Abercrombie & Fitch 1998 Annual Report Download - page 11

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expected to be substantially complete by the end of the first
fiscal quarter.
The Company procures its merchandise and supplies from a
vast network of vendors located both within and outside the
United States. The Company has identified key vendors and
suppliers and made inquiries prior to the end of the fiscal year 1998
to determine their Year 2000 compliance status. The Company is
currently assessing the responses from these vendors and suppliers
and is looking to obtain appropriate assurances from these
vendors regarding their Year 2000 compliance status.
The Company also utilizes various facilities, distribution
equipment and transportation and logistic services from The
Limited and is in the process of assessing their Year 2000 com-
pliance status.
The Company believes that the most likely worst case scenario
is that there will be some minor disruption of systems that will
affect the supply and distribution channels on a short-term basis
rather than impacting the Company in the long-term. The
Company is in the process of developing contingency plans,
such as alternative sourcing, and identifying the necessary actions
that would need to be taken if critical systems or service providers
were not Year 2000 compliant. Given the uncertainty as to the
exact nature and extent of problems that may arise, the Company’s
contingency planning will focus on minimizing any significant
disruptions by committing resources to respond to specific prob-
lems that may arise. At the present time, the Company is not
aware of any Year 2000 issues that it expects might materially affect
its products, services, competitive position or financial perfor-
mance. However, despite the Company’s significant efforts to
make its systems and facilities Year 2000 compliant, the ability of
third party service providers, vendors and certain other third
parties, including governmental entities and utility companies to
be Year 2000 compliant is beyond the Company’s control.
Accordingly, the Company can give no assurances that the fail-
ure of systems of other companies on which the Company’s
systems rely or that the failure of key suppliers or other third
parties to comply with Year 2000 requirements will not have a
material adverse effect on the Company.
Total expenditures related to remediation, testing, conversion,
replacement and upgrading system applications are not expected
to exceed $4.0 million. Of the total, approximately $1.0 million will
be expenses associated with remediation and testing of existing
Abercrombie &Fitch Co.
systems. Total incremental expenses, including depreciation and
amortization of new package systems, remediation to bring
current systems into compliance and writing off legacy systems
are not expected to have a material impact on the Company’s
financial condition in any year during the conversion process
through 2000. As of January 30, 1999, the Company has incurred
expenses of approximately $3.7 million, consisting of internal staff
costs as well as outside consulting and other expenditures. In 1998,
a significant amount of total internal staff resources were directed
towards Year 2000 projects. In 1999, internal resources and costs
are not expected to change significantly but will be redirected from
the Year 2000 projects to other Company initiatives.
RELATIONSHIP WITH THE LIMITED Subsequent to the
Exchange Offer (see Note 1 to the Consolidated Financial
Statements), the Company and The Limited entered into service
agreements which include among other things tax, informa-
tion technology and store design and construction. These
agreements are generally for a term of one year. At the end of
fiscal year 1998, the Company had hired associates with the
appropriate expertise or contracted with outside parties to replace
those services provided by The Limited which expire in May
1999. Service agreements were also entered into for the contin-
ued 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
five percent of such amounts.
The Company does not anticipate that costs associated with
the services provided by The Limited, which expire in May
2001, or costs incurred to replace the services currently provided
by The Limited will have a material adverse impact on its
financial condition.