Abercrombie & Fitch 1998 Annual Report Download - page 21

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Abercrombie &Fitch Co.
services and the Company was required to purchase these ser-
vices 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. Fiscal year 1998 reflects activity through
the completion of the Exchange Offer.
(Thousands) 1998 1997 1996
Mast and Gryphon purchases $20,176 $089,892 $61,776
Capital expenditures 3,199 27,012 20,839
Inbound and outbound transportation 2,280 5,524 3,326
Corporate charges 2,671 6,857 3,989
Store leases and other occupancy, net 561 1,184 1,509
Distribution center, IT and home
office expenses 2,217 3,102 2,696
Centrally managed benefits 1,524 3,596 3,136
Interest charges, net 4 3,583 2,190
$32,632 $140,750 $99,461
The Company’s proprietary credit card processing is per-
formed by Alliance Data Systems which is approximately 31%
owned by The Limited.
Subsequent to the Exchange Offer, 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 contin-
ued use by the Company of its distribution and home office
space and transportation and logistic services. These agree-
ments are generally for a term of three years. Costs for these
services are generally the costs and expenses incurred by The
Limited plus five percent of such amounts. At the end of fiscal
year 1998, the Company had hired associates with the appropriate
expertise or contracted with outside parties to replace those ser-
vices provided by The Limited which expire in May 1999.
The Company does not anticipate that costs associated with
the remaining service agreements 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.
Shahid & Company, Inc. has provided advertising and design
services for the Company since 1995. Sam N. Shahid Jr., who
serves on the Board of Directors for the Company, has been
President and Creative Director of Shahid & Company, Inc.
since 1993. Fees paid to Shahid & Company, Inc. for services
provided during fiscal year 1998 were approximately $1.2 million.
9. STOCK OPTIONS AND RESTRICTED STOCK Under the
Company’s stock plan, associates may be granted up to a total of
5.5 million restricted shares and options to purchase the
Company’s common stock at the market price on the date of
grant. In 1998, associates of the Company were granted approx-
imately 2.0 million options, with vesting periods ranging from four
to six years. A total of 66,000 shares were issued to non-associate
directors in 1998, all of which vest over four years. All options have
a maximum term of ten years.
The Company adopted the disclosure requirements of SFAS
No. 123, “Accounting for Stock-Based Compensation,” effective
with the 1996 financial statements, but elected to continue to
measure compensation expense in accordance with APB
Opinion No. 25, “Accounting for Stock Issued to Employees.”
Accordingly, no compensation expense for stock options has been
recognized. If compensation expense had been determined
based on the estimated fair value of options granted in 1998,
1997 and 1996, consistent with the methodology in SFAS No.
123, the pro forma effect on net income and net income per
diluted share would have been a reduction of approximately $6.1
million or $.11 per share in 1998 and $1.7 million or $.03 per
share in 1997. In 1996, the pro forma effect would have had no
impact on net income and net income per diluted share. The
weighted-average fair value of all options granted during fiscal
1998, 1997 and 1996 was $19.59, $8.50 and $6.67. The fair
value of each option was estimated using the Black-Scholes
option-pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996: no expected dividends,
price volatility of 40% in 1998 and 35% in 1997 and 1996, risk-
free interest rates of 5.5%, 6.0% and 6.25%, assumed forfeiture
rates of 10% and expected lives of 5 years in 1998 and 1996 and
6.5 years in 1997.
The pro forma effect on net income for 1998, 1997 and 1996
is not representative of the pro forma effect on net income
in future years because it takes into consideration pro forma