primarily by significantly higher transactions per store as compared to the second quarter of 1997. Comparable store sales increases were strong in both the men's and women's businesses. The men's business was driven by a very strong performance in knits, caps and activewear, with women's having significant increases in knits, shirts, pants and denim. Additionally, the A&F Quarterly accounted for 1.8% of net sales in the second quarter of 1998. Year-to-date net sales were $281.4 million, an increase of 75%, from $161.0 million for the same period in 1997. Sales growth resulted from a comparable store sales increase of 46% and the net addition of 32 new stores. Net retail sales per average selling square foot for the Company increased 42%, principally from an increase in the number of transactions per store. The A&F Quarterly represented 1.9% of 1998 year-to-date net sales. Gross Income Gross income, expressed as a percentage of net sales, increased to 37.5% for the second quarter of 1998 from 32.1% for the same period in 1997. The increase was attributable to significant leverage in buying and occupancy costs, as a percentage of net sales, associated with increased comparable store sales as well as improved merchandise margins (representing gross income before the deduction of buying and occupancy costs). The 1998 year-to-date gross income, expressed as a percentage of net sales, increased to 37.1% from 32.1% for the comparable period in 1997. Merchandise margins increased as a percentage of net sales due to higher initial markups (IMU) while buying and occupancy costs declined due to leverage achieved from comparable store sales increases. General, Administrative and Store Operating Expenses General, administrative and store operating expenses, expressed as a percentage of net sales, were 25.9% in the second quarter of 1998 as compared to 26.8% for the same period in 1997. The improvement resulted primarily from the favorable leveraging of store expenses due to higher sales volume. Included in the second quarter 1998 general, administrative and store operating expenses were approximately $1.5 million in costs associated with the year 2000 initiative. General, administrative and store operating expenses, expressed as a percentage of net sales, were 27.4% and 28.1% for the year-to-date periods in 1998 and 1997, respectively. The improvement resulted from management's continued emphasis on expense control and the favorable leveraging of expenses, primarily store expenses, over higher sales volume. 12
13 Operating Income Second quarter and year-to-date operating income, expressed as a percentage of net sales, were 11.6% and 9.8%, in 1998, up from 5.3% and 4.1% for the comparable periods in 1997. The improvement in operating income in these periods is a result of higher gross income and lower general, administrative and store operating expenses, expressed as a percentage of net sales. Interest Expense Second quarter and year-to-date 1998 net interest income was $570 thousand and $739 thousand as compared with net interest expense of $1.2 million and $2.2 million for the comparable periods last year. Net interest income in 1998 was primarily from short-term investments. Interest expense in 1997 consisted of $975 thousand per quarter on the $50 million long-term debt that was repaid during the first quarter of 1998 in addition to interest on short-term borrowings. FINANCIAL CONDITION Liquidity and Capital Resources Cash provided from operating activities and the Company's $150 million credit agreement provide the resources to support operations, including projected growth, seasonal requirements and capital expenditures. A summary of the Company's working capital position and long-term ongoing capitalization follows (thousands): <TABLE> <CAPTION> August 1, January 31, 1998 1998 -------- -------- <S> <C> <C> Working capital $ 37,628 $ 42,000 ======== ======== Capitalization: Long-term debt - $ 50,000 Shareholders' equity $102,058 58,775 -------- -------- Total capitalization $102,058 $108,775 ======== ======== </TABLE> Net cash provided by operating activities totaled $18.4 million for the twenty-six weeks ended August 1, 1998 versus $14.4 million net cash used for operating activities in the comparable period in 1997. The improvement in cash provided by operating activities was largely due to increases in net income and accounts payable and accrued expenses. Cash requirements for inventory increased over the period, supporting the sales growth and addition of stores. Correspondingly, accounts payable and accrued expenses also increased supporting the growth in inventories and sales. Additionally, cash used for income taxes increased due to tax payments made on higher earnings. 13
14 Abercrombie & Fitch's operations are seasonal in nature and typically peak during the back-to-school and Christmas selling periods. Accordingly, cash requirements for inventory expenditures are highest during these periods. Investing activities were all for capital expenditures, which are primarily for new stores. In 1998, financing activities consisted primarily of the repayment of $50 million long-term debt to The Limited. This occurred through the issuance of 600,000 shares of Class A common stock to The Limited with the remaining balance paid with cash from operations. Additionally, settlement of the intercompany balance between the Company and The Limited occurred as of the split-off date. Capital Expenditures Capital expenditures, primarily for new and remodeled stores, totaled $15.4 million for the twenty-six weeks ended August 1, 1998 compared to $12.8 million for the comparable period of 1997. During the second quarter, the Company opened five Abercrombie & Fitch stores and nine "abercrombie" kids stores. The Company anticipates spending $38-$43 million in 1998 for capital expenditures, of which $31-$36 million will be for new stores, remodeling and/or expansion of existing stores and related improvements. The Company intends to add approximately 210,000 net selling square feet in 1998, which will represent a 17% increase over year-end 1997. It is anticipated that the increase will result from the addition of 30 new Abercrombie & Fitch stores and the remodeling and/or expansion of four stores. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for Abercrombie & Fitch stores opened in 1998 will approximate $725,000 per store, after giving effect to landlord allowances. In addition, inventory purchases are expected to average approximately $275,000 per store. Additionally, the Company plans to open 13 to 15 "abercrombie" stores in 1998. The planned store size is approximately 3,200 selling square feet and the average cost for leasehold improvements and furniture and fixtures will be approximately $520,000. The Company expects capital expenditures will be funded principally by net cash provided by operating activities. Information Systems and "Year 2000" Compliance The Company has 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. Total expenditures related to remediation, testing, conversion, replacement and upgrading system applications are expected to range from $3.0 million to $4.0 million from 1997 through 2000. As of August 1, 1998, the Company has incurred approximately $2.8 million of expenses consisting of internal staff costs as well as outside consulting and other expenditures related to the initiative. The Company expects to be fully 14
15 compliant with Year 2000 by the end of the current fiscal year. Total incremental expenses, including depreciation and amortization of new package systems, remediation to bring current systems into compliance and writing off legacy systems are not expected to have a material impact on the Company's financial condition in any year during the conversion process through 2000. The Company is attempting to contact vendors and others on whom it relies to assure that their systems will be timely converted. However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted 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. Relationship with The Limited Subsequent to the split-off, the Company and The Limited entered into service agreements which include among other things, tax, information technology and store design and construction. These agreements are generally for a term of one year. Service agreements were also entered into for the continued use by the Company of its distribution and home office space and transportation and logistic services. These agreements are generally for a term of three years. Costs for these services will generally be the costs and expenses incurred by The Limited plus 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 adverse impact on its financial condition. Adoption of Accounting Standards In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires that certain external costs, internal payroll and payroll related costs be capitalized during the application development stage of a software development project and amortized over the software's useful life. The Company will adopt the SOP in the first quarter of 1999. The Company does not anticipate the adoption of this SOP will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 All forward-looking statements made by the Company involve material risks and uncertainties and are subject to change based on various important factors 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. Such factors include, but are not limited to, 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 on appropriate terms, ability to develop new merchandise, ability to hire and train associates, and other factors that may be described in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. 15
16 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is a defendant in a variety of lawsuits arising in the ordinary course of business. On November 13, 1997, the United States District Court for the Southern District of Ohio, Eastern Division, dismissed with prejudice an amended complaint previously transferred to that court by the United States District Court, Central District of California. The amended complaint, which had been filed against the Company, The Limited and certain of The Limited's other subsidiaries by the American Textile Manufacturers Institute ("ATMI"), a textile industry trade association, alleged that the defendants violated the federal False Claims Act by submitting false country of origin records to the U.S. Customs Service. On November 26, 1997, ATMI served a motion to alter or amend judgment and a motion to disqualify the presiding judge and to vacate the order of dismissal. The motion to disqualify was denied on December 22, 1997, but as a matter of his personal discretion, the presiding judge elected to recuse himself from further proceedings and this matter was transferred to another judge of the United States District Court for the Southern District of Ohio, Western Division. On May 21, 1998, this judge reaffirmed the earlier dismissal and denied all pending motions seeking to alter, amend or vacate the judgment that had been entered in favor of the Company. On June 5, 1998, ATMI filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit. On June 2, 1998, Abercrombie & Fitch filed suit against American Eagle Outfitters alleging an intentional and systematic copying of the Abercrombie & Fitch Brand, its images and business practices, including the design and look of the Company's merchandise, marketing and catalogue/magazine. The lawsuit was filed in Federal District Court in Columbus, Ohio and seeks to enjoin American Eagle's practices, recover lost profits and obtain punitive damages. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, the foregoing proceedings are not expected to have a material adverse effect on the Company's financial position or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 16, 1998, the Company held its annual meeting of stockholders at its corporate headquarters, Four Limited Parkway East, Reynoldsburg, Ohio. At such meeting, (i) Messrs. John A. Golden and Seth R. Johnson were elected to the Company's Board of Directors to serve for a three year term expiring in 2001, (ii) the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan was approved and (iii) the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors was approved. The votes on the foregoing matters are as follows: (i) Elections of Messrs. Golden and Johnson <TABLE> <CAPTION> For Withheld --- -------- <S> <C> <C> John A. Golden 37,487,296 2,036,477 Seth R. Johnson 39,356,356 167,417 </TABLE> 16
17 (ii) Approval of the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan <TABLE> <CAPTION> For Against Abstain --- ------- ------- <S> <C> <C> 22,380,564 6,090,802 11,052,407 </TABLE> (iii) Approval of the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors <TABLE> <CAPTION> For Against Abstain --- ------- ------- <S> <C> <C> 27,643,919 909,060 10,970,794 </TABLE> Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3. Articles of Incorporation and Bylaws 3.1 Amended and Restated Certificate of Incorporation of the Company incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 3.2 Bylaws of the Company incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 4. Instruments Defining the Rights of Security Holders 4.1 Specimen Certificate of Class A Common Stock of the Company incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-8231) (the "Form S-1"). 4.2 Credit Agreement dated as of April 30, 1998 among Abercrombie & Fitch Stores, Inc., as Borrower, the Company, as Guarantor, the Lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, and Chase Securities, Inc., as Arranger, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 30, 1998. 4.3 Rights Agreement dated as of July 16, 1998 between Abercrombie & Fitch Co. and First Chicago Trust Company of New York, incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-A dated July 21, 1998. 10. Material Contracts 10.1 Abercrombie & Fitch Co. Incentive Compensation Performance Plan incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 14, 1997. 10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan, as amended. 17
18 10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors incorporated by reference to Exhibit B to the Company's Proxy Statement dated May 29, 1998. 10.4 Employment Agreement by and between the Company and Michael S. Jeffries dated as of May 13, 1997 with exhibits and amendment incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 1, 1997. 10.5 Employment Agreement by and between the Company and Michele Donnan-Martin dated December 5, 1997 incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-4 (File No. 333-46423) (the "Form S-4"). 10.6 Employment Agreement by and between the Company and Seth R. Johnson dated December 5, 1997 incorporated by reference to Exhibit 10.10 to the Form S-4. 10.7 Tax Disaffiliation Agreement dated as of May 19, 1998 between The Limited, Inc. and the Company incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. 10.8 Amended and Restated Services Agreement dated as of May 19, 1998 between The Limited, Inc. and the Company incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. 10.9 Shared Facilities Agreement dated September 27, 1996 by and between the Company and The Limited, Inc. incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 10.10 Sublease Agreement by and between Victoria's Secret Stores, Inc. and the Company dated June 1, 1995 (the "Sublease Agreement") incorporated by reference to Exhibit 10.3 to the Form S-1. 10.11 Amendment No. 1 to the Sublease Agreement dated as of May 19, 1998 incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. 15. Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Independent Accountants' Report 27. Financial Data Schedule (b) Reports on Form 8-K A report on Form 8-K was filed on July 21, 1998. Such report related to the announcement of the Company's adoption of a Stockholder Rights Plan and a Share Buyback Plan. 18
19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABERCROMBIE & FITCH CO. (Registrant) By /s/ Seth R. Johnson ------------------- Seth R. Johnson, Vice President and Chief Financial Officer* Date: September 10, 1998 - - ------------------------ * Mr. Johnson is the principal financial officer and has been duly authorized to sign on behalf of the Registrant. 19
20 EXHIBIT INDEX Exhibit No. Document ----------- -------- 10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan, as amended. 15 Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Independent Accountants' Report. 27 Financial Data Schedule.