<PAGE> 1
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 July 31, 1999
-------------
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 1-14987
-------
TOO, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1333930
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3885 Morse Road, Columbus, OH 43219
-----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 479-3500
-------------------
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 (or such shorter time as the Company became
effective).
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 Outstanding at September 21, 1999
------------ ---------------------------------
$.01 Par Value 30,674,120 Shares
<PAGE> 2
TOO, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Thirteen and Twenty-six Weeks Ended
July 31, 1999 and August 1, 1998........................................................ 3
Consolidated Balance Sheets
July 31, 1999 and January 30, 1999 ..................................................... 4
Consolidated Statements of Cash Flows
Twenty-six Weeks Ended
July 31, 1999 and August 1, 1998........................................................ 5
Notes to Consolidated Financial Statements....................................................... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition........................................... 11
Part II. Other Information
Item 1. Legal Proceedings........................................................................... 18
Item 6. Exhibits and Reports on Form 8-K............................................................ 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TOO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------ ------------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $86,864 $74,746 $181,912 $157,003
Costs of goods sold, occupancy and buying costs
58,258 50,730 121,582 108,099
------------- ------------- ------------- -------------
Gross income 28,606 24,016 60,330 48,904
General, administrative and store operating
expenses 26,902 23,676 57,314 48,275
------------- ------------- ------------- -------------
Operating income 1,704 340 3,016 629
Provision for income taxes 700 100 1,200 200
------------- ------------- ------------- -------------
Net income $1,004 $240 $1,816 $429
============= ============= ============= =============
Net income per basic and diluted share $.03 $.01 $.06 $.01
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
TOO, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands)
<TABLE>
<CAPTION>
July 31, January 30,
1999 1999
--------------- --------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash $2,620 $987
Receivables 1,475 1,440
Inventories 41,812 27,565
Store supplies 5,891 5,237
Deferred income taxes 2,951 2,951
Other 116 582
--------------- --------------
Total current assets 54,865 38,762
Property and equipment, net 55,433 44,894
Deferred income taxes 6,313 6,313
--------------- --------------
Total assets $116,611 $89,969
=============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current liabilities:
Accounts payable $7,195 $3,108
Accrued expenses 24,384 22,377
Income taxes payable 1,083 11,883
--------------- --------------
Total current liabilities 32,662 37,368
Other long-term liabilities 1,769 1,501
Net Investment by The Limited 82,180 51,100
--------------- --------------
Total liabilities and shareholder's equity $116,611 $89,969
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
--------------------------------------
July 31, August 1,
1999 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,816 $429
Impact of other operating activities on cash flows:
Depreciation and amortization 6,158 5,251
Change in assets and liabilities:
Inventories (14,247) (13,312)
Accounts payable and accrued expenses 6,094 5,515
Income taxes (10,800) (10,294)
Other assets and liabilities 45 1,048
----------------- -----------------
Net cash used for operating activities (10,934) (11,363)
----------------- -----------------
Investing activities:
Capital expenditures (16,697) (3,152)
----------------- -----------------
Net cash used for investing activities (16,697) (3,152)
----------------- -----------------
Financing activities:
Increase in net investment by The Limited 29,264 15,854
----------------- -----------------
Net cash provided by financing activities 29,264 15,854
----------------- -----------------
Net increase in cash 1,633 1,339
Cash, beginning of year 987 1,649
----------------- -----------------
Cash, end of period $2,620 $2,988
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
Too, Inc. (formerly Limited Too, Inc. referred to herein as the
Company) is a specialty retailer that sells apparel, underwear,
sleepwear, swimwear, lifestyle and personal care products for
fashion-aware, trend-setting young girls. Prior to August 23, 1999 the
Company operated as a wholly-owned subsidiary of The Limited, Inc. The
consolidated financial statements include the accounts of Too, Inc. and
its subsidiaries and reflect the company's assets, liabilities, results
of operations and cash flows on a historical cost basis.
On August 23, 1999 The Limited, Inc. (The Limited) effected a tax free
spin-off of 100% of the common stock of Too, Inc. by distributing a
dividend of approximately 30.7 million shares of Too, Inc. stock to The
Limited shareholders of record as of August 11, 1999. The Limited's
shareholders received one share of Too, Inc. common stock for every
seven shares of The Limited's common stock held as of the record date.
The accompanying interim consolidated financial statements as of and
for the thirteen and twenty-six week periods ended July 31, 1999 and
August 1, 1998 are unaudited and are presented to comply with 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 Form 10 filing dated August 18, 1999. In the opinion
of management, the accompanying interim 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
twenty-six week periods ended July 31, 1999 and August 1, 1998 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.
6
<PAGE> 7
2. Earnings per Share
Earnings per basic and diluted share is based on the 30.7 million
shares distributed to The Limited's shareholders on August 23, 1999,
representing 100% of the outstanding shares of the Company's common
stock as of the record date August 11, 1999.
In connection with the spin-off, associates of the Company who were
participants in The Limited Inc's. Stock Option and Restricted Stock
plans, were able to convert their unvested awards into Too, Inc. stock
options and restricted stock based on a formula designed to preserve
the intrinsic value of the options and restricted stock. In addition,
certain members of executive management and associates of the Company
received additional awards in conjunction with the spin-off. As the
stock options and restricted stock grants in Too, Inc. were not
outstanding as of July 31, 1999, no dilutive effect is reflected in
earnings per share amounts presented.
3. Inventories
The fiscal year of the Company 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 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.
4. Property and Equipment, Net
Property and equipment, net, consisted of (thousands):
<TABLE>
<CAPTION>
July 31, January 30,
1999 1999
----------------- -----------------
<S> <C> <C>
Property and equipment, at cost $113,390 $98,473
Less accumulated depreciation and amortization 57,957 53,579
----------------- -----------------
Property and equipment, net $55,433 $44,894
================= =================
</TABLE>
7
<PAGE> 8
5. Income Taxes
The Company is included in The Limited's consolidated federal and
certain state income tax groups for income tax reporting purposes
through August 23, 1999. However, the Company is responsible for its
proportionate share of income taxes calculated upon its federal taxable
income at a current estimate of the Company's annual effective tax
rate. Income tax obligations are treated as having been settled through
the net investment by The Limited account as if the Company was filing
its income tax returns on a separate company basis. Such amounts were
$12,000,000 and $10,500,000 for the twenty-six weeks ended July 31,
1999 and August 1, 1998, respectively.
6. Shareholder's Equity and Intercompany Relationship with The Limited
Up to the date of the spin-off, The Limited provided various services
to the Company including, but not limited to, store design and
construction supervision, real estate management, travel and flight
support, merchandise sourcing, compensation and benefit plan
administration, management information and telecommunication services,
merchandise distribution services, engineering, customs and freight,
tax return preparation, and treasury. In connection with the spin-off,
the Company entered into various agreements with a duration of one to
three years with The Limited, to continue some of these services. The
Limited will bill the Company actual costs incurred, plus 5% based on
internal costs such as payroll, rent, and depreciation while third
party costs are charged without any markup.
Through the date of the spin-off, the Company participated in The
Limited's centralized cash management system. Under this system cash
received from the Company's operations is transferred to The Limited's
centralized cash accounts and cash disbursements are funded from the
centralized cash accounts on a daily basis. No interest has been
charged or earned on the cash management account. Subsequent to August
1, 1999, interest is earned by the Company or charged to the Company
for net cash balances due from or owed to The Limited. Interest is
calculated based on the Federal Reserve AA Composite 30-day rate.
The following table summarizes the related party transactions between
the Company and The Limited and its other wholly-owned subsidiaries,
for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Twenty-Six Weeks
Ended Year Ended
July 31, 1999 January 30, 1999
------------------------- --------------------------
<S> <C> <C>
Merchandise purchases $33,114 $58,456
Capital expenditures 15,241 11,818
Inbound and outbound shipping 2,808 6,023
Store leasing construction and
management 28,423 50,044
Distribution center, MIS and home office
expenses 5,265 9,140
Corporate services and centrally
managed benefits 8,723 13,920
------------------------- --------------------------
$93,574 $149,401
========================= ==========================
</TABLE>
8
<PAGE> 9
The following is a summary of the activity in the net investment by The
Limited account (in thousands):
<TABLE>
<CAPTION>
Twenty-Six Weeks
Ended Year Ended
July 31, 1999 January 30, 1999
------------------------- -----------------------
<S> <C> <C>
Beginning balance $51,100 $37,773
Transactions with related parties 93,574 149,401
Centralized cash management (76,310) (167,444)
Settlement of income taxes 12,000 14,314
Net income 1,816 17,056
------------------------- -----------------------
Ending balance $82,180 $51,100
========================= =======================
</TABLE>
7. Subsequent Event
Effective August 13, 1999, the Company entered into a five year $100 million
credit agreement with a syndicate of banks. The credit agreement is
collateralized by virtually all assets of the Company and its subsidiaries and
is comprised of a $50 million term loan and a $50 million revolving credit
facility. On August 13, 1999, the entire portion of the term loan was drawn to
pay a $50 million dividend to The Limited. Additionally, approximately $14
million was drawn on the revolving credit facility to pay working capital
advances of $12 million made by The Limited in 1999 through July 31, 1999, as
well as financing fees of $1.75 million. The working capital advances made by
The Limited were included in the net investment by The Limited at July 31, 1999.
The remainder of the credit facility is available to fund working capital
requirements and for general corporate purposes. Interest or borrowings under
the credit agreement is based on matrix pricing applied to either the London
Interbank Offered Rate plus a spread or base rate, as defined. Payments under
the term loan are due at various dates starting in July 2002 through August
2004. A commitment fee of 1/2 of 1% per annum, as defined, is charged on the
unused portion of the revolving credit facility. Under the terms of the credit
agreement, the Company is required to comply with certain financial ratios. The
credit agreement also prohibits the Company from incurring certain additional
indebtedness and restricts substantial asset sales, capital expenditures above
approved limits and cash dividends.
9
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of Too, Inc.
We have reviewed the condensed consolidated balance sheets of Too, Inc. (the
"Company") at July 31, 1999 and the related condensed consolidated statements of
income for each of the thirteen and twenty-six week periods ended July 31, 1999
and August 1, 1998 and the condensed consolidated statements of cash flows for
the twenty-six week periods ended July 31, 1999 and August 1, 1998. 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 financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 30, 1999, and the
related consolidated statements of operations and cash flows for the year then
ended (not presented herein); and in our report dated April 22, 1999, 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 January 30, 1999, 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 23, 1999
10
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Adjusted Earnings Per Basic and Diluted Share
(Thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Thirteen Weeks Twenty-six Twenty-six
Weeks Ended Ended Weeks Ended Weeks Ended
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
=============== ================= ================= ==================
<S> <C> <C> <C> <C>
Earnings Per Basic and Diluted Share $.03 $.01 $.06 $.01
=============== ================= ================= ==================
Adjusted Earnings Per Basic and
Diluted Share:
Net Income $1,004 $240 $1,816 $429
Adjusted Interest Expense (1) (1,115) (1,115) (2,108) (2,108)
Adjusted Tax Benefit (2) 500 500 900 900
--------------- ----------------- ----------------- ------------------
Adjusted Net Income (Loss) $389 ($375) $608 ($779)
Adjusted Earnings Per Basic
and Diluted Share $.01 ($.01) $0.02 ($.02)
--------------- ----------------- ----------------- ------------------
Weighted Average Basic and Diluted
Shares Outstanding (3) 30,674 30,674 30,674 30,674
=============== ================= ================= ==================
</TABLE>
1) Adjusted net income (loss) and adjusted earnings per basic and diluted
share include interest expense and financing fees, net of the related tax
benefit, on approximately $52 million of indebtedness representing debt
incurred under the credit facility which was used to pay a $50 million
dividend to The Limited and pay financing fees of $1.75 million.
2) The Tax Benefit is related to adjusted interest expense arising from the
credit facility at an estimated effective tax rate of approximately 40%.
3) Earnings per basic and diluted share is based on the number of shares
outstanding as a result of the spin-off occurring August 23, 1999. The
Limited distributed approximately 30.7 million shares representing 100% of
its ownership in the Company to shareholders of record as of August 11,
1999. The
11
<PAGE> 12
distribution ratio was one share of Too, Inc. common stock for every seven
shares of The Limited's common stock outstanding on the date of the
spin-off. The Company has not reported the dilutive effect of the stock
options and restricted stock since stock options and restricted stock were
not present at the end of the reported period.
Financial Summary
-----------------
The following summarized financial and statistical data compares the thirteen
week and twenty-six week periods ended July 31, 1999 to the comparable 1998
periods:
<TABLE>
<CAPTION>
Second Quarter Year - to - Date
------------------------------------ ------------------------------------
1999 1998 Change 1999 1998 Change
--------- ------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET SALES (MILLIONS): $87 $75 16% $182 $157 16%
COMPARABLE STORE SALES INCREASE: 8% 20% 9% 21%
========= ========= ========= =========
STORE DATA:
Retail sales increase
attributable to net new and
remodeled stores 8% 5% 7% 4%
Retail sales per average gross square foot $66 $60 10% $138 $126 10%
Retail sales per average store (thousands) $266 $239 11% $558 $504 11%
Number of stores at end of period 332 311
Retail gross square feet at end of
quarter (thousands) 1,352 1,244 9%
Average store size at end of
quarter (gross square feet) 4,072 4,000 2%
=========== =========== ============= ===========
NUMBER OF STORES:
Beginning of period 321 313 319 312
Opened 11 20 1
Closed (2) (7) (2)
----------- ----------- ------------- -----------
End of period 332 311 332 311
=========== =========== ============= ===========
</TABLE>
12
<PAGE> 13
Net Sales
- ---------
Net sales for the second quarter of 1999 increased 16% to $86.9 million from
$74.7 million in 1998. The net sales increase was attributable to an 8% increase
in comparable store sales. The balance of the increase was due to the net
addition of 21 new stores since the end of the second quarter 1998.
The Company's second quarter performance was driven by a sales increase of 28%
in Girls Add-On, which includes swimwear and sleepwear, and a strong performance
in Knit-Tops.
Year-to-date net sales increased 16% to $182 million from $157 million in 1998.
The net sales increase was attributable to a 9% increase in comparable store
sales. The balance of the increase was due to the net addition of 21 new stores
and the favorable impact of our remodel and refurbishment program.
Gross Income
- ------------
The second quarter of 1999 gross income rate, expressed as a percentage of
sales, increased to 32.9% from 32.1% for the same period in 1998. The increase
was driven by an increase in the merchandise margin rate (which represents gross
income before deduction of buying and occupancy costs). The increase in the
merchandise margin rate was due to higher initial markups and lower markdowns.
The 1999 year-to-date gross income rate increased to 33.2% from 31.1% in 1998.
The increase was primarily attributable to higher initial markups and lower
markdowns which was partially offset by slightly higher buying and occupancy
costs.
General, Administrative and Store Operating Expenses
- ----------------------------------------------------
The general, administrative and store operating expense rate, expressed as a
percentage of net sales, decreased to 31.0% in the second quarter of 1999 from
31.7% for the same period in 1998. The rate decrease was primarily due to a
reduction of $800,000 in second quarter marketing activity. This was partially
offset by start-up expense of $400,000 incurred as part of the catalog launch to
occur in the third quarter and spin-off related expense of $1.2 million.
The year-to-date, general, administrative and store operating expense rate
increased to 31.5% from 30.7% in 1998. The rate increase was driven by catalog
start-up expense of $1.0 million and spin-off related expense of $1.2 million.
Operating Income
- ----------------
Second quarter and year-to-date operating income, expressed as a percentage of
net sales, were 2.0% and 1.7% in 1999 compared to 0.5% and 0.4% in 1998,
respectively. The increase in the gross income rate more than offset the
increase in the general, administrative and store operating expense rate
year-to-date.
13
<PAGE> 14
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Cash provided from operating activities and the revolving portion of the credit
facility provide the resources to support operations, including projected
growth, seasonal working capital requirements and capital expenditures.
Net cash used for operating activities totaled $10.9 million for the twenty-six
weeks ended July 31, 1999 versus net cash used for operating activities of $11.4
million for the same period in 1998. The change in net cash used for operating
activities was primarily driven by an increase of $2.3 million in net income
before depreciation and amortization in the 1999 period over the comparative
period in 1998, offset by a $900,000 increase in cash used in the 1999 period
to fund inventories principally for new stores.
Investing activities were for capital expenditures, which were primarily for new
and remodeled stores.
Financing activities included an increase of $29.3 million in the net investment
by The Limited representing working capital advances in the first half of 1999
of which $12 million was repaid on August 13, 1999 with proceeds from the $100.0
million credit agreement. Additionally, the Company paid a $50 million cash
dividend to The Limited with proceeds from the credit agreement on August 13,
1999.
Approximately $14 million was drawn on the revolving portion of the credit
agreement to pay working capital advances of $12 million made by The Limited in
1999 (included in net investment by The Limited) as well as financing fees of
$1.75 million. The remainder of the revolving portion of the credit agreement
will be used to fund working capital requirements and for general corporate
purposes.
A summary of the Company's working capital position and capitalization follows
(in thousands). Adjusted working capital is shown to reflect the $14 million
drawn on the revolving credit facility to pay working capital advances by The
Limited. Adjusted capitalization, including long-term debt, reflects the $50
million term loan drawn to pay a $50 million cash dividend to The Limited.
<TABLE>
<CAPTION>
--------
Adjusted
-------- --------- -----------
July 31, July 31, January 30,
1999 1999 1999
-------- --------- -----------
<S> <C> <C> <C>
Working capital $8,453 $22,203 $1,394
========== ========== ===========
Capitalization:
Long-term debt 50,000
Net investment by The Limited 20,180 82,180 51,100
---------- ---------- -----------
Total capitalization $70,180 $82,180 $51,100
========== ========== ===========
</TABLE>
14
<PAGE> 15
Capital Expenditures
- --------------------
Capital expenditures, primarily for new and remodeled stores, totaled $16.7
million for the twenty six weeks ended July 31, 1999, compared to $3.2 million
for the comparable period of 1998. The Company anticipates spending
approximately $35.0 million in 1999 for capital expenditures, which will be
primarily for new stores, the remodel or relocation and expansion of about 20
existing stores and related improvements for the retail business.
The Company intends to add approximately 90,000 gross square feet during the
remainder of 1999, which will represent a 12% increase over year-end 1998. It is
anticipated the increase will result from the addition of approximately 22 net
new stores and the expansion of approximately 4 stores. The Company expects that
capital expenditures will be funded principally by net cash provided by
operating activities.
INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE
The Year 2000 issue arises primarily from computer programs, commercial systems
and embedded chips that will be unable to properly interpret dates beyond the
year 1999. The Company utilizes a variety of proprietary and third party
computer technologies - both hardware and software - directly in its businesses.
The Company also relies on numerous third parties and their systems' ability to
address the Year 2000 issue. The Company's critical information technology
("IT") functions include point-of-sale equipment, merchandise distribution,
merchandise and non-merchandise procurement, credit card and banking services,
transportation, and business and accounting management systems. The Company is
using both internal and external resources to complete its Year 2000
initiatives.
Readiness
- ---------
In order to address the Year 2000 issue, the Company participated with its
former parent, The Limited, which established a program management office to
oversee, monitor and coordinate the company-wide Year 2000 effort. This office
has developed and is implementing a Year 2000 plan. The implementation includes
five stages:
- awareness, which includes identifying risks and conducting an education
program regarding Year 2000 issues
- assessment, which primarily includes establishing project resources,
developing a Year 2000 renovation strategy, completing a company-wide
inventory of information technology and determining the necessary
training and testing facility requirements
- renovation/development, which includes the analysis of existing
information systems, the design of remediation activities and the
coding of necessary remedies
- validation, which primarily includes system testing
- implementation, which includes the placement of renovated systems "in
production" and training end users
There are four areas of focus:
- RENOVATION OF LEGACY SYSTEMS. The Company has completed all five
stages of Year 2000 implementation for renovation of legacy systems.
15
<PAGE> 16
- INSTALLATION OF NEW SOFTWARE PACKAGES TO REPLACE SELECTED LEGACY
SYSTEMS. Replacement of significant legacy systems with new software
packages is complete.
- ASSESSMENT OF YEAR 2000 READINESS AT KEY VENDORS AND SUPPLIERS. A vast
network of vendors, suppliers and service providers located both within
and outside the United States provide the Company with merchandise for
resale, supplies for operational purposes and services. The Company has
identified key vendors, suppliers and service providers, and The
Limited is making efforts to determine their Year 2000 status. As a
result, The Limited obtained completed Year 2000 surveys from
approximately 40 of our most critical third-party vendors representing
over half of our total 1998 purchases to determine an estimated
compliance date. Of the 40 third-party vendors surveyed, approximately
half have indicated that they are Year 2000 compliant. The majority of
the remaining vendors have indicated they will be compliant prior to
year-end. Based upon the results of the surveys, the Company selected 3
vendors for on-site visits to further assess the vendors' progress and
estimated compliance dates. The Limited and the Company will continue
to monitor the status of the vendors' estimated compliance dates in
order to identify potential delays.
- EVALUATING FACILITIES AND DISTRIBUTION EQUIPMENT WITH EMBEDDED
COMPUTER TECHNOLOGY. The Company uses various facilities and
distribution equipment with embedded computer technology, such as
conveyors, elevators, and security systems, fire protection systems and
energy management systems. All stages of our efforts are complete.
Cost to Address the Year 2000 Issue
- -----------------------------------
Total expenditures incurred related to remediation, testing, conversion,
replacement and upgrading system applications were $6.6 million, of which
approximately $4.9 million represents capital assets which will be amortized
principally over a period of five years beginning in May 1999. In addition,
significant internal payroll costs (not separately identified) were incurred
relating to the Company's Year 2000 initiatives.
Additional expenditures are expected to range from $3.5 million to $3.8 million
through October 1999, of which approximately $2.4 million of new software
purchases will be capitalized. Total incremental expenses, primarily
depreciation and amortization of new package systems, are not expected to have a
material impact on the Company's financial condition during 1999 and 2000.
Included in the above costs are expenditures associated with the development of
an internal testing center, which has enabled the Company to perform
comprehensive testing of newly renovated systems by processing transactions as
if they had occurred in the Year 2000. This internal testing process was used to
develop the risk and cost estimates described above. Efforts by approximately
500 employees of The Limited's information technology division represent
approximately three-fourths of the total information technology budgeted hours
for the Year 2000 project. The Limited engaged external consultants to assist it
with program management and new software package implementation, which represent
the remaining hours. The Company has allocated approximately 35% of its
information technology budget for the period from Fall 1997 through Fall 1999
toward Year 2000 remediation efforts.
Reasonably Likely Worst Case Scenario and Contingency Plans
- -----------------------------------------------------------
The Company believes that the reasonably likely worst case scenario would
involve short-term disruption of systems affecting its supply and distribution
channels. The Limited is in the process of developing contingency plans, such as
alternative sourcing, and identifying the necessary actions that it would need
to take if critical systems or service providers were not Year 2000 compliant.
The Limited expects to finalize these contingency plans in the second half of
1999.
16
<PAGE> 17
At the present time, the Company and The Limited are not aware of any Year 2000
issues that are expected to affect materially its products, services,
competitive position or financial performance. Additionally, the Company has not
postponed any significant information technology projects due to the Year 2000
project. Thus, the Company does not believe that the delay of any projects has
had a material impact on its financial condition and results of operations.
However, despite The Limited's significant efforts to make its systems,
facilities and equipment Year 2000 compliant, the compliance of third party
service providers and vendors (including, for instance, governmental entities
and utility companies) is beyond the Company's control. Accordingly, the Company
can give no assurances that the failure of technology infrastructure of the
United States, foreign nations or other companies on which the Company's systems
rely, or the failure of key suppliers or other third parties to comply with Year
2000 requirements, will not have a material adverse effect on the Company.
In connection with the spin-off, we will indemnify The Limited against any
liabilities caused by or arising from The Limited's year 2000 readiness
assistance. We have also agreed not to make any claims against The Limited
caused by or arising from The Limited's Year 2000 readiness assistance and in
connection with the failure of any of our systems to be Year 2000 ready.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM 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 Form 10-Q or made by 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. Forward-looking statements are
indicated by words such as "anticipate," "estimate," "expect," "intend," "risk,"
"could," "may," "will," "pro forma," "likely," "possible," "potential," and
similar words and phrases and the negative forms and variations of these words
and phrases, and include statements in this Management's Discussion and Analysis
relating to anticipated capital expenditures in 1999 for new stores and the
remodeling or expansion of existing stores, and the funding therefor, and the
costs and dates relating to the Year 2000 effort, which statements are based on
the Company's current best estimates that may be proven incorrect as additional
information becomes available. The Company's Year 2000-related forward-looking
statements are also based on assumptions about many important factors, including
the technical skills of employees and independent contractors, the
representations and preparedness of third parties, the ability of vendors to
deliver merchandise or perform services required by the Company and the
collateral effects of the Year 2000 issues on the Company's business partners
and customers. While the Company believes its assumptions are reasonable, it
cautions that it is impossible to predict factors that could cause actual costs
or timetables to differ materially from the expected results. In addition to
Year 2000 issues, 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 1999 and beyond to differ
materially from those expressed or implied in any forward-looking statements
included in this Form 10-Q or otherwise made by management: changes in consumer
spending patterns, consumer preferences and overall economic conditions, 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, postal rate increases and charges, paper and printing
costs, availability of suitable store locations at appropriate terms, ability to
develop new merchandise and ability to hire and train associates.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit arising in the ordinary course
of business.
On November 13, 1997, the United States District Court for the Southern
District of Ohio, Eastern Division, dismissed with prejudice an amended
complaint that had been filed against the Company, The Limited and
certain of The Limited's other subsidiaries by the American Textile
Manufacturers Institute ("ATMI"), a textile industry trade association.
The amended complaint alleged that the defendants violated the federal
False Claims Act by submitting false country of origin declarations to
the U.S. Customs Service. On November 26, 1997, ATMI served a motion to
alter or amend judgment and a motion to disqualify the presiding judge
and to vacate the order of dismissal. The motion to disqualify was
denied on December 22, 1997, but as a matter of his personal
discretion, the presiding judge elected to recuse himself from further
proceedings and this matter was transferred to a judge of the United
States District Court for the Southern District of Ohio, Western
Division. On May 21, 1998, this judge denied all pending motions
seeking to alter, amend or vacate the judgment that had been entered in
favor of the Company. On June 5, 1998, ATMI appealed to the United
States Court of Appeals for the Sixth Circuit (the "Sixth Circuit"). On
September 14, 1999, the Sixth Circuit sustained the dismissal of ATMI's
amended complaint and the judgment in favor of the Company. On
September 28, 1999, ATMI filed a petition for rehearing en banc with
the Sixth Circuit.
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.
18
<PAGE> 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27. Financial Data Schedule.
(b) Reports on Form 8-K
A Report on Form 8-K was filed October 1, 1999.
19
<PAGE> 20
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.
TOO, INC.
(Registrant)
By /S/ Kent A. Kleeberger
----------------------------------------
Kent A. Kleeberger,
Vice President and
Chief Financial Officer
Date: October 4, 1999
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements (unaudited) of Too, Inc. for the quarter ended
July 31, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> MAY-02-1999
<PERIOD-END> JUL-31-1999
<CASH> 2,620
<SECURITIES> 0
<RECEIVABLES> 1,475
<ALLOWANCES> 0
<INVENTORY> 41,812
<CURRENT-ASSETS> 54,865
<PP&E> 113,390
<DEPRECIATION> 57,957
<TOTAL-ASSETS> 116,611
<CURRENT-LIABILITIES> 32,662
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 82,120
<TOTAL-LIABILITY-AND-EQUITY> 116,611
<SALES> 86,864
<TOTAL-REVENUES> 86,864
<CGS> 58,258
<TOTAL-COSTS> 58,258
<OTHER-EXPENSES> 26,902
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,704
<INCOME-TAX> 700
<INCOME-CONTINUING> 1,004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,004
<EPS-BASIC> $.01
<EPS-DILUTED> 0
</TABLE>
