Abercrombie & Fitch 1998 Annual Report Download - page 20

Abercrombie &Fitch Co.
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indirect subsidiary of The Limited. Mast is a contract manu-
facturer and apparel importer, while Gryphon is a developer
of fragrance and personal care products and also a contract
manufacturer. Prices were negotiated on a competitive basis
by merchants of the Company with Mast, Gryphon and the
manufacturers.
The Company’s real estate operations, including all aspects
of lease negotiations and ongoing dealings with landlords and
developers, were handled centrally by the Real Estate Division
of The Limited (“Real Estate Division”). Real Estate Division
expenses were allocated to the Company based on the number
of new and remodeled store construction projects and open
selling square feet.
The Company’s store design and construction operations
were coordinated centrally by the Store Planning Division of
The Limited (“Store Planning Division”). The Store Planning
Division facilitated the design and construction of the stores
and upon completion transferred the stores to the Company at
actual cost. Store Planning Division expenses were charged to
the Company based on a combination of new and remodeled
store construction projects and open selling square feet.
The Company’s inbound and outbound transportation
expenses were managed centrally by Limited Distribution
Services (“LDS”), a wholly-owned subsidiary of The Limited.
Inbound freight was charged to the Company based on actual
receipts, while outbound freight was charged on a percentage of
cartons shipped basis.
The Limited provided 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 were charged directly
to the Company. All other services-related costs not specifically
attributable to the business were allocated to the Company
based upon a percentage of sales.
Prior to the Exchange Offer, the Company participated in
The Limited’s centralized cash management system whereby
cash received from operations was transferred to The Limited’s
centralized cash accounts and cash disbursements were 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 intercom-
pany cash management 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 was calculated
based on 30-day commercial paper rates for “AA” rated compa-
nies as reported in the Federal Reserve’s H.15 statistical
release. The average outstanding balance of the noninterest
bearing intercompany payable to The Limited in the twenty-
six week period ending August 3, 1996 approximated $64.5
million. A summary of the intercompany payment activity
during the noninterest bearing period follows:
Twenty-six weeks ended
August 3, 1996
Balance at beginning of period $86,045
Mast and Gryphon purchases 23,178
Other transactions with related parties 9,667
Centralized cash management (16,417)
Settlement of current period income taxes $5,700
Payment to The Limited (91,000)
Conversion to Working Capital Note (8,616)
Balance at end of period $08,557
The Company was charged rent expense, common area
maintenance charges and utilities for stores shared with other
consolidated subsidiaries of The Limited. The charges were
based on square footage and represented the proportionate
share of the underlying leases with third parties.
The Company was also charged rent expense and utilities
for the distribution and home office space occupied (which
approximated fair market value).
For the period prior to the Exchange Offer, the Company
and The Limited entered into intercompany agreements that
established the provision of services in accordance with the
terms described above. The prices charged to the Company for
services provided under these agreements may have been higher
or lower than prices that would have been charged by third
parties. It is not practicable, therefore, to estimate what these
costs would have been if The Limited had not provided these