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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2002
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-12107
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ABERCROMBIE & FITCH CO.
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(Exact name of registrant as specified in its charter)
Delaware 31-1469076
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6301 Fitch Path, New Albany, OH 43054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 283-6500
----------------
Not Applicable
----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock Outstanding at September 12, 2002
- -------------------------- ---------------------------------------
$.01 Par Value 97,627,221 Shares
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income
Thirteen and Twenty-six Weeks Ended
August 3, 2002 and August 4, 2001....................................... 3
Condensed Consolidated Balance Sheets
August 3, 2002 and February 2, 2002..................................... 4
Condensed Consolidated Statements of Cash Flows
Twenty-six Weeks Ended
August 3, 2002 and August 4, 2001....................................... 5
Notes to Condensed Consolidated Financial Statements........................... 6
Report of Independent Accountants.............................................. 11
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition........................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 19
Item 4. Controls and Procedures................................................... 19
Part II. Other Information
Item 1. Legal Proceedings......................................................... 20
Item 5. Other Information......................................................... 21
Item 6. Exhibits and Reports on Form 8-K.......................................... 28
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------- -------------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
NET SALES $329,154 $280,116 $641,946 $543,796
Cost of Goods Sold, Occupancy and Buying Costs 197,280 171,789 395,643 337,629
-------------- -------------- -------------- --------------
GROSS INCOME 131,874 108,327 246,303 206,167
General, Administrative and Store Operating
Expenses 82,304 68,397 159,746 134,174
-------------- -------------- -------------- --------------
OPERATING INCOME 49,570 39,930 86,557 71,993
Interest Income, Net 731 1,128 1,603 2,848
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 50,301 41,058 88,160 74,841
Provision for Income Taxes 19,160 16,020 33,730 29,200
-------------- -------------- -------------- --------------
NET INCOME $ 31,141 $ 25,038 $ 54,430 $ 45,641
============== ============== ============== ==============
NET INCOME PER SHARE:
Basic $ 0.32 $ 0.25 $ 0.55 $ 0.46
============== ============== ============== ==============
Diluted $ 0.31 $ 0.24 $ 0.53 $ 0.44
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 98,764 99,323 98,894 99,167
============== ============== ============== ==============
Diluted 101,465 104,020 101,879 103,453
============== ============== ============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
August 3, February 2,
2002 2002
------------ ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and Equivalents $ 229,034 $ 167,664
Marketable Securities - 71,220
Receivables 13,961 20,456
Inventories 179,562 108,876
Store Supplies 23,348 21,524
Other 17,674 15,455
------------ ------------
TOTAL CURRENT ASSETS 463,579 405,195
PROPERTY AND EQUIPMENT, NET 401,906 365,112
OTHER ASSETS 147 239
------------ ------------
TOTAL ASSETS $ 865,632 $ 770,546
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 58,506 $ 31,897
Accrued Expenses 138,925 109,586
Income Taxes Payable 19,639 22,096
------------ ------------
TOTAL CURRENT LIABILITIES 217,070 163,579
DEFERRED INCOME TAXES 12,572 1,165
OTHER LONG-TERM LIABILITIES 9,808 10,368
SHAREHOLDERS' EQUITY:
Common Stock 1,033 1,033
Paid-In Capital 142,424 141,394
Retained Earnings 573,970 519,540
------------ ------------
717,427 661,967
Less: Treasury Stock, at Average Cost (91,245) (66,533)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 626,182 595,434
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 865,632 $ 770,546
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Twenty-six Weeks Ended
----------------------------
August 3, August 4,
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net Income $ 54,430 $ 45,641
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 26,309 18,685
Noncash Charge for Deferred Compensation 1,300 2,466
Changes in Assets and Liabilities:
Inventories (70,686) (36,730)
Accounts Payable and Accrued Expenses 40,662 17,792
Income Taxes 8,897 (21,830)
Other Assets and Liabilities (3,729) (3,594)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 57,183 22,430
--------- ---------
INVESTING ACTIVITIES:
Capital Expenditures (44,255) (70,903)
Proceeds from Maturities of Marketable Securities 71,220 -
Notes Receivable - (317)
--------- ---------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 26,965 (71,220)
--------- ---------
FINANCING ACTIVITIES:
Stock Option Exercises and Other 791 8,615
Purchases of Treasury Stock (23,569) -
--------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (22,778) 8,615
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 61,370 (40,175)
Cash and Equivalents, Beginning of Year 167,664 137,581
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 229,034 $ 97,406
========= =========
SIGNIFICANT NONCASH INVESTING ACTIVITIES:
Accrual for Construction in Progress $ 13,135 $ 17,898
========= =========
Construction Allowance Receivables $ - $ 4,019
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
ABERCROMBIE & FITCH
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. ("A&F"), through its subsidiaries (collectively,
A&F and its subsidiaries are referred to as "Abercrombie & Fitch" or the
"Company"), is a specialty retailer of high quality, casual apparel for
men, women and kids with an active, youthful lifestyle.
The condensed consolidated financial statements include the accounts of A&F
and all significant subsidiaries that are more than 50 percent owned and
controlled. All significant intercompany balances and transactions have
been eliminated in consolidation.
The condensed consolidated financial statements as of August 3, 2002 and
for the thirteen and twenty-six week periods ended August 3, 2002 and
August 4, 2001 are unaudited and are presented pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in
A&F's Annual Report on Form 10-K for the fiscal year ended February 2, 2002
(the "2001 fiscal year"). In the opinion of management, the accompanying
condensed consolidated financial statements reflect all adjustments (which
are of a normal recurring nature) necessary to present fairly the financial
position and results of operations and cash flows for the interim periods,
but are not necessarily indicative of the results of operations for a full
fiscal year.
The condensed consolidated financial statements as of August 3, 2002 and
for the thirteen and twenty-six week periods ended August 3, 2002 and
August 4, 2001 included herein have been reviewed by the independent
accounting firm of PricewaterhouseCoopers LLP and the report of such firm
follows the notes to condensed consolidated financial statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions of
Section 11 of the Securities Act of 1933 (the "Act") for its report on the
condensed consolidated financial statements because that report is not a
"report" within the meaning of Sections 7 and 11 of the Act.
Certain prior period amounts have been reclassified to conform with current
year presentation.
2. ISSUANCES OF ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations," will be effective for fiscal years
beginning after June 15, 2002 (February 2, 2003 for the Company). The
standard requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is a cost by
increasing the carrying amount of the related long-lived asset. Over time,
the liability is
6
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related obligation for its recorded
amount or the entity incurs a gain or loss upon settlement. Because costs
associated with exiting leased properties at the end of lease terms are
minimal, management anticipates that the adoption of SFAS No. 143 will not
have a significant effect on the Company's results of operations or its
financial position.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," will be effective for
fiscal years beginning after May 15, 2002 (February 2, 2003 for the
Company). The standard rescinds Financial Accounting Standards Board
("FASB") Statements No. 4 and 64 that deal with issues relating to the
extinguishment of debt. The standard also rescinds FASB Statement No. 44
that deals with intangible assets of motor carriers. The standard modifies
FASB Statement No. 13, "Accounting for Leases," so that certain capital
lease modifications must be accounted for by lessees as sale-leaseback
transactions. Additionally, the standard identifies amendments that should
have been made to previously existing pronouncements and formally amends
the appropriate pronouncements. Management anticipates that the adoption
of SFAS No. 145 will not have a significant effect on the Company's results
of operations or its financial position.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," requires that a liability for a cost associated with an exit
or disposal activity be recognized and measured initially at fair value
when the liability is incurred. The provisions of the standard are
effective for exit or disposal activities initiated after December 31,
2002, with earlier application encouraged. Management anticipates that the
adoption of SFAS No. 146 will not have a significant effect on the
Company's results of operations or its financial position.
3. EARNINGS PER SHARE
Weighted Average Shares Outstanding (in thousands):
Thirteen Weeks Ended
---------------------
August 3, August 4,
2002 2001
--------- ---------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (4,536) (3,977)
--------- ---------
Basic shares 98,764 99,323
Dilutive effect of options and restricted shares 2,701 4,697
--------- ---------
Diluted shares 101,465 104,020
========= =========
7
Twenty-six Weeks Ended
-----------------------
August 3, August 4,
2002 2001
--------- ---------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (4,406) (4,133)
--------- ---------
Basic shares 98,894 99,167
Dilutive effect of options and restricted shares 2,985 4,286
--------- ---------
Diluted shares 101,879 103,453
========= =========
Options to purchase 9,443,000 and 6,209,000 shares of Class A Common Stock
during the thirteen and twenty-six weeks ended August 3, 2002,
respectively, and 4,503,000 and 5,610,000 shares during the thirteen and
twenty-six weeks ended August 4, 2001, respectively, were outstanding, but
were not included in the computation of net income per diluted share
because the options' exercise prices were greater than the average market
price of the underlying shares.
A total of 232,000 and 240,000 restricted shares were issued during the
twenty-six weeks ended August 3, 2002 and August 4, 2001, respectively.
The issuances decreased unearned compensation by $6.0 million and $5.3
million in the year-to-date periods of 2002 and 2001, respectively.
4. INVENTORIES
The fiscal year of A&F and its subsidiaries is comprised of two principal
selling seasons: Spring (the first and second quarters) and Fall (the third
and fourth quarters). Valuation of finished goods inventories is based
principally upon the lower of average cost or market determined on a
first-in, first-out basis utilizing the retail method. Inventory valuation
at the end of the first and third quarters reflects adjustments for
inventory markdowns and shrinkage estimates for the total selling season.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
August 3, February 2,
2002 2002
---------- -----------
Property and equipment, at cost $ 564,378 $ 501,323
Accumulated depreciation and amortization (162,472) (136,211)
---------- -----------
Property and equipment, net $ 401,906 $ 365,112
========== ===========
6. INCOME TAXES
The provision for income taxes is based on the current estimate of the
annual effective tax rate. Income taxes paid during the twenty-six weeks
ended August 3, 2002 and August 4, 2001 approximated $24.4 million and
$50.5 million, respectively. Current year payment amounts reflect statutory
deferral methods implemented during the current fiscal year.
8
7. LONG-TERM DEBT
The Company entered into a $150 million syndicated unsecured credit
agreement (the "Agreement") on April 30, 1998. 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 August 3, 2002 or
February 2, 2002.
8. RELATED PARTY TRANSACTIONS
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 the thirteen and twenty-six week periods ended August 3, 2002 were
approximately $0.5 and $1.0 million, respectively, compared to $0.4 million
and $0.8 million for the comparable periods in 2001.
On January 1, 2002, A&F loaned the amount of $4,953,833 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 December 31, 2002. If A&F records net sales of at least
$1,156,100,000 during the period from February 3, 2002 through November 30,
2002, the outstanding principal under the note will not bear interest. If
A&F does not record net sales exceeding that threshold, the outstanding
principal under the note will bear interest from January 1, 2002 at the
rate of 4.5% per annum. This note constitutes a replacement of, and
substitute for, the replacement promissory note dated as of May 18, 2001 in
the amount of $4,817,146, which has been cancelled. The replacement
promissory note dated May 18, 2001 constituted a replacement of, and
substitute for, the replacement promissory note dated as of August 28, 2000
in the amount of $4.5 million. The replacement promissory note dated August
28, 2000 constituted a replacement of, and substitute for, the promissory
note dated March 1, 2000 and the replacement promissory note dated May 19,
2000 in the amounts of $1.5 million and $3.0 million, respectively. The
replacement promissory note dated May 19, 2000 constituted a replacement
of, and substitute for, the promissory note dated as of November 17, 1999
in the amount of $1.5 million.
9
9. CONTINGENCIES
The Company is involved in a number of legal proceedings. Although it is
not possible to predict with any certainty the eventual outcome of any
legal proceedings, it is the opinion of management that the ultimate
resolution of these matters will not have a material impact on the
Company's results of operations, cash flows or financial position.
10
Report of Independent Accountants
To the Board of Directors and
Shareholders of Abercrombie & Fitch
We have reviewed the accompanying condensed consolidated balance sheet of
Abercrombie & Fitch (the "Company") and its subsidiaries as of August 3, 2002,
and the related condensed consolidated statements of income for each of the
thirteen and twenty-six week periods ended August 3, 2002 and August 4, 2001 and
the condensed consolidated statements of cash flows for the twenty-six week
periods ended August 3, 2002 and August 4, 2001. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of February
2, 2002, and the related consolidated statements of income, shareholders'
equity, and cash flows for the year then ended (not presented herein), and in
our report dated February 19, 2002 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of February 2, 2002, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
PricewaterhouseCoopers LLP
Columbus, Ohio
August 12, 2002
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
During the second quarter of the 2002 fiscal year, net sales increased 18% to
$329.2 million from $280.1 million a year ago. Operating income improved to
$49.6 million in the second quarter of 2002 from $39.9 million in the second
quarter of 2001. Net income increased to $31.1 million in the second quarter of
2002 as compared to $25.0 million last year. Earnings per diluted share were
$.31 in the second quarter of 2002 compared to $.24 a year ago. Year-to-date
earnings per diluted share were $.53 in 2002 compared to $.44 in 2001.
The following data represents the amounts shown in the Company's condensed
consolidated statements of income for the thirteen and twenty-six week periods
ended August 3, 2002 and August 4, 2001, expressed as a percentage of net sales:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
---- ---- ---- ----
NET SALES 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold, Occupancy and
Buying Costs 59.9 61.3 61.6 62.1
---- ---- ---- ----
GROSS INCOME 40.1 38.7 38.4 37.9
General, Administrative and Store
Operating Expenses 25.0 24.4 24.9 24.7
---- ---- ---- ----
OPERATING INCOME 15.1 14.3 13.5 13.2
Interest Income, Net (0.2) (0.4) (0.2) (0.5)
---- ---- ---- ----
INCOME BEFORE INCOME TAXES 15.3 14.7 13.7 13.8
Provision for Income Taxes 5.8 5.7 5.3 5.4
---- ---- ---- ----
NET INCOME 9.5% 8.9% 8.5% 8.4%
==== ==== ==== ====
12
Financial Summary
The following summarized financial and statistical data compares the thirteen
and twenty-six week periods ended August 3, 2002 to the comparable fiscal 2001
periods:
Thirteen Weeks Ended Twenty-six Weeks Ended
----------------------------------------- -----------------------------------------
August 3, August 4, August 3, August 4,
2002 2001 Change 2002 2001 Change
---------- ---------- ---------- ---------- ---------- ----------
Comparable store sales (5)% (8)% (6)% (3)%
Retail sales increase 23% 30% 24% 28%
attributable to new and
remodeled stores, magazine,
catalogue and Web sites
Retail sales per average gross $ 82 $ 90 (9)% $ 161 $ 173 (7)%
square foot
Retail sales per average store $ 607 $ 708 (14)% $ 1,195 $ 1,369 (13)%
(thousands)
Average store size at end of 7,386 7,758 (5)%
quarter (gross square feet)
Gross square feet at end of 3,937 3,142 25%
quarter (thousands)
Number of stores and
gross square feet by division:
- ------------------------------
Abercrombie & Fitch:
Stores at beginning of period 311 265 309 265
Opened 6 16 10 17
Closed (1) - (3) (1)
---------- ---------- ---------- ----------
Stores at end of period 316 281 316 281
========== ========== ========== ==========
Gross square feet (thousands) 2,852 2,565
========== ==========
abercrombie:
Stores at beginning of period 153 85 148 84
Opened 4 27 9 28
Closed - - - -
---------- ---------- ---------- ----------
Stores at end of period 157 112 157 112
========== ========== ========== ==========
Gross square feet (thousands) 701 503
========== ==========
Hollister Co.:
Stores at beginning of period 43 5 34 5
Opened 17 7 27 7
Closed - - (1) -
---------- ---------- ---------- ----------
Stores at end of period 60 12 60 12
========== ========== ========== ==========
Gross square feet (thousands) 384 74
========== ==========
13
Net Sales
Net sales for the second quarter of 2002 increased 18% to $329.2 million from
$280.1 million in 2001. The increase was due to the addition of new stores
offset by a 5% decline in comparable store sales. The retail environment
remained promotional and the Company continued to execute certain promotional
strategies throughout the quarter. Although total Company comparable store sales
remained negative, the addition of new and noncomparable store sales resulted in
an addition to net sales of $60.6 million. The decrease in comparable store
sales amounted to a $13.7 million decrease in net sales. Comparable store sales
were down in the mid-single digits in the womens business for the quarter.
Stronger performing categories were woven shirts, skirts and knit tops. Mens
comparable store sales also decreased in the mid-single digits for the quarter.
Knits, denim and active wear performed well. Overall, the womens business
accounted for 59% of the total adult business. The kids business had a
comparable store sales decrease in the low-single digits with girls much
stronger than boys. The girls business achieved positive comparable store sales
for the quarter. The newest division, Hollister Co., continues to demonstrate
strong customer acceptance. Sales per square foot in the Hollister stores were
over 80% of the Abercrombie & Fitch stores in the same mall. The adult and kids
e-commerce business continued to become a larger part of the business as
Internet sales grew by over 40% during the second quarter compared to last year.
The Company's catalogue, the A&F Quarterly (a catalogue/magazine), and the
Company's Web sites had increased net sales of $2.2 million versus last year and
accounted for 4.1% of net sales in the second quarter of 2002 as compared to
4.0% for the same period last year.
Year-to-date net sales were $641.9 million, an increase of 18%, from $543.8
million for the same period in 2001. The sales increase was attributable to the
net addition of 128 stores offset by a 6% comparable store sales decrease. The
addition of new and noncomparable store sales resulted in an addition to net
sales of $120.3 million. The decline in comparable store sales amounted to a
$28.1 million decrease in net sales. The womens business had a comparable store
sales decrease in the low-single digits with knit tops, shirts, skirts and denim
performing well. Comparable store sales decreased in the mid-single digits in
the mens business. Stronger performing categories were knits, denim, active wear
and accessories. Overall, the womens business was 58% of the total adult
business. The kids business had a mid-single digit decline in comparable store
sales for the year-to-date period with girls performing better than boys. The
girls business had positive comparable store sales for the year-to-date period.
Hollister Co. demonstrated strong customer acceptance as sales per square foot
in the Hollister stores were over 80% of the Abercrombie & Fitch stores in the
same mall. The adult and kids e-commerce businesses grew by over 50% during the
year-to-date period compared to last year. The Company' s catalogue, the A&F
Quarterly and the Company's Web sites had increased net sales of $5.9 million
versus last year and represented 4.7% of 2002 year-to-date net sales as compared
to 4.4% last year.
Gross Income
The gross income rate (gross income divided by net sales) increased to 40.1%
during the second quarter of 2002 from 38.7% for the same period in 2001. The
increase was primarily attributable to higher initial markup (IMU). Continued
improvement in the sourcing of merchandise has been an important factor in
improving IMU in all three divisions. Partially offsetting the
14
increase in IMU were increased buying and occupancy costs, as a percentage of
net sales, and a higher markdown rate. Buying and occupancy costs increased due
to the inability to leverage fixed expenses with lower sales volume per average
store. The markdown rate increased due to the impact of promotional strategies
and the desire to minimize spring carryover inventory. Spring carryover
inventory was more than 20% below last year at the end of the second quarter in
retail dollars per store.
The 2002 year-to-date gross income rate increased to 38.4% from 37.9% for the
comparable period in 2001. The increase was attributable to higher IMU as a
result of the aforementioned improved sourcing of merchandise. The increase was
partially offset by higher buying and occupancy costs and an increased markdown
rate. Buying and occupancy costs increased, as a percentage of net sales, due to
the inability to leverage fixed expenses with lower sales volume per average
store. The markdown rate increased due to promotional strategies and the desire
to end the second quarter in a cleaner position with respect to spring carryover
inventory than last year.
General, Administrative and Store Operating Expenses
The general, administrative and store operating expense rate (general,
administrative and store operating expenses divided by net sales) was 25.0% and
24.4% in the second quarter of 2002 and 2001, respectively. The increase was
mostly due to higher incentive compensation costs, reflecting the increase in
net income versus last year, and marketing costs incurred as part of the
Company's direct mail promotional strategies. These increases were partially
offset by reductions in store payroll hours per average store and improvements
in distribution and fulfillment costs. During the second quarter, productivity
in the distribution center, as measured in units processed per labor hour, was
67% higher than last year. Smaller productivity improvement is expected for the
balance of the year as the Company begins to anniversary productivity
improvement achieved through the use of a new warehouse management system. In
the direct business, fulfillment costs per order have been reduced by over 20%
since being brought in-house in mid-April of 2002.
The general, administrative and store operating expense rate was 24.9% and
24.7% for the year-to-date periods in 2002 and 2001, respectively. The increase
resulted primarily from increased marketing costs incurred as part of the
Company's direct mail promotional strategies. Improvements in distribution
center productivity and reduced fulfillment costs helped to partially offset the
increased marketing costs.
Operating Income
The second quarter and year-to-date operating income rates (operating income
divided by net sales) were 15.1% and 13.5% in 2002, up from 14.3% and 13.2% for
the comparable periods in 2001. The increase in operating income rates in these
periods was a result of increased gross income rates. Higher general,
administrative and store operating expense rates partially offset the increased
gross income rates.
15
Interest Income/Expense
Second quarter and year-to-date net interest income were $0.7 and $1.6 million
in 2002 as compared with net interest income of $1.1 and $2.8 million for the
second quarter and year-to-date periods last year. The decrease in net interest
income was primarily due to a decline in interest rates. Additionally, in the
second quarter and year-to-date periods of 2002, cash was primarily invested in
tax-free securities bearing a lower interest rate versus last year's commercial
paper investments. The tax-free investments lowered the effective tax rates to
38.1% and 38.3% for the second quarter and year-to-date periods of 2002,
respectively.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities provides the resources to support
operations, including projected growth, seasonal requirements and capital
expenditures. A summary of the Company's working capital position and
capitalization follows (thousands):
August 3, February 2,
2002 2002
------------- ---------------
Working capital $246,509 $241,616
============= ===============
Capitalization:
Shareholders' equity $626,182 $595,434
============= ===============
Net cash provided by operating activities totaled $57.2 million for the
twenty-six weeks ended August 3, 2002 versus $22.4 million in the comparable
period of 2001. Current year net income adjusted for depreciation and
amortization was the primary source of cash. Additionally, cash was provided
from increases in accounts payable, accrued expenses and deferred income tax
liabilities. Accounts payable increased as a result of an overall increase in
inventories supporting the continued growth of the business. Accrued expenses
also increased from the continued growth and development of the business.
Specific accounts within accrued expenses that increased were incentive
compensation, reflecting the increase in year-to-date net income, and taxes,
other than income, consistent with the increase in store openings. Deferred
income tax liabilities increased in the current year primarily as a result of
increasing differences in tax and book depreciation methods due to the
accelerated growth of store openings in the past few years and "bonus"
accelerated depreciation allowed under the Job Creation and Worker Assistance
Act of 2002. Uses of cash consisted mostly of increases in inventories. Although
inventories were down by 9% per gross square foot versus last year at
quarter-end, the total inventory balance increased as a result of a 25% increase
in gross square feet. Additional uses of cash were directly related to store
growth and primarily consisted of increases in capitalized store supplies and
prepaid rent related to stores (classified in other current assets).
The Company's operations are seasonal in nature and typically peak during the
back-to-school and Christmas selling periods. Accordingly, cash requirements for
inventory expenditures are highest during these periods.
16
Cash outflows for investing activities were for capital expenditures (see the
discussion in the "Captial Expenditures" section below) related primarily to new
stores. Cash inflows from investing activities consisted of maturities of
marketable securities.
Financing activities during 2002 consisted primarily of the repurchase of
1,000,000 shares of the Company's Class A Common Stock pursuant to a previously
authorized stock repurchase program. At its August 2002 Board meeting, the Board
of Directors authorized the repurchase of an additional 5,000,000 shares of the
Company's Class A Common Stock. This action increased the total number of shares
authorized for repurchase to 5,850,000 as of August 3, 2002. In addition to
stock repurchases, financing activities also consisted of stock option exercises
and restricted stock issuances.
The Company has available a $150 million syndicated unsecured credit agreement.
No amounts are currently outstanding. Additional details regarding the credit
agreement can be found in the Notes to Condensed Consolidated Financial
Statements (Note 7).
The Company also has a $75 million facility for trade letters of credit. The
trade letters of credit are issued to numerous overseas suppliers and serve as
guarantees to the suppliers. As of August 3, 2002, $44.4 million was outstanding
under this trade letter of credit facility.
Capital Expenditures
Capital expenditures, net of construction allowances, totaled $44.3 million and
$70.9 million for the twenty-six weeks ended August 3, 2002 and August 4, 2001,
respectively. Additionally, the noncash accrual for construction in progress
increased $13.1 million in 2002 and $17.9 million in 2001. Capital expenditures
related to new stores, including the noncash accrual for construction in
progress, accounted for approximately $51 million during the first twenty-six
weeks of 2002. The balance of capital expenditures related primarily to
improvements in the distribution center.
The Company anticipates spending $105 to $115 million in 2002 for capital
expenditures, of which $75 to $85 million will be for new stores. The balance of
capital expenditures primarily relates to improving the in-store information
technology structure and improvements in and expansion of the distribution
center. The Company intends to add approximately 706,000 gross square feet for
new stores in 2002, which will represent a 19% increase over year-end 2001. It
is anticipated the increase will result from the addition of approximately 33
new "Abercrombie & Fitch" stores, 18 new "abercrombie " stores and 60 new
"Hollister Co." stores.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Abercrombie & Fitch stores to be opened in 2002 will
approximate $600,000 per store, after giving effect to landlord allowances. In
addition, inventory purchases are expected to average approximately $300,000 per
store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for abercrombie stores to be opened in 2002 will
approximate $500,000 per store, after giving effect to landlord allowances. In
addition, inventory purchases are expected to average approximately $125,000 per
store.
17
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Hollister Co. stores to be opened in 2002 will
approximate $725,000 per store, after giving effect to landlord allowances.
However, the Company continues in the early stages of developing Hollister Co.
and, as a result, current average costs for leasehold improvements and furniture
and fixtures are not representative of future costs. In addition, inventory
purchases are expected to average approximately $200,000 per store.
The Company expects that substantially all future capital expenditures will be
funded with cash from operations. In addition, the Company has available the
$150 million credit agreement to support operations.
Critical Accounting Policies and Estimates
The Company's significant and critical accounting policies and estimates can be
found in the Notes to Consolidated Financial Statements contained in A&F's
Annual Report on Form 10-K for the fiscal year ended February 2, 2002 (Note 2).
Additionally, the Company believes that the following policy is critical to the
portrayal of the Company's financial condition and results of operations for
interim periods.
Income Taxes - At the end of each interim period, the Company makes its best
estimate of the effective tax rate expected to be applicable for the full fiscal
year. The rate so determined is used in providing for income taxes on a current
year-to-date basis.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," will be effective for fiscal years beginning
after June 15, 2002 (February 2, 2003 for the Company). The standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is a cost by increasing the carrying amount
of the related long-lived asset. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related obligation for its recorded amount or the entity
incurs a gain or loss upon settlement. Because costs associated with exiting
leased properties at the end of lease terms are minimal, management anticipates
that the adoption of SFAS No. 143 will not have a significant effect on the
Company's results of operations or its financial position.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," will be effective for fiscal
years beginning after May 15, 2002 (February 2, 2003 for the Company). The
standard rescinds Financial Accounting Standards Board ("FASB") Statements No. 4
and 64 that deal with issues relating to the extinguishment of debt. The
standard also rescinds FASB Statement No. 44 that deals with intangible assets
of motor carriers. The standard modifies FASB Statement No. 13, " Accounting for
Leases," so that certain capital lease modifications must be accounted for by
lessees as sale-leaseback transactions. Additionally, the standard identifies
amendments that should have been made to previously existing pronouncements and
formally amends the appropriate pronouncements. Management anticipates that the
adoption of SFAS No. 145 will not have a significant effect on the Company's
results of operations or its financial position.
18
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value when the
liability is incurred. The provisions of the standard are effective for exit or
disposal activities initiated after December 31, 2002, with earlier application
encouraged. Management anticipates that the adoption of SFAS No. 146 will not
have a significant effect on the Company's results of operations or its
financial position.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
A&F cautions that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Form 10-Q or
made by management of A&F involve risks and uncertainties and are subject to
change based on various important factors. The following factors, among others,
in some cases have affected and in the future could affect the Company's
financial performance and actual results and could cause actual results for 2002
and beyond to differ materially from those expressed or implied in any of the
forward-looking statements included in this Form 10-Q or otherwise made by
management: changes in consumer spending patterns and consumer preferences; the
effects of political and economic events and conditions domestically and in
foreign jurisdictions in which the Company operates, including, but not limited
to, acts of terrorism or war; the impact of competition and pricing; changes in
weather patterns; political stability; currency and exchange risks and changes
in existing or potential duties, tariffs or quotas; availability of suitable
store locations at appropriate terms; ability to develop new merchandise; and
ability to hire, train and retain associates.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of A&F's financial instruments as of August 3, 2002 has not
significantly changed since February 2, 2002. A&F's market risk profile as of
February 2, 2002 is disclosed in Item 7A of A&F's Annual Report on Form 10-K for
the year then ended.
Item 4. CONTROLS AND PROCEDURES
Since this form 10-Q is being filed for the quarterly period ended August 3,
2002, the disclosure requirements of paragraph (a) of Item 307 of Regulation S-K
are not applicable.
There have been no changes in the internal controls of A&F which would require
disclosure under paragraph (b) of Item 307 of Regulation S-K.
19
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in lawsuits arising in the ordinary course of
business.
On January 13, 1999, a complaint was filed against many national
retailers in the United States District Court for the Central District
of California. The complaint (1) purported to be filed on behalf of a
class of unnamed garment workers, (2) related to labor practices
allegedly employed on the island of Saipan, Commonwealth of the Northern
Mariana Islands, by apparel manufacturers unrelated to the Company, some
of which had sold goods to the Company, and (3) sought injunctive,
unspecified monetary and other relief. On September 29, 1999, the action
was transferred to the United States District Court for the District of
Hawaii. Thereafter, the plaintiffs moved for leave to amend their
complaint to add A&F and others as additional defendants. That motion
was granted and, on April 28, 2000, an amended complaint was filed which
added A&F and others as defendants, but did not otherwise substantively
alter either the claims alleged or the relief sought by the plaintiffs.
A&F joined with other retailer defendants in moving to dismiss the
amended complaint. Certain of the other defendants also moved to
transfer the action to Saipan. On June 23, 2000, the District Court of
Hawaii ordered the case to be transferred to the United States District
Court for the District of the Northern Mariana Islands. Plaintiffs filed
a Petition for Writ of Mandamus challenging the transfer and on March
22, 2001, the Ninth Circuit Court of Appeals issued an order denying the
Petition for Writ of Mandamus, thus allowing the case to be transferred
to the United States District Court for the Northern Mariana Islands.
The defendants' motion to dismiss the first amended complaint for
failure to state a claim upon which relief can be granted was denied in
part and granted in part on November 26, 2001. As to the partial
granting of the motion, the Court also granted the plaintiffs leave to
amend to cure any pleading defects in a second amended complaint.
Plaintiffs filed their motion for class certification on December 13,
2001 and their second amended complaint, which added neither new parties
nor claims but realleged claims previously dismissed, on December 17,
2001. The motion for class certification was heard on February 14, 2002.
The motion for preliminary approval of settlement as to certain other
retailer defendants was also heard the same date. A motion to dismiss
the second amended complaint was heard on March 19, 2002. On May 10,
2002, the Court granted in part and denied in part the motion to dismiss
the second amended complaint as to the remaining RICO claim and granted
the motion to dismiss the second amended complaint as to the Common Law
Peonage claim, the Anti-Peonage statutory claim, and the Alien Tort
Claims Act claim. Plaintiffs were given leave to file a third amended
complaint. The motions for class certification and preliminary approval
of settlement as to certain other retailer defendants were also granted.
A third amended complaint was filed on July 25, 2002.
A&F is aware of 20 actions that have been filed against A&F and certain
of its officers and directors on behalf of a purported, but as yet
uncertified, class of shareholders who purchased A&F's Class A Common
Stock between October 8, 1999 and October 13, 1999. These 20 actions
have been filed in the United States District Courts for the Southern
District of New York and the Southern District of Ohio, Eastern Division
alleging violations of the federal securities laws and seeking
unspecified damages. On April 12, 2000, the Judicial Panel on
Multidistrict Litigation issued a Transfer Order transferring the 20
pending actions to the Southern District of New York for consolidated
20
pretrial proceedings under the caption In re Abercrombie & Fitch
Securities Litigation. On November 16, 2000, the Court signed an Order
appointing the Hicks Group, a group of seven unrelated investors in
A&F's securities, as lead plaintiff, and appointing lead counsel in the
consolidated action. On December 14, 2000, plaintiffs filed a
Consolidated Amended Class Action Complaint (the "Amended Complaint") in
which they did not name as defendants Lazard Freres & Co. and Todd
Slater, who had formerly been named as defendants in certain of the 20
complaints. A&F and other defendants filed motions to dismiss the
Amended Complaint on February 14, 2001.
A&F believes that the actions against it are without merit and intends
to defend vigorously against them. However, A&F does not believe it is
feasible to predict the outcome of these proceedings. The timing of the
final resolution of these proceedings is also uncertain.
In addition, the United States Securities and Exchange Commission
initiated a formal investigation regarding trading in the securities of
A&F and the disclosure of sales forecasts in October 1999, and the Ohio
Division of Securities requested information from A&F regarding these
same matters. A&F has cooperated in the investigations.
Item 5. OTHER INFORMATION
The following paragraphs provide an updated summary of the material
attributes of the capital stock of A&F. The following paragraphs
summarize the provisions of A&F's Amended and Restated Certificate of
Incorporation, as amended (the " Amended Certificate"), and A&F's
Amended and Restated Bylaws (the "Amended Bylaws"), affecting the rights
of the holders of capital stock and are qualified in their entirety by
reference to the Amended Certificate and the Amended Bylaws, copies of
which have been filed with the Securities and Exchange Commission (the
"SEC").
General
-------
The authorized capital stock of A&F consists of (a) 256,400,000 shares
of Common Stock, $0.01 par value (the "Common Stock"), of which (i)
150,000,000 shares are designated as Class A Common Stock (the "Class A
Common Stock") and (ii) 106,400,000 shares are designated as Class B
Common Stock (the "Class B Common Stock"); and (b) 15,000,000 shares of
Preferred Stock, $0.01 par value (the "Preferred Stock"), of which
100,000 shares are designated as Series A Participating Cumulative
Preferred Stock (the "Series A Preferred Stock").
As of September 12, 2002, 97,627,221 shares of Class A Common Stock were
outstanding and there were no shares of Class B Common Stock and no
shares of Preferred Stock outstanding. The shares of Class A Common
Stock are listed on the New York Stock Exchange.
21
Common Stock
------------
Voting Rights
General. Holders of Class A Common Stock are entitled to one vote per
share on all matters to be voted upon by the A&F stockholders. Holders
of Class A Common Stock are not entitled to cumulate their votes in the
election of directors.
The A&F stockholders may only take action at an annual or special
meeting of the stockholders. Elections of directors are determined by a
plurality of the votes cast. Subject to any special voting rights or
requirements provided for in the Amended Certificate, in the Amended
Bylaws or by law, other matters to be voted upon by A&F stockholders
must be approved by a majority in voting interest of the A&F
stockholders present in person or by proxy and voting thereon.
If Class B Common Stock is issued in the future, the holders thereof
would be entitled to three votes per share on all matters to be voted
upon by the A&F stockholders but would otherwise have identical rights
to those of the holders of Class A Common Stock. The Class A Common
Stock and the Class B Common Stock would vote as a single class, subject
to any voting rights granted to holders of Preferred Stock.
Special Voting Rights. The Amended Certificate requires the affirmative
vote of the holders of not less than 75% of the outstanding shares of
A&F entitled to vote thereon in order to adopt amendments to the
provisions of the Amended Certificate addressing (a) the manner in which
the Amended Bylaws may be amended by the directors or the stockholders;
(b) the classification of the Board of Directors; (c) the requirement
that actions be taken by the stockholders only at a meeting; (d) the
factors to be considered by the directors in evaluating significant
corporate transactions; (e) the required vote for removal of a director;
(f) the required vote for amendment of the Amended Certificate or the
Amended Bylaws; and (g) the vote required for approval of business
combinations with 5% stockholders (which vote must also include the
affirmative vote of the holders of not less than 75% of the outstanding
shares entitled to vote thereon excluding the 5% stockholder(s) in
question). Other amendments to the Amended Certificate must be approved
in the manner prescribed by the Delaware General Corporation Law (the
"DGCL"). If a proposed amendment to the Amended Certificate would
adversely affect the powers, preferences or special rights of the shares
of Class A Common Stock or Class B Common Stock, the affirmative vote of
not less than 75% of the outstanding shares affected by the proposed
amendment, voting as a separate class, would also be required.
The Amended Certificate also requires the affirmative vote of not less
than 75% of the outstanding shares entitled to vote thereon in order for
the Amended Bylaws to be amended, altered, repealed or rescinded by the
A&F stockholders or any proposed amendment to the Amended Certificate
which would contravene any then existing provision of the Amended Bylaws
to be adopted by the A&F stockholders.
Under Article ELEVENTH of the Amended Certificate (the "Supermajority
Voting Provisions"), Business Combinations (as defined below) between
A&F, or one of its subsidiaries, and an Interested Person (as defined
below) require the affirmative vote of not less than 75% of the then
outstanding shares of Voting Stock (as defined below) held
22
by stockholders other than the Interested Person, unless the proposed
Business Combination has been approved by a majority of the Continuing
Directors (as defined below). Such Continuing Director approval may be
given either before or after the Interested Person in question achieves
that status and if given, the Business Combination will require only the
affirmative vote by the A&F stockholders, if any, required by law or
otherwise.
An "Interested Person" for purposes of Article ELEVENTH generally is
defined as any person which, together with its affiliates and
associates, "beneficially owns" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934 as in effect on August 27, 1996) in the
aggregate 5% or more of the outstanding Voting Stock of A&F, as well as
any affiliate or associate of that person.
A "Business Combination" includes: (a) a merger or consolidation
involving A&F, or any subsidiary thereof, and an Interested Person; (b)
a sale, lease, exchange, transfer or other disposition of (i) a
"substantial part" of the assets of A&F or any subsidiary thereof (i.e.,
assets constituting in excess of 20% of the fair market value of the
total consolidated assets of A&F and its subsidiaries as of the end of
the then most recent fiscal year) to an Interested Person or (ii) a
substantial part of the assets of an Interested Person to A&F, or any
subsidiary thereof; (c) the issuance or transfer by A&F, or any
subsidiary thereof, of any securities of A&F, or any subsidiary
thereof, to an Interested Person; and (d) a reclassification of
securities, recapitalization or other comparable transaction involving
A&F that would have the effect of increasing the voting power of any
Interested Person with respect to the Voting Stock of A&F.
"Voting Stock" includes the outstanding shares of Common Stock and any
outstanding shares of Preferred Stock entitled to vote on each matter as
to which holders of Common Stock are entitled to vote.
A "Continuing Director" is an individual serving as a member of the A&F
Board of Directors immediately prior to the time the Interested Person
in question acquires that status, or an individual who was elected or
appointed to fill a vacancy after such time by a majority of the
then-current Continuing Directors.
Quorum for Meetings of Stockholders. The holders of at least one-third
of the voting power of A&F must be present in person or by proxy in
order to constitute a quorum at a meeting of the A&F stockholders called
by the A&F Board of Directors. Otherwise, the holders of a majority of
the voting power of A&F must be present in person or by proxy in order
to constitute a quorum.
Dividends
Subject to the rights of the holders of Preferred Stock, the holders of
Common Stock are entitled to receive dividends when and as declared by
the A&F Board of Directors out of the assets of A&F legally available
therefor. A Delaware corporation, such as A&F, may generally pay
dividends out of its surplus or if there is no surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
23
Other Rights
On liquidation, dissolution or winding up of the affairs of A&F, after
payment in full of the amounts required to be paid to the holders of
Preferred Stock, all holders of Common Stock, regardless of class, are
entitled to share ratably in any assets and funds legally available for
distribution to the holders of Common Stock.
No shares of either class of Common Stock are subject to redemption or
have preemptive rights to purchase additional shares of Common Stock.
Under the DGCL, A&F may generally repurchase shares of Common Stock out
of surplus. However, any such repurchase would be subject to the rights
of the holders of any outstanding Preferred Stock and any restrictions
in A&F's financing agreements.
Preferred Stock
---------------
Preferred Stock is issuable from time to time in one or more series with
such designations, rights, privileges, restrictions and conditions as
the A&F Board of Directors may fix and determine. Under the Amended
Certificate, the A&F Board of Directors is authorized to determine the
voting, dividend, conversion, redemption and liquidation rights,
preferences and limitations applicable to each series of Preferred
Stock.
Rights of Holders of Series A Preferred Stock
As contemplated by the Rights Agreement, dated as of July 16, 1998, as
amended by Amendment No. 1 to Rights Agreement, dated as of April 21,
1999, and as supplemented by the Certificate of adjustment of number of
Rights associated with each share of Class A Common Stock, dated May 27,
1999 (collectively, the "Rights Agreement"), copies of which have been
filed with the SEC, the A&F Board of Directors created the Series A
Preferred Stock as evidenced by the Certificate of Designation of Series
A Participating Cumulative Preferred Stock of A&F, dated July 21, 1998,
a copy of which has been filed with the SEC (the "Certificate of
Designation"). Series A Preferred Stock would only be issued in
accordance with the terms of the Rights Agreement. The number of shares
designated as Series A Preferred Stock may be increased or decreased by
resolution of the A&F Board of Directors but may not be decreased to a
number less than the number of shares then outstanding plus the number
of shares issuable upon exercise or conversion of all outstanding
rights, options or other A&F securities.
Voting Rights. In addition to any other voting rights required by the
DGCL, the holders of any Series A Preferred Stock which may be issued in
the future would be entitled to 2000 votes per share on all matters to
be voted upon by the A&F stockholders, subject to anti-dilution
adjustments in the event of future changes in A&F's capitalization. The
holders of Series A Preferred Stock would vote as a single class with
the holders of Common Stock on the matters to be voted upon by the A&F
stockholders, except as provided in the Certificate of Designation or by
law. The Certificate of Designation specifies rights which holders of
Series A Preferred Stock would have to elect two directors if dividends
thereon were in arrears in an amount equal to six quarterly dividends.
24
The Amended Certificate may not be amended in any manner which would
adversely affect the powers, preferences or special rights of the Series
A Preferred Stock without the affirmative vote of the holders of a
majority of the outstanding shares of Series A Preferred Stock, voting
separately as a class.
Dividend Rights. The holders of any Series A Preferred Stock which may
be issued in the future would be entitled to receive, when, as and if
declared by the A&F Board of Directors out of funds legally available
for the payment of dividends, quarterly dividends payable in cash on the
third Monday of February, May, August and November of each year (each
date being a "Quarterly Dividend Payment Date") commencing on the first
Quarterly Dividend Payment Date after the first issuance of any share of
Series A Preferred Stock. The quarterly dividends would be in an amount
per share equal to the greater of: (a) $1.00; and (b) subject to
anti-dilution adjustments in the event of future changes in A&F's
capitalization, the sum of (i) 2000 times the aggregate per share amount
of all cash dividends; and (ii) 2000 times the aggregate per share
amount of all non-cash dividends (other than dividends payable in Class
A Common Stock or subdivisions of the outstanding Common Stock)
declared on the Common Stock since the immediately preceding Quarterly
Dividend Payment Date (or the date of issuance of the Series A Preferred
Stock in the case of the first Quarterly Dividend Payment Date).
Dividends on the Series A Preferred Stock would be cumulative.
If dividends payable to holders of Series A Preferred Stock were in
arrears, A&F would not be able to declare or pay dividends on the Common
Stock, or repurchase any of the Common Stock.
Other Rights. On liquidation, dissolution or winding up of A&F, before
any distribution would be made to holders of Common Stock, the holders
of any outstanding Series A Preferred Stock would be entitled to receive
an amount per share equal to the greater of: (a) $1.00 per share, plus
an amount equal to all accrued and unpaid dividends to the date of
payment; and (b) 2000 times the aggregate amount to be distributed per
share to holders of Common Stock, subject to anti-dilution adjustments
in the event of future changes in A&F's capitalization.
Outstanding Series A Preferred Stock would not be redeemable.
If A&F were to enter into any consolidation, merger, combination or
other transaction in which shares of Common Stock are exchanged for or
changed into other stock or securities, cash or any other property,
outstanding shares of Series A Preferred Stock would, at the same time,
be similarly exchanged for or changed into an amount per share, subject
to anti-dilution adjustments in the event of future changes in A&F's
capitalization, equal to 2000 times the aggregate amount of the stock,
securities, cash or any other property, as the case may be, into which
or for which each share of Common Stock had been changed or exchanged.
25
Other Provisions Affecting Capital Stock
----------------------------------------
Director Nomination Procedure; Number of Directors; Classified Board
The Amended Bylaws require that a stockholder nomination for election to
the A&F Board of Directors at any annual meeting of stockholders be made
in writing and delivered in person or mailed by United States certified
mail to the secretary of A&F and received at A&F's principal executive
offices not less than 120 nor more than 150 days before the first
anniversary date of A&F's proxy statement in connection with the last
annual meeting of the A&F stockholders. Each stockholder nomination must
contain the following information: (a) the name and address of the
nominating stockholder; (b) the name, age, business address and, if
known, residence address of the nominee; (c) the principal occupation or
employment of the nominee; (d) the class and number of shares of capital
stock of A&F beneficially owned by the nominating stockholder (including
the name in which the shares are registered) and the nominee; (e) any
other information concerning the nominee that would be required to be
disclosed in proxy solicitations for elections of directors under the
SEC's rules; and (f) a description of any arrangement or understanding
between the nominating stockholder and the nominee or any other person
providing for the nomination. Each nomination must be accompanied by the
written consent of the proposed nominee to be named in the proxy
statement and to serve if elected. No person may be elected as a
director unless he or she has been nominated by a stockholder in such
manner or by the A&F Board of Directors.
The Amended Bylaws provide that the number of directors on the A&F Board
of Directors (exclusive of directors to be elected by the holders of any
one or more series of Preferred Stock voting separately as a class or
classes) may not be less than four nor more than nine, the exact number
to be determined by the affirmative vote of a majority of the whole
authorized number of directors.
The A&F Board of Directors (exclusive of directors to be elected by the
holders of any one or more series of Preferred Stock voting separately
as a class or classes) is divided into three classes. The number of
directors in each class is determined by a formula described in the
Amended Certificate. The election of each class of directors constitutes
a separate election. Directors generally serve three-year terms or until
their earlier resignation, removal from office or death.
Removal of Directors
Generally, a director may be removed from office at any annual or
special stockholders' meeting only for cause and only upon the
affirmative vote of not less than 75% of the outstanding shares of
voting stock of A&F entitled to vote on the removal. Directors who are
elected by the holders of a class or series of Preferred Stock may only
be removed pursuant to the provisions establishing the right to elect
those directors.
Advance Notification of Stockholder Proposals
The Amended Bylaws provide for an advance notice procedure for
stockholder proposals to be considered at annual meetings of
stockholders. Notice of the intent to submit a proposal at an annual
meeting must be made in writing and delivered in person
26
or mailed by United States certified mail to the secretary of A&F and
received at A&F's principal executive offices not less than 120 nor more
than 150 days before the first anniversary date of A&F's proxy statement
in connection with the last annual meeting of stockholders. Each
stockholder notice of intention to submit a proposal at an annual
meeting must contain the following information: (i) the name and address
of the submitting stockholder; (ii) the class and number of shares of
capital stock of A&F beneficially owned by the submitting stockholder
(including the name in which the shares are registered); (iii) a
representation that the stockholder intends to appear at the annual
meeting in person or by proxy to submit the proposal; (iv) any material
interest of the submitting stockholder in the proposal; and (v) a brief
description of the proposal, including the resolutions to be presented
at the annual meeting, and the reasons for conducting the proposed
business at the annual meeting.
27
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Certificate of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of Incorporation of A&F as filed
with the Delaware Secretary of State on August 27, 1996,
incorporated by reference to Exhibit 3.1 to A&F's Quarterly
Report on Form 10-Q for the quarter ended November 2, 1996. (File
No. 1-12107)
3.2 Certificate of Designation of Series A Participating Cumulative
Preferred Stock of A&F as filed with the Delaware Secretary of
State on July 21, 1998, incorporated by reference to Exhibit 3.2
to A&F's Annual Report on Form 10-K for the year ended January
30, 1999. (File No. 1-12107)
3.3 Certificate of Decrease of Shares Designated as Class B Common
Stock of A&F as filed with the Delaware Secretary of State on
July 30, 1999, incorporated by reference to Exhibit 3.3 to A&F `s
Quarterly Report on Form 10-Q for the quarter ended July 31,
1999. (File No. 1-12107)
3.4 Amended and Restated Bylaws of A&F, effective January 31, 2002,
incorporated by reference to Exhibit 3.4 to A&F's Annual Report
on Form 10-K for the year ended February 2, 2002. (File No.
1-12107)
4. Instruments Defining the Rights of Security Holders.
4.1 Credit Agreement, dated as of April 30, 1998, among Abercrombie &
Fitch Stores, Inc., as Borrower, A&F, as Guarantor, the Lenders
party thereto, The Chase Manhattan Bank, as Administrative Agent,
and Chase Securities, Inc., as Arranger, incorporated by
reference to Exhibit 4.1 to A&F's Current Report on Form 8-K
dated May 7, 1998. (File No. 1-12107)
4.2 First Amendment and Waiver, dated as of July 30, 1999, to the
Credit Agreement, dated as of April 30, 1998, among Abercrombie &
Fitch Stores, Inc., A&F, the lenders party thereto and The Chase
Manhattan Bank, as Administrative Agent, incorporated by
reference to Exhibit 4.3 to A&F's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1999. (File No. 1-12107)
4.3 Rights Agreement, dated as of July 16, 1998, between A&F and
First Chicago Trust Company of New York, as Rights Agent,
incorporated by reference to Exhibit 1 to A&F's Registration
Statement on Form 8-A dated July 21, 1998. (File No. 1-12107)
4.4 Amendment No. 1 to Rights Agreement, dated as of April 21, 1999,
between A&F and First Chicago Trust Company of New York, as
Rights Agent, incorporated by reference to Exhibit 2 to A&F's
Amendment No. 1 to Form 8-A dated April 23, 1999. (File No.
1-12107)
4.5 Certificate of adjustment of number of Rights associated with
each share of Class A Common Stock, dated May 27, 1999,
incorporated by reference to Exhibit 4.6 to A&F's Quarterly
Report on Form 10-Q for the quarter ended July 31, 1999. (File
No. 1-12107)
4.6 Appointment and Acceptance of Successor Rights Agent, effective
as of the
28
opening of business on October 8, 2001, between A&F and National
City Bank, incorporated by reference to Exhibit 4.6 to A&F's
Quarterly Report on Form 10-Q for the quarter ended August 4,
2001. (File No. 1-12107)
10. Material Contracts.
10.1 Abercrombie & Fitch Co. Incentive Compensation Performance Plan,
incorporated by reference to Exhibit 10.1 to A&F's Quarterly
Report on Form 10-Q for the quarter ended May 4, 2002. (File No.
1-12107)
10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option
and Performance Incentive Plan (reflects amendments through
December 7, 1999 and the two-for-one stock split distributed June
15, 1999 to stockholders of record on May 25, 1999), incorporated
by reference to Exhibit 10.2 to A&F's Annual Report on Form 10-K
for the year ended January 29, 2000. (File No. 1-12107)
10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan
for Non-Associate Directors (reflects amendments through November
1, 2001 and the two-for-one stock split distributed June 15, 1999
to stockholders of record on May 25, 1999), incorporated by
reference to Exhibit 10.3 to A&F's Quarterly Report on Form 10-Q
for the quarter ended November 3, 2001. (File No. 1-12107)
10.4 Abercrombie & Fitch Co. 2002 Stock Option Plan for Associates,
incorporated by reference to Exhibit 10.4 to A&F's Annual Report
on Form 10-K for the year ended February 2, 2002. (File No.
1-12107)
10.5 Employment Agreement by and between A&F and Michael S. Jeffries
dated as of May 13, 1997 with exhibits and amendment,
incorporated by reference to Exhibit 10.4 to A&F's Quarterly
Report on Form 10-Q for the quarter ended November 1, 1997. (File
No. 1-12107)
10.6 Employment Agreement by and between A&F and Seth R. Johnson dated
as of December 5, 1997, incorporated by reference to Exhibit
10.10 to A&F's Amendment No. 4 to Form S-4 Registration Statement
filed on April 14, 1998 (Registration No. 333-46423).
10.7 Abercrombie & Fitch, Inc. Directors' Deferred Compensation Plan,
incorporated by reference to Exhibit 10.14 to A&F's Annual Report
on Form 10-K for the year ended January 30, 1999. (File No.
1-12107)
10.8 Replacement Promissory Note, dated January 1, 2002, issued by
Michael S. Jeffries to A&F, incorporated by reference to Exhibit
10.9 to A&F's Annual Report on Form 10-K for the year ended
February 2, 2002. (File No. 1-12107)
15. Letter re: Unaudited Interim Financial Information to Securities and
Exchange Commission re: Inclusion of Report of Independent Accountants.
29
99. Additional Exhibits
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Title 18, United States Code, Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended August 3,
2002.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABERCROMBIE & FITCH CO.
(Registrant)
By /s/ Wesley S. McDonald
----------------------
Wesley S. McDonald,
Vice President - Chief Financial
Officer*
Date: September 16, 2002
* Mr. McDonald has been duly authorized to sign on behalf of the Registrant as
its principal financial officer.
31
CERTIFICATIONS
I, Michael S. Jeffries, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Abercrombie &
Fitch Co.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 16, 2002
/s/ Michael S. Jeffries
------------------------------------------------
Print Name: Michael S. Jeffries
Title: Chairman and Chief Executive Officer
I, Wesley S. McDonald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Abercrombie &
Fitch Co.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 16, 2002
/s/ Wesley S. McDonald
------------------------------------------------
Print Name: Wesley S. McDonald
Title: Vice President - Chief Financial Officer
32
EXHIBIT INDEX
Exhibit No. Document
- ----------- ----------------------------
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Inclusion of Report of
Independent Accountants.
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Title 18, United States Code, Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.