Abercrombie & Fitch 1997 Annual Report Download - page 19

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Abercrombie &Fitch Co.
The Limited provides certain services to the Company
including, among other things, aircraft, tax, treasury, legal, cor-
porate secretary, accounting, auditing, corporate development,
risk management, associate benefit plan administration, human
resource and compensation, government affairs and public
relation services. Identifiable costs are charged directly to the
Company. All other services-related costs not specifically
attributable to the business have been allocated to the Company
based upon a percentage of sales.
The Company participates in The Limited’s centralized
cash management system whereby cash received from opera-
tions is transferred to The Limited’s centralized cash accounts
and cash disbursements are funded from the centralized cash
accounts on a daily basis. Prior to the initial capitalization of
the Company, the intercompany cash management account
was noninterest bearing. After the initial capitalization of the
Company on July 11, 1996, the intercompany cash manage-
ment account became an interest earning asset or interest
bearing liability of the Company depending upon the level of
cash receipts and disbursements. Interest on the intercompany
cash management account is calculated based on 30-day com-
mercial paper rates for “AA” rated companies as reported in the
Federal Reserve’s H.15 statistical release. The average out-
standing balance of the noninterest bearing intercompany
payable to The Limited in the twenty-six week period ending
August 3, 1996 and fifty-three weeks ended February 3, 1996
approximated $64.5 million and $89.8 million. A summary of
the intercompany payment activity during the noninterest
bearing periods follows:
Twenty-six Fifty-three
weeks ended weeks ended
August 3, 1996 February 3, 1996
Balance at beginning of period $86,045 $74,101
Mast and Gryphon purchases $23,178 35,167
Other transactions with related parties $09,667 33,546
Centralized cash management (16,417) (64,269)
Settlement of current period income taxes $05,700 7,500
Payment to The Limited (91,000) –
Conversion to Working Capital Note (8,616) –
Balance at end of period $08,557 $86,045
The Company is charged rent expense, common area main-
tenance charges and utilities for stores shared with other
consolidated subsidiaries of The Limited. The charges are
based on square footage and represent the proportionate share
of the underlying leases with third parties.
The Company is also charged rent expense and utilities for
the distribution and home office space occupied (which
approximates fair market value).
The Company and The Limited have entered into inter-
company agreements that establish the provision of services
in accordance with the terms described above. The prices
charged to the Company for services provided under these
agreements may be higher or lower than prices that may be
charged by third parties. It is not practicable, therefore, to
estimate what these costs would be if The Limited were not
providing these services and the Company was required to
purchase these services from outsiders or develop internal
expertise. Management believes the charges and allocations
described above are fair and reasonable.
The following table summarizes the related party transac-
tions between the Company and The Limited and its subsidiaries,
for the years indicated (thousands):
1997 1996 1995
Mast and Gryphon purchases $089,892 $61,776 $35,167
Capital expenditures 27,012 20,839 20,280
Inbound and outbound transportation 5,524 3,326 2,869
Corporate charges 6,857 3,989 4,019
Store leases and other occupancy, net 1,184 1,509 1,397
Distribution center, IT and home
office expenses 3,102 2,696 2,564
Centrally managed benefits 3,596 3,136 2,417
Interest charges 3,583 2,190 –
$140,750 $99,461 $68,713
The Company and The Limited are parties to a corporate
agreement under which the Company granted to The Limited a
continuing option to purchase, under certain circumstances,
additional shares of Class B common stock or shares of nonvot-
ing capital stock of the Company.