Abercrombie & Fitch 2000 Annual Report Download - page 12

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Abercrombie &Fitch
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8. LONG-TERM DEBT The Company entered into a $150
million syndicated unsecured credit agreement (the “Agreement”),
on April 30, 1998 (the “Effective Date”). Borrowings outstanding
under the Agreement are due April 30, 2003. The Agreement has
several borrowing options, including interest rates that are based
on the bank agent’s “Alternate Base Rate,” a LIBO Rate or a rate
submitted under a bidding process. Facility fees payable under the
Agreement are based on the Company’s ratio (the “leverage
ratio”) of the sum of total debt plus 800% of forward minimum
rent commitments to trailing four-quarters EBITDAR and
currently accrues at .225% of the committed amount per annum.
The Agreement contains limitations on debt, liens, restricted
payments (including dividends), mergers and acquisitions, sale-
leaseback transactions, investments, acquisitions, hedging
transactions and transactions with affiliates. It also contains
financial covenants requiring a minimum ratio of EBITDAR to
interest expense and minimum rent and a maximum leverage
ratio. No amounts were outstanding under the Agreement at
February 3, 2001 and January 29, 2000.
9. 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, A&F negotiated arms-
length terms with the merchandise and service suppliers that
are Limited subsidiaries. A&F and The Limited also entered into
various service agreements for terms ranging from one to three
years. A&F hired associates with the appropriate 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 distribution and
home office space and transportation and logistic services. The
agreement for use of distribution space terminates in April 2001.
The agreement for use of home office space expires in May
2001. The agreement for transportation and logistics services will
also expire in May 2001, although most services have already been
transitioned to the Company. The cost of these services gener-
ally is equal to The Limited’s cost in providing the relevant
services plus 5% of such costs.
For the periods prior to the Exchange Offer, A&F and The
Limited entered into intercompany agreements that established
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 pur-
chase these services 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 fiscal year 1998. The amounts below reflect activity through
the completion of the Exchange Offer.
(Thousands) 1998
Mast and Gryphon purchases $20,176
Capital expenditures 3,199
Inbound and outbound transportation 2,280
Corporate charges 2,671
Store leases and other occupancy, net 561
Distribution center, IT and home
office expenses 2,217
Centrally managed benefits 1,524
Interest charges, net 4
$32,632
The Company does not anticipate that 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 A&F’s Board of Directors, has been President and
Creative Director of Shahid & Company, Inc. since 1993. Fees
paid to Shahid & Company, Inc. for services provided during
fiscal years 2000, 1999 and 1998 were approximately $1.7 million,
$1.4 million and $1.2 million, respectively.
Abercrombie &Fitch
On August 28, 2000, A&F loaned $4.5 million to its Chairman
of the Board, a major shareholder of A&F, pursuant to the terms
of a replacement promissory note, which provides that such
amount is due and payable on May 18, 2001 together with
interest at the rate of 6.5% per annum. This note constitutes a
replacement of, and substitute for, the promissory notes dated
March 1, 2000 and May 19, 2000 in the amounts of $1.5 million
and $3.0 million, respectively, which were cancelled.
10. STOCK OPTIONS AND RESTRICTED SHARES Under A&F’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 A&F’s common stock at the market price on the date
of grant. In 2000, associates of the Company were granted
approximately 1.4 million options, with vesting periods from four
to five years. A total of 30,000 options were granted to non-
associate directors in 2000, 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 accor-
dance 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
2000, 1999 and 1998, 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 $20.0
million or $.20 per share in 2000, $18.5 million or $.17 per share
in 1999 and $6.1 million or $.06 per share in 1998. The weighted-
average fair value of all options granted during fiscal 2000, 1999 and
1998 was $8.90, $23.34 and $9.89, respectively. The fair value of
each option was estimated using the Black-Scholes option-pricing
model with the following weighted-average assumptions for 2000,
1999 and 1998: no expected dividends; price volatility of 50% in
2000, 45% in 1999 and 40% in 1998; risk-free interest rates of
6.2%, 6.0% and 5.5% in 2000, 1999 and 1998, respectively; assumed
forfeiture rates of 10%; and expected lives of 5 years in 2000, 6.5
years in 1999 and 5 years in 1998.
The pro forma effect on net income for 2000, 1999 and 1998
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 sub-
sequent to the Offering.
Options Outstanding at February 3, 2001
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-$23 5,004,000 7.2 $13.17 1,496,000 $10.82
$23-$38 2,821,000 7.8 $25.85 590,000 $26.36
$38-$52 5,169,000 8.4 $43.55 78,000 $40.70
$8-$52 12,994,000 7.8 $28.01 2,164,000 $16.13
A summary of option activity for 1998, 1999 and 2000 follows:
Stock Option Activity
Number of Weighted Average
Shares Option Price
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
2000
Outstanding at beginning of year 12,809,000 $28.03
Granted 1,414,000 17.25
Exercised (193,000) 14.57
Canceled (1,036,000) 16.06
Outstanding at end of year 12,994,000 $28.01
Options exercisable at year-end 2,164,000 $16.13