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 May 4, 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 1-8344
------
LIMITED BRANDS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1029810
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Three Limited Parkway, P.O. Box 16000, Columbus, Ohio 43216
- -------------------------------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 415-7000
----------------
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.
Common Stock, $.50 Par Value Outstanding at May 31, 2002
---------------------------- ---------------------------
521,192,074 Shares
LIMITED BRANDS, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Thirteen Weeks Ended
May 4, 2002 and May 5, 2001..................................................... 4
Consolidated Balance Sheets
May 4, 2002, February 2, 2002 and May 5, 2001................................... 5
Consolidated Statements of Cash Flows
Thirteen Weeks Ended
May 4, 2002 and May 5, 2001..................................................... 6
Notes to Consolidated Financial Statements .............................................. 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 26
Part II. Other Information
Item 1. Legal Proceedings.................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders.................................. 29
Item 6. Exhibits and Reports on Form 8-K..................................................... 30
2
Safe Harbor Statement Under The Private Securities Litigation Act Of 1995
- -------------------------------------------------------------------------
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Quarterly Report on Form 10-Q ("Report") or otherwise made by the Company
or management of the Company involve risks and uncertainties and are subject to
change based on various important factors, many of which may be beyond the
Company's control. Accordingly, the Company's future performance and financial
results may differ materially from those expressed or implied in any such
forward-looking statements. Words such as "estimate," "project," "plan,"
"believe," "expect," "anticipate," "intend," and similar expressions may
identify forward-looking statements. 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
forward-looking statements included in this Report or otherwise made by the
Company or management: changes in consumer spending patterns, consumer
confidence, consumer preferences and overall economic conditions; the potential
impact of national and international security concerns on the retail
environment; the impact of competition and pricing; changes in weather patterns;
political stability; postal rate increases and charges; paper and printing
costs; risks associated with the seasonality of the retail industry; risks
related to consumer acceptance of the Company's products and the ability to
develop new merchandise; the ability to retain, hire and train key personnel;
risks associated with the possible inability of the Company's manufacturers to
deliver products in a timely manner; risks associated with relying on foreign
sources of production; and risks associated with the possible lack of
availability of suitable store locations on appropriate terms. Investors should
read the Company's filings with the Securities and Exchange Commission for a
more detailed discussion of these and other factors. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized.
3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
LIMITED BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions except per share amounts)
(Unaudited)
Thirteen Weeks Ended
-------------------------------
May 4, May 5,
2002 2001
-------------- -------------
Net sales $ 2,027 $ 2,127
Costs of goods sold, buying and occupancy (1,342) (1,456)
-------------- -------------
Gross income 685 671
General, administrative and store operating expenses (547) (608)
Special and nonrecurring item (34) -
-------------- -------------
Operating income 104 63
Interest expense (9) (8)
Other income, net 7 6
Minority interest (6) (6)
-------------- -------------
Income before income taxes 96 55
Provision for income taxes 46 24
-------------- -------------
Net income $ 50 $ 31
============== =============
Net income per share:
Basic $ 0.11 $ 0.07
============== =============
Diluted $ 0.10 $ 0.07
============== =============
Dividends per share $ 0.075 $ 0.075
============== =============
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
4
LIMITED BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions)
May 4, February 2, May 5,
2002 2002 2001
------------- ------------- -------------
(Unaudited) (Unaudited)
ASSETS
------
Current assets:
Cash and equivalents $ 1,255 $ 1,375 $ 289
Accounts receivable 78 79 82
Inventories 919 966 1,130
Other 252 262 319
------------- ------------- -------------
Total current assets 2,504 2,682 1,820
Property and equipment, net 1,346 1,359 1,410
Deferred income taxes - 67 132
Goodwill 1,315 121 126
Trade names and other intangible assets 454 31 35
Other assets 460 459 341
------------- ------------- -------------
Total assets $ 6,079 $ 4,719 $ 3,864
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 234 $ 245 $ 247
Current portion of long-term debt 150 150 -
Accrued expenses 595 648 517
Income taxes 53 276 12
------------- ------------- -------------
Total current liabilities 1,032 1,319 776
Deferred income taxes 107 - -
Long-term debt 248 250 400
Other long-term liabilities 221 229 226
Minority interest - 177 137
Shareholders' equity:
Common stock 261 216 216
Paid-in capital 1,668 53 84
Retained earnings 2,585 2,552 2,166
------------- ------------- -------------
4,514 2,821 2,466
Less: treasury stock, at average cost (43) (77) (141)
------------- ------------- -------------
Total shareholders' equity 4,471 2,744 2,325
============= ============= =============
Total liabilities and shareholders' equity $ 6,079 $ 4,719 $ 3,864
============= ============= =============
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
5
LIMITED BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
(Unaudited)
Thirteen Weeks Ended
----------------------------------
May 4, May 5,
2002 2001
--------------- --------------
Operating activities:
Net income $ 50 $ 31
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 70 70
Special and nonrecurring item 34 -
Amortization of deferred compensation 4 -
Deferred income taxes 6 (4)
Minority interest, net of dividends paid 1 -
Change in assets and liabilities:
Accounts receivable 2 12
Inventories 47 27
Accounts payable and accrued expenses (82) (92)
Income taxes (218) (130)
Other assets and liabilities 21 (56)
--------------- --------------
Net cash used for operating activities (65) (142)
--------------- --------------
Investing activities:
Capital expenditures (50) (104)
Net expenditures related to Easton real estate investment - (1)
--------------- --------------
Net cash used for investing activities (50) (105)
--------------- --------------
Financing activities:
Dividends paid (32) (32)
Proceeds from exercise of stock options and other 27 4
--------------- --------------
Net cash used for financing activities (5) (28)
--------------- --------------
Net decrease in cash and equivalents (120) (275)
Cash and equivalents, beginning of year 1,375 564
--------------- --------------
Cash and equivalents, end of period $ 1,255 $ 289
=============== ==============
In 2002, non-cash investing and financing activities included the
issuance of 89 million shares of Limited Brands common stock valued at
$1.6 billion in exchange for all of the outstanding shares of Intimate
Brands, Inc. Class A common stock (see Note 2).
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
6
LIMITED BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
Limited Brands, Inc. (the "Company" or "Limited Brands"; formerly "The
Limited, Inc.") sells women's and men's apparel, women's intimate
apparel and personal care products under various trade names through
its specialty retail stores and direct response (catalog and
e-commerce) businesses.
The consolidated financial statements include the accounts of the
Company and its subsidiaries including Intimate Brands, Inc. ("IBI" or
"Intimate Brands"), an 84% owned subsidiary through March 21, 2002 and
wholly-owned thereafter (see Note 2). All significant intercompany
balances and transactions have been eliminated in consolidation.
Investments in unconsolidated entities over which the Company exercises
significant influence but does not have control are accounted for using
the equity method. The Company's share of the net income or loss of
those unconsolidated entities is included in other income (expense).
The consolidated financial statements as of and for the thirteen-week
periods ended May 4, 2002 and May 5, 2001 are unaudited and are
presented pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, these consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's 2001
Annual Report on Form 10-K. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments
(which are of a normal recurring nature) necessary for a fair statement
of the results for the interim periods, but are not necessarily
indicative of the results of operations for a full fiscal year.
The consolidated financial statements as of and for the thirteen-week
periods ended May 4, 2002 and May 5, 2001 included herein have been
reviewed by the independent public accounting firm of
PricewaterhouseCoopers LLP and the report of such firm follows the
Notes to Consolidated Financial Statements. PricewaterhouseCoopers LLP
is not subject to the liability provisions of Section 11 of the
Securities Act of 1933 for its report on the consolidated financial
statements because that report is not a "report" within the meaning of
Sections 7 and 11 of that Act.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
7
2. Acquisition of Minority Interest of Intimate Brands
On March 21, 2002, the Company completed a tax-free tender offer and
merger, which resulted in the acquisition of the IBI minority interest.
The acquisition resulted in the recombination of Intimate Brands and
Limited Brands. The total purchase price was approximately $1.6
billion, based on approximately 89 million Limited Brands common shares
issued in the transaction and the average closing price of Limited
Brands common stock over the 3-day period before and after the
transaction date.
The acquisition was effected through an offer to exchange 1.1 shares of
Limited Brands common stock for each share of IBI Class A common stock
followed by a merger in which all publicly-held shares not tendered
were exchanged for the same consideration. As a result, IBI became a
wholly-owned subsidiary of Limited Brands and the former public
shareholders of IBI became shareholders of Limited Brands.
The acquisition was accounted for using the purchase method of
accounting, as prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations." The Company
allocated the purchase price to the minority interest portion of the
fair values of identifiable intangible assets acquired.
The purchase price allocation included $411 million of acquired
intangible assets related to trade names with indefinite lives. In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
these intangible assets will not be amortized. The remaining purchase
price allocation included the fair market value adjustments related to
customer relationships and lists, property and equipment, leases,
long-term debt and deferred rent. These adjustments are amortized over
their respective useful lives (primarily five years) resulting in a
non-cash expense of approximately $5 million per year. In addition, the
acquisition resulted in approximately $1.2 billion of goodwill. None of
these amounts are deductible for tax purposes.
The table on the following page summarizes selected unaudited pro forma
information for the quarters ended May 4, 2002 and May 5, 2001 as if
the recombination had been completed at the beginning of the periods
presented. This selected unaudited pro forma information is not
necessarily indicative of the operating results that would have
occurred if the recombination had been completed at the beginning of
the periods presented and is not necessarily indicative of the results
that may be achieved in the future. The pro forma information includes
adjustments related to additional depreciation and amortization from
the fair market value adjustments described above, the elimination of
minority interest in earnings of Intimate Brands and an increase in
total weighted average shares outstanding based on the conversion of
Intimate Brands historical weighted average Class A common stock
outstanding using the 1.1 exchange ratio.
8
Thirteen Weeks Ended
-------------------------------
(millions, except per share May 4, May 5,
amounts) 2002 2001
------------- -------------
Net sales $ 2,027 $ 2,127
Net income
56 36
Net income per share:
Basic $ 0.11 $ 0.07
Diluted $ 0.10 $ 0.07
The selected unaudited pro forma information for the quarter ended May
4, 2002 includes a pre-tax, non-cash special and nonrecurring charge of
$34 million (see Note 3). In addition, the selected unaudited pro forma
information for the quarter ended May 4, 2002 includes a pre-tax,
non-cash compensation cost related to the exchange of unvested IBI
stock awards for Limited Brands stock awards that will be recognized as
expense over the remaining vesting periods, primarily the next two
years. In the first quarter of 2002, the Company recognized $4 million
of compensation expense related to these unvested awards.
3. Special and Nonrecurring Item
In connection with the acquisition of the IBI minority interest (see
Note 2), vested IBI stock options and restricted stock were exchanged
for Limited Brands stock awards with substantially similar terms. In
accordance with Emerging Issues Task Force Issue No. 00-23, "Issues
Related to the Accounting for Stock Compensation under APB Opinion No.
25 and FASB Interpretation No. 44," the exchange was accounted for as a
modification of a stock-based compensation arrangement. As a result,
the Company recorded a pre-tax, non-cash special and nonrecurring
charge of $34 million in the first quarter of 2002.
4. Goodwill and Other Intangible Assets
The Company adopted SFAS No. 142 in the first quarter of 2002. Under
SFAS 142, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but must be tested for impairment
annually (or in interim periods if events indicate possible
impairment). Other intangible assets will continue to be amortized over
their useful lives.
Intangible assets, not subject to amortization, represent trade names
that were recorded in connection with the acquisition of the Intimate
Brands minority interest and were $411 million as of May 4, 2002.
9
Intangible assets, subject to amortization, were as follows (in
millions):
May 4, 2002 February 2, 2002 May 5, 2001
---------------------------- ------------------------------- -------------------------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
---------- -------------- ----------- ---------------- ----------- ----------------
Intellectual
property assets
and other
intangibles $ 54 $ (11) $ 41 $ (10) $ 41 $ (6)
---------- -------------- ----------- ---------------- ----------- ----------------
Total $ 54 $ (11) $ 41 $ (10) $ 41 $ (6)
========== ============== =========== ================ =========== ================
The changes in the carrying amount of goodwill for the quarter ended
May 4, 2002 based upon a preliminary allocation are as follows (in
millions):
Victoria's Bath & Body
Secret Works Apparel Total
-------------- -------------- -------------- --------------
Balance, February 2, 2002 $ 50 $ 67 $ 4 $ 121
Goodwill acquired 640 554 - 1,194
-------------- -------------- -------------- --------------
Balance, May 4, 2002 $ 690 $ 621 $ 4 $ 1,315
============== ============== ============== ==============
The estimated annual amortization expense for intangibles each year
through 2006 is approximately $8 million.
In accordance with SFAS No.142, the quarter ended May 5, 2001 has not
been restated to add back the amortization expense of goodwill.
Goodwill amortization expense for the quarter ended May 5, 2001 did not
have a material impact on net income or earnings per share.
10
5. Earnings Per Share and Shareholders' Equity
Earnings per basic share is computed based on the weighted average
number of outstanding common shares. Earnings per diluted share
includes the weighted average effect of dilutive options and
restricted stock on the weighted average shares outstanding.
Additionally, earnings per diluted share includes the impact of the
dilutive options and restricted stock at IBI prior to the
recombination as a reduction to earnings. This had no impact on
earnings per diluted share for the thirteen-week periods ended May 4,
2002 and May 5, 2001.
Weighted average common shares outstanding (millions):
Thirteen Weeks Ended
-----------------------------------
May 4, May 5,
2002 2001
---------------- ---------------
Common shares issued 477 432
Treasury shares (3) (6)
---------------- ---------------
Basic shares 474 426
Dilutive effect of stock options
and restricted shares 13 10
---------------- ---------------
Diluted shares 487 436
================ ===============
The computation of earnings per diluted share excludes options to
purchase 6.1 million and 7.4 million shares of common stock at
quarter-end 2002 and 2001, because the options' exercise price was
greater than the average market price of the common shares during the
period.
Other comprehensive income is included in retained earnings and
relates primarily to fluctuations in the market value of the Company's
investment in Charming Shoppes, Inc. common stock. For the thirteen
weeks ended May 4, 2002, other comprehensive income amounted to
approximately $17 million (net of tax). Accumulated other
comprehensive income (loss), net of tax, was approximately $11 million
and ($6) million at May 4, 2002 and February 2, 2002.
6. Inventories
The fiscal year of the Company and its subsidiaries is comprised of
two principal selling seasons: spring (the first and second quarters)
and fall (the third and fourth quarters). Inventories are principally
valued at the lower of average cost or market, on a first-in first-out
basis, using the retail method. Inventory valuation at the end of the
first and third quarters reflects adjustments for estimated inventory
markdowns for the total selling season.
11
7. Property and Equipment, Net
Property and equipment, net consisted of (millions):
May 4, February 2, May 5,
2002 2002 2001
--------------- --------------- ----------------
Property and equipment, at cost $ 3,036 $ 3,018 $ 3,204
Accumulated depreciation and
amortization (1,690) (1,659) (1,794)
--------------- --------------- ----------------
Property and equipment, net $ 1,346 $ 1,359 $ 1,410
=============== =============== ================
8. Income Taxes
The provision for income taxes is based on the current estimate of the
annual effective tax rate and, for the thirteen weeks ended May 4,
2002, also reflects an unfavorable impact related to the exchange of
vested IBI incentive stock options (see Note 3). Income taxes paid
during the thirteen weeks ended May 4, 2002 and May 5, 2001
approximated $270 million and $157 million. Income taxes payable
included net current deferred tax liabilities of $20 million, $25
million and $11 million at May 4, 2002, February 2, 2002 and May 5,
2001.
The Internal Revenue Service (IRS) has assessed the Company for
additional taxes and interest for the years 1992 to 1998 relating to
the undistributed earnings of foreign affiliates for which the Company
has provided deferred taxes. On September 7, 1999, the United States
Tax Court sustained the position of the IRS with respect to the 1992
year. In connection with an appeal of the Tax Court judgment, in 1999
the Company made a $112 million payment of taxes and interest for the
years 1992 to 1998 that reduced deferred tax liabilities. On March 29,
2002, the U.S. Court of Appeals for the Sixth Circuit ruled in favor
of the Company, reversing the previous Tax Court judgment relating to
the 1992 year. The IRS had 60 days to file a petition for rehearing
with the U.S. Appeals Court which expired on May 28, 2002. In
addition, the IRS has until June 27, 2002 to file a request for an
appeal with the U.S. Supreme Court. The Company continues to provide
deferred taxes on the undistributed earnings of foreign affiliates,
and management believes the ultimate resolution of this matter will
not have a material adverse effect on the Company's results of
operations or financial condition.
12
9. Long-Term Debt
Unsecured long-term debt consisted of (millions):
May 4, February 2, May 5,
2002 2002 2001
---------------- ---------------- ---------------
7-1/2% $250 million debentures due
March 2023, less unamortized discount
of $2 at May 4, 2002 $ 248 $ 250 $ 250
7-4/5% Notes due May 15, 2002 150 150 150
---------------- ---------------- ---------------
398 400 400
Less: current portion of long-term debt 150 150 -
---------------- ---------------- ---------------
$ 248 $ 250 $ 400
================ ================ ===============
The 7 1/2% debentures may be redeemed at the option of the Company, in
whole or in part, at any time on or after March 15, 2003, at declining
premiums. The unamortized discount relates to the fair market value
adjustment of Intimate Brands' portion of the 7 1/2 % debentures in
connection with the recombination (see Note 2). The discount is being
amortized over the remaining term of the debentures.
On July 13, 2001, the Company entered into a $1.25 billion unsecured
revolving credit facility (the "Facility"). The Facility is comprised
of a $500 million 364-day agreement and a $750 million 5-year
agreement. Borrowings outstanding under the Facility, if any, are due
July 13, 2002 and July 13, 2006, respectively. The Facility has
several borrowing and interest rate options. Fees payable under the
Facility are based on the Company's long-term credit ratings, and are
0.1% (for the 364-day agreement) and 0.125% (for the 5-year agreement)
of the committed amount per year.
The Facility requires the Company to maintain certain specified fixed
charge and debt to capital ratios. The Company was in compliance with
these requirements at May 4, 2002.
The Facility supports the Company's commercial paper and letter of
credit programs, which are used from time to time to fund working
capital and other general corporate requirements. The Company did not
issue commercial paper or draw on the Facility during the first
quarter of 2002. In addition, no commercial paper or amounts under the
Facility (or the previous credit facility) were outstanding at May 4,
2002.
The Company has a shelf registration statement, under which up to $250
million of debt securities and warrants to purchase debt securities
may be issued.
13
10. Segment Information
Following the acquisition of the IBI minority interest (see Note 2),
the Company has resegmented its business into three reportable
segments: Victoria's Secret, Bath & Body Works and Apparel.
Previously, the Company's reportable segments were Intimate Brands and
Apparel. Historical financial information has been reclassified to
reflect this new segmentation.
The Victoria's Secret segment derives its revenues from sales of
women's intimate and other apparel, personal care products and
accessories marketed under the Victoria's Secret brand name.
Victoria's Secret merchandise is sold through its stores and direct
response (catalog and e-commerce) businesses. The Bath & Body Works
segment derives its revenues from the sale of personal care products
and accessories and home fragrance products marketed under the Bath &
Body Works and White Barn Candle brand names. The Apparel segment
derives its revenues from sales of women's and men's apparel through
Express, Express Men's, Lerner (New York & Company) and Limited
Stores.
Segment information as of and for the thirteen weeks ended May 4, 2002
and May 5, 2001 follows (in millions):
Bath &
Victoria's Body Reconciling
2002 Secret Works Apparel Other (A) Items Total
------------------ ------------ ----------- ----------- ------------ -------------- -----------
Net sales $ 762 $ 320 $ 866 $ 340 $ (261) (B) $ 2,027
Operating
income (loss) 100 28 44 (34) (34) (C) 104
Total assets 1,474 1,191 647 2,767 - 6,079
Bath &
Victoria's Body Reconciling
2001 Secret Works Apparel Other (A) Items Total
------------------ ------------ ----------- ----------- ------------ -------------- -----------
Net sales $ 706 $ 320 $ 825 $ 526 $(250) (B) $ 2,127
Operating
income (loss) 61 34 (10) (22) - 63
Total assets 820 516 739 1,789 - 3,864
(A) Included in the "Other" category are Corporate (including non-core
real estate and equity investments), Mast, Henri Bendel and disposed
businesses.
(B) Represents intersegment sales elimination for Mast sales included in
"Other."
(C) Represents a $34 million pre-tax, non-cash special and nonrecurring
charge for vested stock awards related to the IBI recombination (see
Note 2).
14
Report of Independent Accountants
---------------------------------
To the Board of Directors and
Shareholders of
Limited Brands, Inc.:
We have reviewed the accompanying consolidated balance sheets of Limited Brands,
Inc. and its subsidiaries (the "Company") as of May 4, 2002 and May 5, 2001, and
the related consolidated statements of income and of cash flows for each of the
thirteen-week periods ended May 4, 2002 and May 5, 2001. These financial
statements are the responsibility of the Company's management.
We conducted our reviews 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 auditing standards generally accepted in the United States of
America, 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 reviews, we are not aware of any material modifications that should
be made to the accompanying 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, of shareholders'
equity, and of cash flows for the year then ended (not presented herein), and in
our report dated February 28, 2002, except for Note 14 as to which the date is
March 21, 2002, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet information 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.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
May 20, 2002
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the first quarter of 2002 were $2.027 billion compared to $2.127
billion in 2001. Excluding Lane Bryant's net sales in the first quarter of 2001
(Lane Bryant was sold to Charming Shoppes, Inc. on August 16, 2001), net sales
increased 7%. Comparable store sales increased 4% for the quarter. Operating
income increased to $104 million from $63 million in 2001. Net income increased
to $50 million from $31 million in 2001, and earnings per share increased to
$0.10 from $0.07 in 2001.
Net income for the first quarter of 2002 included a pre-tax, non-cash special
and nonrecurring charge of $34 million, or $0.05 per share, resulting from the
Intimate Brands, Inc. recombination. In addition to this charge, there were a
number of items that impact the comparability of the Company's reported results.
See the "Special and Nonrecurring Items" and "Other Data" sections for a
discussion of these items and the impact on 2002 and 2001 earnings.
Following the Intimate Brands, Inc. recombination, the Company has resegmented
its business into three reportable segments: Victoria's Secret, Bath & Body
Works and Apparel. Historical financial information has been reclassified to
reflect this new segmentation (see Note 10 to the Consolidated Financial
Statements).
16
Financial Summary
- -----------------
The following summarized financial and statistical data compares reported
results for the thirteen-week period ended May 4, 2002 to the comparable period
for 2001:
First Quarter
---------------------------------------
2002 2001 Change
---------- ---------- -----------
Net Sales (millions):
Victoria's Secret Stores $ 536 $ 480 12%
Victoria's Secret Direct 226 226 0%
---------- ---------- -----------
Total Victoria's Secret $ 762 $ 706 8%
---------- ---------- -----------
Bath & Body Works $ 320 $ 320 0%
---------- ---------- -----------
Express $ 482 $ 452 7%
Lerner New York 228 228 0%
Limited Stores 156 145 8%
---------- ---------- -----------
Total apparel businesses $ 866 $ 825 5%
---------- ---------- -----------
Other (a) 79 276 N/M
---------- ---------- -----------
Total net sales $2,027 $2,127 (5%)
---------- ---------- -----------
Segment Operating Income (millions):
Victoria's Secret $ 100 $ 61 64%
Bath & Body Works 28 34 (18%)
Apparel 44 (10) 540%
Other (a) (34) (22) N/M
---------- ---------- -----------
Sub-total 138 63 119%
Special and nonrecurring item (b) (34) - N/M
---------- ---------- -----------
Total operating income $ 104 $ 63 65%
========== ========== ===========
N/M - not meaningful
(a) Other includes Corporate, Mast, Henri Bendel, and, in 2001, Lane Bryant.
(b) Represents a pre-tax, non-cash $34 million charge for vested stock awards
related to the Intimate Brands, Inc. recombination.
17
First Quarter
------------------------
2002 2001
---------- ----------
Comparable Store Sales:
Victoria's Secret 8% (7%)
---------- ----------
Bath & Body Works (8%) (8%)
---------- ----------
Express 7% 0%
Lerner New York 3% 6%
Limited Stores 10% (1%)
---------- ----------
Total apparel businesses 7% 1%
---------- ----------
Lane Bryant N/M 5%
Henri Bendel 2% (4%)
---------- ----------
Total comparable store sales increase
(decrease) 4% (2%)
========== ==========
N/M - not meaningful
First Quarter
-----------------------------------
2002 2001 Change
---------- ---------- -----------
Segment Store Data:
Retail sales increase (decrease) attributable to
net new and remodeled stores:
Victoria's Secret 4% 4%
Bath & Body Works 8% 14%
Apparel (2%) (1%)
Retail sales per average selling square foot:
Victoria's Secret $ 120 $ 114 5%
Bath & Body Works $ 92 $ 104 (12%)
Apparel $ 72 $ 65 11%
Retail sales per average store (thousands):
Victoria's Secret $ 534 $ 499 7%
Bath & Body Works $ 198 $ 220 (10%)
Apparel $ 437 $ 398 10%
Average store size at end of quarter (selling square feet):
Victoria's Secret 4,454 4,376 2%
Bath & Body Works 2,149 2,132 1%
Apparel 6,059 6,115 (1%)
Selling square feet at end of quarter (thousands):
Victoria's Secret 4,481 4,242 6%
Bath & Body Works 3,492 3,140 11%
Apparel 11,937 12,627 (5%)
18
Number of Stores:
Victoria's Secret Bath & Body Works Apparel
-------------------------- -------------------------- ----------------------
2002 2001 2002 2001 2002 2001
----------- ---------- ----------- ----------- --------- ---------
Beginning of period 1,002 958 1,615 1,432 1,996 2,085
Opened 6 10 15 41 2 -
Closed (2) (2) (5) - (28) (20)
----------- ---------- ----------- ----------- --------- ---------
End of period 1,006 966 1,625 1,473 1,970 2,065
=========== ========== =========== =========== ========= =========
Number of Stores Selling Sq. Ft. (thousands)
--------------------------------------------- ----------------------------------------------
May 4, May 5, May 4, May 5,
2002 2001 Change 2002 2001 Change
------------- -------------- ---------- -------------- -------------- -----------
Victoria's Secret 1,006 966 40 4,481 4,242 239
Bath & Body Works 1,625 1,473 152 3,492 3,140 352
Express Women's 667 661 6 4,221 4,250 (29)
Express Men's 424 463 (39) 1,718 1,867 (149)
------------- -------------- ---------- -------------- -------------- -----------
Total Express 1,091 1,124 (33) 5,939 6,117 (178)
Lerner New York 516 555 (39) 3,777 4,101 (324)
Limited Stores 363 386 (23) 2,221 2,409 (188)
------------- -------------- ---------- -------------- -------------- -----------
Total apparel 1,970 2,065 (95) 11,937 12,627 (690)
------------- -------------- ---------- -------------- -------------- -----------
Lane Bryant - 650 (650) - 3,152 (3,152)
Henri Bendel 1 1 - 35 35 -
------------- -------------- ---------- -------------- -------------- -----------
Total stores and
selling sq. ft. 4,602 5,155 (553) 19,945 23,196 (3,251)
============= ============== ========== ============== ============== ===========
Net Sales
- ---------
Net sales for the first quarter of 2002 were $2.027 billion compared to $2.127
billion for the same period in 2001. Excluding Lane Bryant's net sales in the
first quarter of 2001, net sales increased 7%, primarily due to a 4% increase in
comparable store sales.
At the Victoria's Secret businesses, net sales for the first quarter of 2002
increased 8% to $762 million from $706 million in 2001. The net sales increase
was primarily due to an 8% comparable store sales increase at Victoria's Secret
Stores, resulting from strong performance in certain merchandise categories,
particularly bras and panties, as well as the net addition of 40 stores (239,000
selling square feet). Sales at Victoria's Secret Direct remained flat compared
to the same period in 2001, as the favorable impacts of an improved merchandise
assortment and more attractive price points in the Spring 2002 catalogues were
offset by lower sales in the Fall 2001 clearance books.
Bath & Body Works' sales for the first quarter of 2002 were $320 million, flat
compared to the same period in 2001. A net sales increase from the net addition
of 152 stores (352,000 selling square feet) was offset by an 8% decline in
comparable store sales.
19
At the apparel businesses, net sales for the first quarter of 2002 increased 5%
to $866 million from $825 million in 2001. The net sales increase was due to a
comparable store sales increase of 7%, partially offset by the net reduction of
95 stores (690,000 selling square feet).
Gross Income
- ------------
For the first quarter of 2002, the gross income rate (expressed as a percentage
of net sales) increased to 33.8% from 31.5% for the same period in 2001.
Significant improvements at Victoria's Secret and the apparel businesses more
than offset a decline at Bath & Body Works.
The significant increase in the gross income rate at Victoria's Secret was a
result of an increase in the merchandise margin rate, primarily at Victoria's
Secret Stores, combined with a decrease in the buying and occupancy expense
rate, primarily at Victoria's Secret Direct. The increase in the merchandise
margin rate at Victoria's Secret Stores was due to fewer markdowns resulting
from strong performance in certain merchandise categories, particularly bras.
The decrease in the buying and occupancy expense rate at Victoria's Secret
Direct was due to a reduction in circulated pages, made possible because of an
increase in the number of photographs per page.
The decrease in the gross income rate at Bath & Body Works was principally due
to an increase in the buying and occupancy expense rate, partially offset by an
increase in the merchandise margin rate. The increase in the buying and
occupancy expense rate was due to the inability to achieve leverage on
store-related costs as comparable store sales decreased 8%.
The apparel businesses gross income rate increased significantly as all apparel
businesses reported improved merchandise margin rates and, to a lesser extent,
improved buying and occupancy expense rates. The improvement in merchandise
margin rates was due to favorable product assortment and tighter inventory
management. The decrease in the buying and occupancy expense rates was due to
the leverage achieved on a comparable store sales increase of 7%.
General, Administrative and Store Operating Expenses
- ----------------------------------------------------
For the first quarter of 2002, the general, administrative and store operating
expense rate (expressed as a percentage of net sales) decreased to 27.0% from
28.6% last year. The improvement was primarily due a comparable store sales
increase of 4%.
At Victoria's Secret, the general, administrative and store operating expense
rate decreased due to Victoria's Secret Stores' ability to leverage expenses on
a comparable store sales increase of 8% and expense reductions at Victoria's
Secret Direct.
At Bath & Body Works, the general, administrative and store operating expense
rate increased due to an inability to leverage expenses as comparable store
sales decreased 8%.
At the apparel businesses, the general, administrative and store operating
expense rate decreased due to the leverage achieved on a comparable store sales
increase of 7%.
20
Special and Nonrecurring Items
- ------------------------------
In connection with the acquisition of the IBI minority interest (see Note 2 to
the Consolidated Financial Statements), vested IBI stock options and restricted
stock were exchanged for Limited Brands stock awards with substantially similar
terms. In accordance with Emerging Issues Task Force Issue No. 00-23, "Issues
Related to the Accounting for Stock Compensation under APB Opinion No. 25 and
FASB Interpretation No. 44," the exchange was accounted for as a modification of
a stock-based compensation arrangement. As a result, the Company recorded a
pre-tax, non-cash special and nonrecurring charge of $34 million in the first
quarter of 2002.
Operating Income
- ----------------
The operating income rate in the first quarter of 2002 (expressed as a
percentage of sales) increased to 5.1% compared to 3.0% in 2001. Excluding the
special and nonrecurring item in 2002, the increase in the operating income rate
to 6.8% from 3.0% was primarily a result of the 2.3% increase in the gross
income rate and the 1.6% decrease in the general, administrative and store
operating expense rate.
Interest Expense
- ----------------
First Quarter
---------------------------
2002 2001
----------- -----------
Average borrowings (millions) $ 400 $ 401
Average effective interest rate 7.60% 7.61%
The company incurred $9 million in interest expense for the first quarter of
2002 compared to $8 million for the same period in 2001. The increase in
interest expense was primarily due to higher fees associated with the new
revolving credit facility. Interest on outstanding borrowings remained flat.
Other Income, Net
- -----------------
For the first quarter of 2002, other income, net was $7 million, relatively flat
compared to $6 million in 2001.
Other Data
- ----------
The following adjusted income information gives effect to the significant
transactions and events that impact the comparability of the Company's results
in the first quarter of 2002 and 2001. These items are more fully described in
the "Special and Nonrecurring Items" section in Management's Discussion and
Analysis and in Note 3 to the Consolidated Financial Statements.
Management believes this presentation provides a reasonable basis on which
to present the adjusted income information. Although the adjusted income
information should not be construed as an alternative to the reported results
determined in accordance with generally accepted accounting principles, it is
provided to assist in investors' understanding of the Company's results of
operations.
21
Adjusted Income Information (millions except per share amounts):
- ----------------------------------------------------------------
Thirteen Weeks Ended
--------------------------------------------------------------------------------
May 4, 2002 May 5, 2001
--------------------------------------- --------------------------------------
Reported Adjustments Adjusted Reported Adjustments Adjusted
------------ ----------- ---------- ----------- ------------- ----------
Net sales $ 2,027 - $ 2,027 $ 2,127 $ (237) $ 1,890
------------- ----------- ---------- ----------- ----------- ----------
Gross income 685 - 685 671 (73) 598
------------- ----------- ---------- ----------- ----------- ----------
General, administrative and
store operating expenses (547) - (547) (608) 54 (554)
Special and nonrecurring
items (34) $ 34 - - - -
------------- ----------- ---------- ----------- ----------- ----------
Operating income 104 34 138 63 (19) 44
Interest expense (9) - (9) (8) - (8)
Other income, net 7 - 7 6 - 6
Minority interest (6) 6 - (6) 6 -
------------- ----------- ---------- ----------- ----------- ----------
Income before income taxes 96 40 136 55 (13) 42
Provision for income taxes 46 8 54 24 (7) 17
------------- ----------- ---------- ----------- ----------- ----------
Net income $ 50 $ 32 $ 82 $ 31 $ (6) $ 25
============= =========== ========== =========== =========== ==========
Net income per share $ 0.10 $ 0.15 $ 0.07 $ 0.05
============= ========== =========== ==========
Weighted average shares
outstanding 487 47 534 436 91 527
============= =========== ============= =========== =========== ==========
Notes to Adjusted Income Information
A) Excluded business
- Lane Bryant results were excluded in determining adjusted results for
2001 as a result of its sale to Charming Shoppes, Inc on August 16,
2001.
B) Offer and merger
On March 21, 2002, the Company completed a tender offer and merger that
resulted in the acquisition of the IBI minority interest (see Note 2 to
the Consolidated Financial Statements). The adjusted results:
- Eliminate the minority interest in earnings of Intimate Brands, Inc.;
and
- Increase total weighted average shares outstanding based on the
conversion of IBI historical weighted average Class A common stock
outstanding, using the exchange ratio of 1.1 shares of Limited Brands
common stock for each share of IBI Class A common stock.
C) Special and nonrecurring item
- The 2002 adjusted results exclude a pre-tax, non-cash $34 million
charge for vested stock awards related to the IBI recombination (See
Note 3 to the Consolidated Financial Statements).
22
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Cash provided from operating activities and funds available from commercial
paper backed by bank credit agreements provide the resources to support current
operations, projected growth, seasonal funding requirements and capital
expenditures. Changes in consumer spending patterns, consumer preferences and
overall economic conditions could impact the availability of future operating
cash flows.
A summary of the Company's working capital position and capitalization follows
(millions):
May 4, February 2, May 5,
2002 2002 2001
---------- ---------- ------------
Working capital $ 1,472 $ 1,363 $ 1,045
========== ========== ============
Capitalization:
Long-term debt $ 248 $ 250 $ 400
Shareholders' equity 4,471 2,744 2,325
---------- ---------- ------------
Total capitalization $ 4,719 $ 2,994 $ 2,725
========== ========== ============
Additional amounts available under
long-term credit agreements $ 1,250 $ 1,250 $ 1,000
========== ========== ============
In addition, the Company may offer up to $250 million of debt securities and
warrants to purchase debt securities under its shelf registration statement.
The increase in total capitalization during the thirteen weeks ended May 4, 2002
was primarily due to the issuance of 89 million shares of Limited Brands common
stock valued at $1.6 billion in connection with the acquisition of the Intimate
Brands, Inc. minority interest (see Note 2 to the Consolidated Financial
Statements).
The Company's operations are seasonal in nature, leading to significant
fluctuations in certain asset and liability accounts between fiscal year-end and
subsequent interim periods. Consequently, the Company analyzes operating cash
flows by comparing the current interim period changes to the prior interim
period changes.
Net cash used for operating activities was $65 million for the thirteen weeks
ended May 4, 2002 versus $142 million used for operating activities for the same
period in 2001. The primary differences in cash used for operating activities
between the first quarter of 2002 and 2001 were due to changes in net income,
including special and nonrecurring items, working capital, income taxes and
other assets and liabilities. The cash used for income taxes was higher in 2002
versus the same period in 2001 due to increased pretax income in 2001, timing of
payments and the taxes due on the gain from the sale of Lane Bryant. The changes
in other assets and liabilities were primarily driven by the timing of certain
payments.
23
In 2002, investing activities included $50 million in capital expenditures.
Financing activities in 2002 consisted of the quarterly dividend payment of
$0.075 per share and proceeds from the exercise of stock options. Financing
activities in 2001 primarily included the quarterly dividend payment of $0.075
per share.
Capital Expenditures
- --------------------
Capital expenditures amounted to $50 million for the first quarter of 2002
compared to $104 million for the same period in 2001. The decrease was due to a
combination of fewer store openings and timing of certain expenditures. The
Company anticipates capital spending to be at or below $430 million in 2002, the
majority of which will be for new stores and for the remodeling of and
improvements to existing stores. Remaining capital expenditures are primarily
related to information technology and distribution center projects. The Company
expects that 2002 capital expenditures will be funded principally by net cash
provided by operating activities.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement updates, clarifies and simplifies existing accounting
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002 with earlier adoption encouraged. The Company is currently evaluating
the impact of adopting SFAS No. 145, but does not expect it to have a material
impact on its results of operations or its financial condition.
Impact of Inflation
- -------------------
The Company's results of operations and financial condition are presented based
on historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, the Company
believes the effects of inflation, if any, on the results of operations and
financial condition have been minor.
24
Critical Accounting Policies and Estimates
- ------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period, as well as the related disclosure of contingent assets and
liabilities at the date of the financial statements. On an on-going basis,
management evaluates its estimates and judgments, including those related to
inventories, long-lived assets, and contingencies. Management bases its
estimates and judgments on historical experience and various other factors that
are believed to be reasonable under the circumstances. Actual results may differ
from these estimates. Management believes the following assumptions and
estimates are most significant to reporting our results of operations and
financial position.
... Inventories - Inventories are valued at the lower of average cost or
market, on a first-in, first-out basis, using the retail method. The
Company records a charge to cost of goods sold for all inventory on hand
when a permanent retail price reduction is reflected in its stores. In
addition, management makes estimates and judgments regarding, among other
things, initial markup, markdowns, future demand and market conditions, all
of which significantly impact the ending inventory valuation. Inventory
valuation at the end of the first and third quarters reflects adjustments
for estimated inventory markdowns for the principal selling seasons: spring
(the first and second quarters) and fall (the third and fourth quarters).
If actual future demand or market conditions are different than those
projected by management, additional inventory write-downs may be required.
Other significant estimates related to inventory include shrink and
obsolete and excess inventory.
... Valuation of Long-Lived Assets and Goodwill - Long-lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Goodwill is periodically reviewed for impairment by comparing each
reporting unit's carrying value to its fair value. Factors used in the
valuation of long-lived assets and goodwill include, but are not limited
to, management's plans for future operations, brand initiatives, recent
operating results and projected cash flows. If future economic conditions
are different than those projected by management, additional impairment
charges may be required.
... Claims and Contingencies- The Company is subject to various claims and
contingencies related to lawsuits, income taxes, insurance and other
matters arising out of the normal course of business. The Company's
determination of the treatment of claims and contingencies in the financial
statements is based on management's view of the expected outcome of the
applicable claim or contingency. The Company consults with legal counsel on
matters related to litigation and seeks input from other experts both
within and outside the company with respect to matters in the ordinary
course of business. The Company accrues a liability if the likelihood of an
adverse outcome is probable and the amount is estimable. If the likelihood
of an adverse outcome is only reasonably possible (as opposed to probable),
or if an estimate is not determinable, disclosure of a material claim or
contingency is made in the notes to the financial statements.
... While the Company's recognition of revenue does not involve significant
judgment, revenue recognition represents an important accounting policy of
the Company. The Company recognizes revenue upon customer receipt of the
merchandise and provides a reserve for projected merchandise returns based
on prior experience.
25
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of May 4, 2002 has not
significantly changed since February 2, 2002. Information regarding the
Company's financial instruments and market risk as of February 2, 2002 is
disclosed in the Company's 2001 Annual Report on Form 10-K.
26
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in a variety of lawsuits arising in the
ordinary course of business.
On January 13, 1999, two lawsuits were filed against the Company, as
well as other defendants, including many national retailers. Both
lawsuits relate 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 have sold goods to
the Company) and seek injunctions, unspecified monetary damages, and
other relief. One lawsuit, on behalf of a class of unnamed garment
workers, was filed in the United States District Court for the Central
District of California, Western Division and subsequently transferred to
the United States District Court for the Northern Mariana Islands. It
alleged violations of federal statutes, the United States Constitution,
and international law. A first amended complaint was filed on April 28,
2000, which added additional defendants but did not otherwise
substantively alter either the claims alleged or relief sought. On
November 26, 2001, a motion to dismiss the first amended complaint for
failure to state a claim upon which relief can be granted was granted in
part and denied in part. A second amended complaint, which added neither
new parties nor claims but realleged claims previously dismissed, was
filed on December 17, 2001. On May 10, 2002, a motion to dismiss the
second amended complaint was granted in part and denied in part, and
plaintiffs were given leave to file a third amended complaint, and
motions to certify the case as a class action and to approve settlements
entered by certain other defendants were granted. The second lawsuit was
filed by a national labor union and other organizations in the Superior
Court of the State of California, San Francisco County, and alleges
unfair business practices under California law. A motion for summary
judgment on that complaint was filed on October 30, 2001 and remains
pending.
In May and June 1999, purported shareholders of the Company filed three
derivative actions in the Court of Chancery of the State of Delaware,
naming as defendants the members of the Company's board of directors and
the Company, as nominal defendant. The actions thereafter were
consolidated. The operative complaint generally alleged that the
rescission of the Contingent Stock Redemption Agreement previously
entered into by the Company with Leslie H. Wexner and The Wexner
Children's Trust (the "Contingent Stock Redemption Agreement")
constituted a waste of corporate assets and a breach of the board
members' fiduciary duties, and that the issuer tender offer completed on
June 3, 1999 was a "wasteful transaction in its own right." On July 30,
1999, all defendants moved to dismiss the complaint, both on the ground
that it failed to allege facts showing that demand on the board to
institute such an action would be futile and for failure to state a
claim. Plaintiffs did not respond to that motion, but on February 16,
2000, plaintiffs filed a first amended consolidated derivative complaint
(the "amended complaint"), which makes allegations similar to the first
complaint concerning the rescission of the Contingent Stock Redemption
Agreement and the 1999 issuer tender offer and adds allegations
apparently intended to show that certain
27
directors were not disinterested in those decisions. Defendants moved to
dismiss the amended complaint on April 14, 2000 and oral argument was
heard on March 28, 2001. On March 27, 2002, the Court granted the motion
in part and denied the motion in part. On May 10, 2002, the Company's
board of directors appointed a special litigation committee composed of
directors Donald B. Shackelford and Raymond Zimmerman and granted that
committee the authority to investigate the claims asserted in the
amended complaint and to determine the Company's response to them. On
May 16, 2002, the Company moved to stay all proceedings in the action
until the special litigation committee has concluded its work. The
motion is pending.
Beginning on February 5, 2002 and continuing thereafter, a total of
thirteen separate lawsuits were filed in the Delaware Court of Chancery
on behalf of a purported class of public shareholders of Intimate
Brands, Inc. ("IBI") relating to the announcement by the Company that it
was commencing an exchange offer for the outstanding public shares of
common stock of IBI. The actions were consolidated under the caption In
re Intimate Brands Inc. Shareholders Litig., Cons. C.A. No. 19382.
Separately, two actions advancing similar allegations and making similar
claims on behalf of IBI shareholders were filed in the Ohio Court of
Common Pleas in Franklin County, Ohio, styled Cameron v. Wexner, et al.,
Case No. 02-CVH-021342 and Zenderman v. Wexner, et al., Case No.
02-CVH-021636. As subsequently amended, these actions generally named as
defendants the Company, IBI and the members of IBI's board of directors,
challenged the Company's disclosures to IBI shareholders in connection
with the exchange offer, alleged that the exchange offer amounted to a
breach of fiduciary duty or was otherwise unlawful and made various
related claims and allegations. On March 6, 2002, the parties reached an
agreement in principle to settle these actions which was subsequently
set forth in a memorandum of understanding dated March 19, 2002. The
settlement is subject to a number of conditions, including completion of
confirmatory discovery satisfactory to plaintiffs' counsel, negotiation
and execution of definitive settlement documents and approval of the
proposed settlement by the Delaware Court of Chancery.
Although it is not possible to predict with certainty the eventual
outcome of any litigation, in the opinion of management, the foregoing
proceedings are not expected to have a material adverse effect on the
Company's financial position or results of operations.
28
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 20, 2002. The
matters voted upon and the results of the voting were as follows:
a) Leonard A. Schlesinger, Donald B. Shackelford, Martin Trust, and
Raymond Zimmerman were elected to the Board of Directors for a term
of three years. Of the 479,053,835 shares present in person or
represented by proxy at the meeting, the number of shares voted for
and the number of shares as to which authority to vote in the
election was withheld were as follows, with respect to each of the
nominees:
Shares Shares as to Which
Voted For Voting Authority
Name Election Withheld
---- -------- --------
Leonard A. Schlesinger 472,674,935 6,378,900
Donald B. Shackelford 474,801,367 4,252,468
Martin Trust 472,620,482 6,433,353
Raymond Zimmerman 474,549,405 4,504,430
In addition, directors whose term of office continued after the
Annual Meeting were: E. Gordon Gee, Alex Shumate, Allan R. Tessler,
Abigail S. Wexner, Eugene M. Freedman, V. Ann Hailey, David T.
Kollat, and Leslie H. Wexner.
b) The shareholders were asked to consider and vote upon a proposal to
adopt the 2002 Restatement of the 1993 Stock Option and Performance
Incentive Plan (1998 Restatement) (the "Stock Plan"). The only
changes made to the Stock Plan from its predecessors are to increase
by 11,800,000 the number of shares of Common Stock that may be
subject to awards granted under the Stock Plan, provide for the
issuance of Substitute Awards in connection with acquisitions or
combinations involving the Company and to provide that it will expire
on May 19, 2012. Of the 479,053,835 shares present in person or
represented by proxy at the meeting, 425,796,175 shares were voted
for the proposal, 51,400,529 shares were voted against the proposal,
and 1,857,131 shares abstained from voting with respect to the
proposal.
29
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
15. Letter re: Unaudited Interim Financial Information to Securities and
Exchange Commission re: Incorporation of Report of Independent
Accountants.
(b) Reports on Form 8-K.
-------------------
The Company filed two reports on Form 8-K for the quarter ended May 4,
2002. The first report on Form 8-K was filed on February 5, 2002,
announcing that a number of lawsuits were filed relating to the
Company's announcement of an exchange offer for the outstanding public
shares of common stock of Intimate Brands, Inc. The second report on
Form 8-K was filed on March 21, 2002, announcing the completion of the
tax-free merger with Intimate Brands, Inc. Subsequent to quarter-end,
the Company filed a report on Form 8-K on May 20, 2002, announcing the
Company changed its name to "Limited Brands, Inc."
30
SIGNATURE
---------
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.
LIMITED BRANDS, INC.
(Registrant)
By /s/ V. Ann Hailey
-----------------
V. Ann Hailey,
Executive Vice President and Chief
Financial Officer*
Date: June 17, 2002
*Ms. Hailey is the principal financial officer and has been duly authorized to
sign on behalf of the Registrant.
31
EXHIBIT 15
----------
June 14, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated May 20, 2002 on our review of interim
financial information of Limited Brands, Inc. (the "Company") as of and for the
period ended May 4, 2002 and included in the Company's quarterly report on Form
10-Q for the quarter then ended is incorporated by reference in its Registration
Statements on Form S-8 (Registration Nos. 33-44041, 33-18533, 33-49871,
333-04927, 333-04941) and on Form S-3 (Registration Nos. 33-43832 and 33-53366).
Very truly yours,
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
