THE LIMITED, INC. AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS 

(Thousands) 

THE LIMITED, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands)

(Unaudited) 

The accompanying Notes are an integral part of these Consolidated Financial Statements. 

1.	Basis of Presentation

The Limited, Inc. (the “Company”) is principally engaged in the purchase, distribution and sale of women’s and men’s apparel, women’s intimate apparel, and personal care products. The Company operates an integrated distribution system that supports its retail activities. These activities are conducted under various trade names through the retail stores and direct response (catalogue and e-commerce) businesses of the Company.

The consolidated financial statements include the accounts of the Company and all significant subsidiaries which are more than 50 percent owned and controlled. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements include the results of Limited Too (“TOO”), through August 23, 1999, when it was established as an independent company in a spin-off transaction, and Galyan’s Trading Co. (“Galyan’s”) through August 31, 1999, when a third party purchased a majority interest.

The consolidated financial statements also include the results of Intimate Brands, Inc. (“IBI”), an 84%-owned subsidiary. The minority interest in the net equity of IBI was $101.6 million, $119.0 million and $47.9 million at October 28, 2000, January 29, 2000 and October 30, 1999.

Investments in other entities (including joint ventures) where the Company has the ability to significantly influence operating and financial policies, including Galyan’s for periods after August 31,1999, are accounted for on the equity method.

The consolidated financial statements as of and for the thirteen and thirty-nine week periods ended October 28, 2000 and October 30, 1999 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 1999 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 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 consolidated financial statements as of and for the thirteen and thirty-nine week periods ended October 28, 2000 and October 30, 1999 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.

2.	Shareholders’ Equity and Earnings Per Share

On May 2, 2000, the Company declared a two-for-one stock split (“stock split”) in the form of a stock dividend distributed on May 30, 2000 to shareholders of record on May 12, 2000. Shareholders’ equity reflects the reclassification of an amount equal to the par value of the increase in issued common shares ($107.9 million) from paid-in capital to common stock. All share and per share data throughout this report has been restated to reflect the stock split.

In conjunction with the stock split, the Company retired 163.7 million treasury shares with a cost of $4.3 billion. A non-cash charge was made against retained earnings for the excess cost of treasury stock over its par value.

Weighted average common shares outstanding (thousands):

		Thirteen Weeks Ended				Thirty-nine Weeks Ended
		October 28, 2000		October 30, 1999		October 28, 2000		October 30, 1999
Basic shares		425,578		429,422		428,226		442,315
Dilutive effect of stock options and restricted      shares		15,791		16,346		16,075		16,790
Diluted shares		441,369		445,768		444,301		459,105

The computation of earnings per diluted share excludes options to purchase 0.6 million and 1.0 million shares of common stock at quarter-end 2000 and 1999, because the options’ exercise price was greater than the average market price of the common shares during the period.

3.	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). Valuation of finished goods inventories is based principally upon the lower of average cost or market determined 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 inventory markdowns and shrinkage estimates for the total selling season.

4.	Property and Equipment, Net

Property and equipment, net, consisted of (thousands):

		October 28, 2000			January 29, 2000			October 30, 1999
Property and equipment, at cost		$3,101,283			$2,944,827			$2,943,637
Accumulated depreciation and amortization		(1,748,720	)		(1,715,215	)		(1,688,762	)
Property and equipment, net		$1,352,563			$1,229,612			$1,254,875

5.	Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate. Income taxes paid during the thirty-nine weeks ended October 28, 2000 and October 30, 1999 approximated $268.0 million and $398.0 million. Income tax assets of $17.4 million (net of a $7.2 million income tax payable) and $16.3 million (net of a $24.6 million deferred tax liability) were included in other current assets at October 28, 2000 and October 30, 1999. Income taxes payable at January 29, 2000 included net current deferred tax assets of $38.5 million.

The Internal Revenue Service (IRS) has assessed the Company for additional taxes for the years 1992 to 1996 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, the Company made a $112 million payment of taxes and interest in the third quarter of 1999 for the years 1992 to 1998 that reduced deferred tax liabilities. 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.

6.	Long-Term Debt

Unsecured long-term debt consisted of (thousands):

        

		October 28, 2000			January 29, 2000			October 30, 1999
7  1 /2% Debentures due March 2023			$250,000			$250,000			$250,000
7  4 /5% Notes due May 2002			150,000			150,000			150,000
9  1 /8% Notes due February 2001			150,000			150,000			150,000
Floating rate notes			—			100,000			300,000
			550,000			650,000			850,000
Less: current portion of long-term debt			150,000			250,000			200,000
			$400,000			$400,000			$650,000

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 Company maintains a $1 billion unsecured revolving credit agreement (the “Agreement”), established on September 29, 1997. Borrowings outstanding under the Agreement, if any, are due September 28, 2002. However, the revolving term of the Agreement may be extended an additional two years upon notification by the Company on September 29, 2001, subject to the approval of the lending banks. The Agreement has several borrowing options, including interest rates which are based on either the lender’s “Base Rate,” as defined, LIBOR, CD-based options or at a rate submitted under a bidding process. Facilities fees payable under the Agreement are based on the Company’s long-term credit ratings, and currently approximate 0.1% of the committed amount per annum.

The Agreement supports the Company’s commercial paper program which is used from time to time to fund working capital and other general corporate requirements. Commercial paper outstanding at October 28, 2000 was $124.1 million. No commercial paper was outstanding at January 29, 2000 or October 30, 1999. The Agreement contains covenants relating to the Company’s working capital, debt and net worth.

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.

Interest paid during the thirty-nine weeks ended October 28, 2000 and October 30, 1999 approximated $48.8 million and $64.1 million.

7.	Segment Information

The Company identifies operating segments based on a business’s operating characteristics. Reportable segments were determined based on similar economic characteristics, the nature of products and services, and the method of distribution. The apparel segment derives its revenues from sales of women’s and men’s apparel. The Intimate Brands segment derives its revenues from sales of women’s intimate and other apparel, and personal care products and accessories. Sales outside the United States were not significant.

The Company and IBI have entered into intercompany agreements for services that include merchandise purchases, capital expenditures, real estate management and leasing, inbound and outbound transportation and corporate services. These agreements specify that identifiable costs be passed through to IBI and that other service-related costs be allocated based upon various methods. Costs are passed through and allocated to the apparel businesses in a similar manner. Management believes that the methods of allocation are reasonable.

As a result of its spin-off, the operating results of TOO are included in the “Other” category for all periods presented. The operating results of Galyan’s (which were consolidated through August 31, 1999 and accounted for on the equity method thereafter) are also included in the “Other” category.

Segment information as of and for the thirteen and thirty-nine weeks ended October 28, 2000 and October 30, 1999 follows (in thousands):

2000		Apparel Businesses			Intimate Brands			Other (A)				Reconciling Items				Total
Thirteen Weeks:
Net sales			$1,233,387			$925,108			$10,697				—				$2,169,192
Intersegment sales			169,926			—			—				($169,926	)(B)			—
Operating income (loss)			22,740			80,119			(741	)			—				102,118
Thirty-nine Weeks:
Net sales			$3,424,984			$3,087,139			$28,482				—				$6,540,605
Intersegment sales			446,991			—			—				($446,991	)(B)			—
Operating income (loss)			22,288			367,058			(4,638	)			—				384,708
Total assets			1,305,229			1,684,764			1,599,317				(580,279	)(C)			4,009,031
1999		Apparel Businesses			Intimate Brands			Other (A)				Reconciling Items				Total
Thirteen Weeks:
Net sales			$1,170,214			$814,158			$79,733				—				$2,064,105
Intersegment sales			145,945			—			—				($145,945	)(B)			—
Operating income (loss)			22,540			72,058			(404	)			—				94,194
Thirty-nine Weeks:
Net sales			$3,311,146			$2,709,088			$416,490				—				$6,436,724
Intersegment sales			412,270			—			—				($412,270	)(B)			—
Operating income (loss)			12,476			322,690			(10,366	)			(13,075	)(D)			311,725
Total assets			1,223,470			1,456,851			1,779,739				(556,227	)(C)			3,903,833

(A)

Included in the “Other” category are Henri Bendel, TOO (through August 23, 1999), Galyan’s (through August 31, 1999), non-core real estate and corporate, including equity investments. None of the businesses included in “Other” are significant operating segments.

(B)

Represents intersegment sales elimination.

(C)

Represents intersegment receivable/payable elimination.

(D)

The 1999 special and nonrecurring item represents a $13.1 million second quarter charge for transaction costs related to the TOO spin-off, which relates to the “Other” category.

8.	Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“ SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was subsequently amended and clarified by SFAS No. 138. SFAS No. 133, as amended, is effective for the Company’s 2001 fiscal year. It requires that derivative instruments be recorded at fair value and that changes in their fair value be recognized in current earnings unless specific hedging criteria are met. With respect to SFAS No. 133, the Company has been educating Company personnel, identifying and documenting the Company’s use of derivative instruments, including embedded derivatives, and addressing other related issues. Due to the Company’s limited use of derivatives, management does not believe that the adoption of SFAS No. 133 will have a significant effect on the Company’s results of operations or its financial position.

Emerging Issues Task Force (“EITF”) Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs,” will be effective in the fourth quarter of 2000 and addresses the classification of shipping and handling fees and costs.

EITF Issue No. 00-14, “Accounting for Certain Sales Incentives,” will be effective in the second quarter of 2001 and addresses the accounting for, and classification of, various sales incentives.

The Securities and Exchange Commission (“SEC”) has issued Staff Accounting Bulletin (“SAB”) No. 101, “ Revenue Recognition in Financial Statements,” which will be effective in the fourth quarter of 2000. SAB No. 101 provides the SEC staff’s views in applying generally accepted accounting principles to selected revenue recognition issues.

The Company has determined that adopting the provisions of the above EITF Issues and SAB No. 101 will not have a material impact on its consolidated financial statements.

Ÿ	Intimate Brands, Inc. (“IBI”) reported earnings per share of $0.09, an increase of 13% from $0.08 in 1999. Operating income increased 11% and net income increased 12%.

Ÿ

Victoria’s Secret Stores’ sales increased 10% to $465.2 million, driven by an 8% comparable store sales increase. Operating income grew 9%. Victoria’s Secret Direct sales increased 7% to $132.6 million while operating income increased to $2.7 million in 2000 from nearly breakeven in 1999. Victoria’s Secret’s brand results were driven by demand for the Body by Victoria seamless lingerie collection, new product introductions and the Dream Angels fine fragrance line.

Ÿ

Bath & Body Works’ sales increased 22% to $317.0 million, driven by the net addition of 244 new stores and a 5% comparable store sales increase. The business launched entries into the performance hair and face care category for the first time in September with strong results. These product initiatives and new store additions helped produce a 27% gain in Bath & Body Works’ operating income.

Ÿ

The apparel businesses were led by Express, which generated a comparable store sales increase of 18% and nearly doubled its operating income for the third quarter and the thirty-nine weeks ended October 28, 2000. In total, the apparel businesses had a 9% comparable store sales increase while operating income was essentially flat to last year. An improved gross margin rate was offset by investments in general, administrative and store operating expenses.

		Third Quarter									Year – to – Date
		2000			1999			Change			2000			1999			Change
Net Sales (millions):
Express		$428			$361			19	%		$1,113			$965			15	%
Lerner New York		239			233			3	%		673			689			(2	%)
Lane Bryant		219			213			3	%		677			673			1	%
Limited Stores		165			177			(7	%)		471			508			(7	%)
Structure		144			147			(2	%)		383			409			(6	%)
Other (principally Mast)		38			39			N/M			108			67			N/M
Total apparel businesses		$1,233			$1,170			5	%		$3,425			$3,311			3	%
Victoria’s Secret Stores		$465			$423			10	%		$1,520			$1,331			14	%
Bath & Body Works		317			260			22	%		976			820			19	%
Victoria’s Secret Direct		133			124			7	%		570			543			5	%
Other (principally Gryphon)		10			7			N/M			21			15			N/M
Total Intimate Brands		$925			$814			14	%		$3,087			$2,709			14	%
Henri Bendel		11			11			—			29			29			—
Galyan’s (through August 31, 1999)		—			27			N/M			—			165			N/M
TOO (through August 23, 1999)		—			42			N/M			—			223			N/M
Total net sales		$2,169			$2,064			5	%		$6,541			$6,437			2	%
Operating Income (millions):
Apparel businesses		$23			$23			—			$22			$12			83	%
Intimate Brands		80			72			11	%		367			323			14	%
Other		(1	)		(1	)		—			(4	)		(10	)		60	%
Sub-total		102			94			8	%		385			325			18	%
Special and nonrecurring items		—			—			—			—			(13	)(a)		N/M
Total operating income		$102			$94			8	%		$385			$312			23	%

(a)	1999 special and nonrecurring item: a $13.1 million second quarter charge for transaction costs related to the TOO spin-off, which relates to the “Other” category.

		Third Quarter									Year–to–Date
		2000			1999			Change			2000			1999			Change
Comparable Store Sales:
Express		18	%		3	%					16	%		9	%
Lerner New York		7	%		11	%					2	%		13	%
Lane Bryant		5	%		7	%					4	%		8	%
Limited Stores		4	%		9	%					4	%		8	%
Structure		2	%		8	%					(2	%)		7	%
Total apparel businesses		9	%		7	%					6	%		9	%
Victoria’s Secret Stores		8	%		16	%					11	%		14	%
Bath & Body Works		5	%		10	%					5	%		11	%
Total Intimate Brands		6	%		13	%					9	%		13	%
Henri Bendel		(5	%)		13	%					0	%		9	%
Galyan’s (through August 31, 1999)		—			N/M						—			9	%
TOO (through August 23, 1999)		—			N/M						—			9	%
Total comparable store sales		8	%		9	%					7	%		10	%
Store Data:
Retail sales increase (decrease) attributable to net new      and remodeled stores:
Apparel businesses		(3	%)		(4	%)					(4	%)		(4	%)
Intimate Brands		9	%		7	%					7	%		8	%
Retail sales per average selling square foot:
Apparel businesses		$    73			$    64			14	%		$  198			$  180			10	%
Intimate Brands		$  113			$  111			2	%		$  369			$  357			3	%
Retail sales per average store (thousands):
Apparel businesses		$  423			$  371			13	%		$1,158			$1,051			10	%
Intimate Brands		$  344			$  338			2	%		$1,123			$1,091			3	%
Average store size at end of quarter (selling square feet):
Apparel businesses		5,809			5,831			(1	%)
Intimate Brands		3,026			3,052			(1	%)
Selling square feet at end of quarter (thousands):
Apparel businesses		16,371			17,626			(7	%)
Intimate Brands		7,072			6,264			13	%
Number of Stores:
Beginning of period		5,038			5,358						5,023			5,382
Opened		146			81						254			224
Disposal of Galyan’s & TOO (a)		—			(353	)					—			(353	)
Closed		(28	)		(25	)					(121	)		(192	)
End of period		5,156			5,061						5,156			5,061

(a)	Limited Too was spun-off on August 23, 1999, and a third party purchased a 60% majority interest in Galyan’s effective August 31, 1999. Results up to these dates are included in the consolidated financial statements.

		Number of Stores							Selling Sq. Ft. (thousands)
		October 28, 2000		October 30, 1999		Change			October 28, 2000		October 30, 1999		Change
Express		677		690		(13	)		4,342		4,440		(98	)
Lerner New York		579		624		(45	)		4,349		4,798		(449	)
Lane Bryant		663		695		(32	)		3,216		3,377		(161	)
Limited Stores		418		487		(69	)		2,547		2,989		(442	)
Structure		481		511		(30	)		1,917		2,022		(105	)
Total apparel businesses		2,818		3,007		(189	)		16,371		17,626		(1,255	)
Victoria’s Secret Stores		927		887		40			4,094		3,924		170
Bath & Body Works		1,410		1,166		244			2,978		2,340		638
Total Intimate Brands		2,337		2,053		284			7,072		6,264		808
Henri Bendel		1		1		—			35		35		—
Total stores and selling sq. ft.		5,156		5,061		95			23,478		23,925		(447	)

		Third Quarter						Year – to – Date
		2000			1999			2000			1999
Average borrowings (millions)		$  741			$ 1,079			$  690			$   967
Average effective interest rate		8.00	%		7.57	%		8.02	%		7.90	%

		Thirteen Weeks Ended
		October 28, 2000			October 30, 1999
		As Reported			As Reported			Adjustments			As Adjusted
Net sales		$2,169,192			$2,064,105			($41,465	)		$2,022,640
Gross income		740,075			670,249			(14,655	)		655,594
General, administrative and store operating expenses		(637,957	)		(576,055	)		10,700			(565,355	)
Operating income		102,118			94,194			(3,955	)		90,239
Interest expense		(14,826	)		(20,412	)		—			(20,412	)
Other income, net		6,850			9,655			—			9,655
Minority interest		(6,911	)		(6,077	)		—			(6,077	)
Gain on sale of subsidiary stock		—			11,002			(11,002	)		—
Income before income taxes		87,231			88,362			(14,957	)		73,405
Provision for income taxes		38,000			47,000			(15,000	)		32,000
Net income		$49,231			$41,362			$43			$41,405
Earnings per share		$0.11			$0.09						$0.09
Weighted average shares outstanding		441,369			445,768						445,768

A)	Excluded business

Results for TOO are excluded in determining adjusted results for 1999 because this business has not been consolidated in the Company’s financial statements subsequent to its spin-off on August 23, 1999.

B)	Special item

In 1999, the Company recognized an $11.0 million gain from the purchase by a third party of a 60% majority interest in Galyan’s.

C)	Provision for income taxes

The $15.0 million tax provision adjustment includes: 1) a $2.0 million provision related to operating income; 2) a $6.0 million provision related to the $11.0 million Galyan’s gain; and 3) a $7.0 million deferred tax provision related to the revised tax basis of the Company’s remaining investment in Galyan’s.

			Thirty-nine Weeks Ended
		October 28, 2000				October 30, 1999
		As Reported				As Reported				Adjustments				As Adjusted
Net sales			$6,540,605				$6,436,724				($223,377	)			$6,213,347
Gross income			2,184,479				2,051,264				(74,985	)			1,976,279
General, administrative and store operating      expenses			(1,799,771	)			(1,726,464	)			68,014				(1,658,450	)
Special and nonrecurring items			—				(13,075	)			13,075				—
Operating income			384,708				311,725				6,104				317,829
Interest expense			(41,505	)			(57,361	)			—				(57,361	)
Other income, net			29,218				37,495				—				37,495
Minority interest			(33,667	)			(28,566	)			—				(28,566	)
Gain on sale of subsidiary stock			—				11,002				(11,002	)			—
Income before income taxes			338,754				274,295				(4,898	)			269,397
Provision for income taxes			149,000				130,000				(11,200	)			118,800
Net income			$189,754				$144,295				$6,302				$150,597
Earnings per share			$0.42				$0.31								$0.32
Weighted average shares outstanding			444,301				459,105								459,105

		October 28, 2000			January 29, 2000			October 30, 1999
Working capital			$804,953			$1,008,071			$810,077
Capitalization:
Long-term debt			$400,000			$400,000			$650,000
Shareholders’ equity			2,087,802			2,147,077			1,831,581
Total capitalization			$2,487,802			$2,547,077			$2,481,581
Additional amounts available under     long-term credit agreements			$875,900			$1,000,000			$1,000,000

The Company is a defendant in a variety of lawsuits arising in the ordinary course of business.

On January 13, 1999, two complaints were filed against the Company and its subsidiary, Lane Bryant, Inc., as well as other defendants, including many national retailers. Both complaints 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 complaint, on behalf of a class of unnamed garment workers, filed in the United States District Court for the Central District of California, Western Division, alleges violations of federal statutes, the United States Constitution, and international law. On April 12, 1999, a motion to dismiss that complaint for failure to state a claim upon which relief can be granted was filed, and it remains pending. On September 29, 1999, the United States District Court for the Central District of California, Western Division, transferred the case to the United States District Court for the District of Hawaii. On June 23, 2000, the United States District Court for the District of Hawaii transferred the case to the United States District Court for the District of the Northern Mariana Islands, and on July 7, 2000 denied plaintiffs’ motion for reconsideration of the transfer order. Plaintiffs have filed a Petition for a Writ of Mandamus challenging the transfer order and Motion for Emergency Stay in the U.S. 9th Circuit Court of Appeals. The Motion for Emergency Stay was granted on November 3, 2000. The Petition for a Writ of Mandamus remains pending. A first amended complaint was filed on April 28, 2000, which adds additional defendants but does not otherwise substantively alter either the claims alleged or relief sought. The second complaint, filed by a national labor union and other organizations in the Superior Court of the State of California, San Francisco County, and which alleges unfair business practices under California law, 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 directors were not disinterested in those decisions. Defendants moved to dismiss the amended complaint on April 14, 2000. The motion has been fully briefed and is pending before the Court.

11.

Statement re: Computation of Per Share Earnings.

12.

Statement re: Computation of Ratio of Earnings to Fixed Charges.

15.

Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Report of Independent Accountants.

27.

Financial Data Schedule.

None.

THE LIMITED, INC.

(Registrant)

By

/s/    V. Ann Hailey

V. Ann Hailey,

Executive Vice President and Chief

Financial Officer*