Abercrombie & Fitch 1998 Annual Report Download - page 17

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Abercrombie &Fitch Co.
INCOME TAXES Income taxes are calculated in accordance
with Statement of Financial Accounting Standards (“SFAS”)
No. 109, “Accounting for Income Taxes,” which requires the
use of the liability method. Deferred tax assets and liabilities are
recognized based on the difference between the financial state-
ment carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates in effect in the years in which those temporary differ-
ences are expected to reverse. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date.
Prior to the Exchange Offer, the Company was included in
The Limited’s consolidated federal and certain state income tax
groups for income tax reporting purposes and was 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. Subsequent to the Exchange Offer, the
Company began filing its tax returns on a separate basis.
SHAREHOLDERS’ EQUITY At January 30, 1999, there were
150 million of $.01 par value Class A common shares autho-
rized, of which 51.4 million and 8.01 million shares were
outstanding at January 30, 1999 and January 31, 1998 and 150
million of $.01 par value Class B common shares authorized, of
which 43 million shares were issued and outstanding at
January 31, 1998. In addition, 15 million of $.01 par value pre-
ferred shares were authorized, none of which have been issued.
Holders of Class A common stock generally have identical
rights to holders of Class B common stock, except that holders
of Class A common stock are entitled to one vote per share
while holders of Class B common stock are entitled to three
votes per share on all matters submitted to a vote of shareholders.
REVENUE RECOGNITION Sales are recorded upon purchase
by customers.
CATALOGUE AND ADVERTISING COSTS Costs related to the
A&F Quarterly, a catalogue/magazine, primarily consist of cata-
logue production and mailing costs and are expensed as incurred.
Advertising costs consist of in-store photographs and advertising
in selected national publications and are expensed when the
photographs or publications first appear. Catalogue and adver-
tising costs amounted to $24.9 million in 1998, $13.7 million in
1997 and $4.1 million in 1996.
STORE PREOPENING EXPENSES Preopening expenses related
to new store openings are charged to operations as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded
values of current assets and current liabilities, including accounts
receivable and accounts payable, approximate fair value due to the
short maturity and because the average interest rate approxi-
mates current market origination rates.
The fair value of the Company’s long-term debt is estimated
based on the quoted market prices for the same or similar issues
or on the current rates offered to the Company for debt of the
same remaining maturity. The estimated fair value of the
Company’s long-term debt at January 31, 1998 was $52.2 million.
EARNINGS PER SHARE Net income per share is computed in
accordance with SFAS No. 128, “Earnings Per Share,” which the
Company adopted in the fourth quarter of 1997. Net income per
basic share is computed based on the weighted average number of
outstanding common shares. Net income per diluted share includes
the weighted average effect of dilutive stock options and restricted
stock. The common stock issued to The Limited (43 million
Class B shares) in connection with the incorporation of the
Company is assumed to have been outstanding for 1997 and 1996.
Weighted Average Common Shares Outstanding (thousands):
1998 1997 1996
Common shares issued 51,650 51,050 45,749
Treasury shares (108) (39) –
Basic shares 51,542 51,011 45,749
Dilutive effect of options and
restricted shares 1,559 467 11
Diluted shares 53,101 51,478 45,760
Options to purchase 228,000 and 240,000 shares of common stock were outstanding at
year-end 1997 and 1996 but were not included in the computation of net income per
diluted share because the options’ exercise price was greater than the average market
price of the common shares.