Abercrombie & Fitch 1999 Annual Report Download - page 16

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Abercrombie &Fitch Co.
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with affiliates and financial covenants requiring a minimum ratio
of EBITDAR to interest expense and minimum rent and a maxi-
mum leverage ratio. No amounts were outstanding under the
Agreement at January 29, 2000 and January 30, 1999.
During the first quarter of 1998, the Company repaid a $50 mil-
lion long-term note owed to The Limited with $24,125,000 in cash
and by issuing 1.2 million shares of Class A Common Stock at a
price of $21.563 per share.
8. RELATED PARTY TRANSACTIONS Prior to the Exchange
Offer, transactions between the Company and The Limited and
its subsidiaries and affiliates principally consisted of the following:
Merchandise purchases
Real estate management and leasing
Capital expenditures
Inbound and outbound transportation
Corporate services
Subsequent to the Exchange Offer, the Company negotiated
arms-length terms with the merchandise and service suppliers that
are Limited subsidiaries. The Company and The Limited also
entered into various service agreements for terms ranging from one
to three years. The Company has hired associates with the appro-
priate expertise or contracted with outside parties to replace those
services which expired in May 1999. Service agreements were also
entered into for the continued use by the Company of its distri-
bution and home office space and transportation and logistic
services. These agreements expire in May 2001. The cost of these
services generally is equal to The Limited’s cost in providing
the relevant services plus five percent of such costs.
For the periods prior to the Exchange Offer, the Company and
The Limited entered into intercompany agreements that estab-
lished the provision of certain services. 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 services and the Company was required to
purchase these services from outsiders or develop internal exper-
tise. 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 prior to the Exchange Offer. Fiscal year 1998 reflects
activity through the completion of the Exchange Offer.
(Thousands) 1998 1997
Mast and Gryphon purchases $20,176 $89,892
Capital expenditures 3,199 27,012
Inbound and outbound transportation 2,280 5,524
Corporate charges 2,671 6,857
Store leases and other occupancy, net 561 1,184
Distribution center, IT and home
office expenses 2,217 3,102
Centrally managed benefits 1,524 3,596
Interest charges, net 4 3,583
$32,632 $140,750
The Company does not anticipate that costs associated with
the remaining services provided by The Limited under agree-
ments 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.
In November 1999, the Company loaned the amount of $1.5
million to its Chairman of the Board, a major shareholder of the
Company, pursuant to the terms of a promissory note, which pro-
vides that such amount is due and payable May 31, 2000 together
with interest at the rate of 6.5% per annum.
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 pro-
vided during fiscal years 1999 and 1998 were approximately $1.4
million and $1.2 million respectively.
Abercrombie &Fitch Co.
9. STOCK OPTIONS AND RESTRICTED SHARES Under the
Company’s stock plans, associates and non-associate directors
may be granted up to a total of 16.3 million restricted shares and
options to purchase the Company’s common stock at the mar-
ket price on the date of grant. In 1999, associates of the Company
were granted approximately 5.8 million options, with vesting peri-
ods ranging from four to seven years. A total of 36,000 options
were granted to non-associate directors in 1999, 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,” in 1996,
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 1999, 1998 and 1997, 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 approx-
imately $18.5 million or $.17 per share in 1999, $6.1 million or $.06
per share in 1998 and $1.7 million or $.02 per share in 1997. The
weighted-average fair value of all options granted during fiscal
1999, 1998 and 1997 was $23.34, $9.89 and $4.25. The fair value
of each option was estimated using the Black-Scholes option-pric-
ing model with the following weighted-average assumptions for
1999, 1998 and 1997: no expected dividends, price volatility of 45%
in 1999, 40% in 1998 and 35% in 1997, risk-free interest rates of
6.0%, 5.5% and 6.0% in 1999, 1998 and 1997, respectively, assumed
forfeiture rates of 10% and expected lives of 6.5 years in 1999, 5
years in 1998 and 6.5 years in 1997.
The pro forma effect on net income for 1999, 1998 and 1997 is
not representative of the pro forma effect on net income in future
years because it takes into consideration pro forma compensation
expense related only to those grants made subsequent to the
Company’s initial public offering.
Stock Options Outstanding at January 29, 2000
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercisable
Prices Outstanding Life Price Exercisable Price
$8-$22 4,842,000 7.6 $12.63 549,000 $ 9.67
$23-$37 2,793,000 8.7 $25.96 7,000 $24.16
$38-$52 5,174,000 9.4 $43.55 – –
$8-$52 12,809,000 8.6 $28.03 556,000 $ 9.85
A summary of option activity for 1997, 1998 and 1999 follows:
Stock Option Activity
Number of Weighted Average
Shares Option Price
1997
Outstanding at beginning of year 480,000 $8.00
Granted 3,338,000 9.02
Exercised (8,000) 8.00
Canceled (42,000) 8.00
Outstanding at end of year 3,768,000 $8.91
Options exercisable at year-end 70,000 $8.00
1998
Outstanding at beginning of year 3,768,000 $ 8.91
Granted 3,970,000 22.47
Exercised (60,000) 8.99
Canceled (110,000) 19.40
Outstanding at end of year 7,568,000 $15.87
Options exercisable at year-end 388,000 $ 8.99
1999
Outstanding at beginning of year 7,568,000 $15.87
Granted 5,794,000 42.90
Exercised (337,000) 9.39
Canceled (216,000) 25.25
Outstanding at end of year 12,809,000 $28.03
Options exercisable at year-end 556,000 $ 9.85