As filed with the Securities and Exchange Commission on May 4, 1999
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
-----------------------
TOO, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 31-1333930
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3885 Morse Road
Columbus, Ohio 43219
(Address of Principal Executive Offices) (Zip Code)
(614) 479-3500
(Registrant's telephone number, including area code)
-----------------------
Securities to be registered
pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
- ------------------- ----------------------------------
Common Stock, par value $.01 per share The New York Stock Exchange, Inc.
Securities to be registered
pursuant to Section 12(g) of the Act:
-------------------------------------
None
================================================================================
<PAGE>
The Limited, Inc.
, 1999
Dear Limited Shareholder:
Beginning in 1995, The Limited, Inc. increased its strategic focus to
unlock and create greater value for shareholders. The strategy and the actions
that have resulted from this focus during the last several years are described
in the accompanying information statement.
As part of these actions, The Limited, Inc. has announced a plan to
establish its Limited Too business as a fully independent public company under
the name Too, Inc. In order to implement this plan and distribute its Too, Inc.
shares, the Board of Directors of The Limited has approved a spin-off to our
shareholders of all the outstanding shares of common stock of Too, Inc. to
holders of record of The Limited's common stock on , 1999. In the spin-off, you
will receive one share of Too, Inc.'s common stock for every share(s) of The
Limited's common stock that you hold at the close of business on , 1999. Your
current shares of our common stock will be unchanged and will continue to
represent your ownership position in The Limited, Inc.
Your Board of Directors has concluded that the spin-off is in the best
interests of The Limited, the Limited Too business and The Limited's
shareholders, because it believes that:
o having two separate public companies will enable the financial
markets to evaluate each company more effectively, thereby maximizing
shareholder value over the long term for both The Limited and Too,
Inc.
o separate management and ownership structures for Too, Inc. will
provide incentives to Too, Inc.'s management and direct
accountability to public investors
o the spin-off will provide Too, Inc.'s management with increased
strategic flexibility and decision-making power to realize the
significant growth opportunities that it has identified
Shares of Too, Inc.'s common stock are expected to trade on the New York
Stock Exchange, under the ticker symbol " ".
<PAGE>
The enclosed information statement explains the proposed spin-off in
detail and provides important information regarding Too, Inc. We urge you to
read it carefully. Please note that a shareholder vote is not required in
connection with this matter, and holders of The Limited's common stock are not
required to take any action to participate in the spin-off. Thus, we are not
asking you for a proxy.
Very truly yours,
Leslie H. Wexner
Chairman and Chief Executive Officer
The Limited, Inc.
2
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Too, Inc.
, 1999
Dear Too, Inc. Shareholder:
We welcome you as a "founding" shareholder of Too, Inc., the successor
company to Limited Too, Inc. that will be publicly traded for the first time on
, 1999. You will become an owner of one share of Too, Inc.'s common stock for
every share(s) of common stock of The Limited, Inc. that you own at the close
of business on , 1999. We expect that shares of our common stock will trade on
the New York Stock Exchange, under the ticker symbol " ".
As you know, Limited Too is the leading specialty retailer specifically
targeted to fashion-aware, trend-setting young girls. Our stores sell apparel,
underwear, sleepwear, swimwear, lifestyle and personal care products for girls
aged 7 to 14 years in a fun shopping environment. In fiscal 1998, we had sales
of $377 million, and we currently have approximately 6,200 sales associates in
321 stores nationwide.
This is a very exciting time, and we are enthusiastic about what the
future holds. We believe that our Company has a great opportunity to grow, and
as a new Too, Inc. shareholder, like our customers, you have an opportunity to
grow with us.
Congratulations on becoming one of the "founding" shareholders of Too,
Inc.!
Very truly yours,
Michael W. Rayden
President and Chief Executive Officer
Too, Inc.
<PAGE>
Preliminary and Subject to Completion, dated May 4, 1999
INFORMATION STATEMENT
TOO, INC.
COMMON STOCK
(par value $.01 per share)
At this time, Too, Inc., the successor company to Limited Too, Inc., is
wholly owned by The Limited, Inc. In this spin-off, The Limited will distribute
100% of the shares of our common stock to its shareholders. Each of you, as a
holder of The Limited's common stock, will receive one share of our common
stock for every share(s) of The Limited that you hold at the close of business
on , 1999, the record date for the spin-off.
We are sending you this information statement to describe the spin-off. We
expect the spin-off to occur on , 1999. The Limited will mail you certificates
representing your proportionate number of whole shares of our common stock on
this day or as soon after this day as practicable. Immediately after the
spin-off is completed, The Limited will not own any shares of our common stock,
and we will be an independent public company. We refer to ourselves in this
information statement as "Limited Too" or "Too, Inc."
No shareholder action is necessary to receive the shares of our common
stock to which you are entitled in the spin-off. This means that:
o you do not need to pay any consideration to The Limited or to Too,
Inc.
o You do not need to surrender any shares of the limited's common stock
to receive your shares of our common stock
In addition, a shareholder vote is not required for the spin-off to occur. The
Limited is not asking you for a proxy, and The Limited requests that you do not
send a proxy.
There has been no trading market for our common stock. However, we expect
that a limited market for shares of our common stock will develop on or shortly
before the record date for the spin-off, commonly known as a "when issued"
trading market. We will apply to list our common stock on the New York Stock
Exchange under the ticker symbol " ".
As you review this information statement, you should carefully consider
the matters described in "Risk Factors" beginning on page 12.
-----------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
information statement is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this information statement is , 1999.
<PAGE>
TABLE OF CONTENTS
Page
----
Introduction............................................................. 3
Summary.................................................................. 5
Risk Factors............................................................. 12
The Spin-Off............................................................. 23
Relationship Between Too, Inc. and The Limited........................... 27
Trading Market........................................................... 36
Dividends................................................................ 37
Unaudited Pro Forma Consolidated Financial Statements.................... 38
Capitalization........................................................... 42
Selected Consolidated Financial and Operating Data....................... 43
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 45
Business................................................................. 52
Management............................................................... 68
Executive Compensation................................................... 70
Security Ownership of The Limited and Too, Inc........................... 78
Description of Capital Stock............................................. 80
Statutory, Charter and Bylaw Provisions.................................. 82
Independent Accountants.................................................. 86
Where You Can Find More Information...................................... 87
Index to the Consolidated Financial Statements of Limited Too, Inc....... F-1
2
<PAGE>
INTRODUCTION
Over the past several years, The Limited's board of directors and senior
management have embarked upon a comprehensive review of The Limited's
organization structure and operations, with the primary goals of generating
maximum value for The Limited's shareholders and focusing its resources on its
key strategic business.
After much consideration, The Limited determined that a complete spin-off
of Too, Inc., the successor company to Limited Too, Inc., from The Limited is
consistent with these objectives and would be in the best interests of The
Limited, the Limited Too business and The Limited's shareholders. We at Limited
Too have demonstrated that we have a unique customer base, focused brand image
and a profitable growth strategy, and The Limited intends for the spin-off to
allow us greater flexibility to grow as an independent company. At the same
time, the spin-off allows The Limited to focus its resources on its other
brands where it can add more value. The Limited believes that:
o having two separate public companies will enable the financial
markets to evaluate each company more effectively, thereby maximizing
shareholder value over the long term for both The Limited and Too,
Inc.
o separate management and ownership structures for Too, Inc. will
provide incentives to Too, Inc.'s management and direct
accountability to public investors
o the spin-off will provide Too, Inc.'s management with increased
strategic flexibility and decision-making power to realize the
significant growth opportunities that it has identified
In deciding to pursue the spin-off, The Limited considered several things,
including the financial advice of J.P. Morgan Securities Inc. and the legal
advice of Davis Polk & Wardwell. To review the reasons for the spin-off in
greater detail, see "The Spin-Off--Background to and Reasons for the Spin-Off."
To accomplish the spin-off, on , 1999, the Board of Directors of
The Limited declared a dividend payable to holders of record of The Limited's
common stock at the close of business on , 1999, of one share of our
common stock for every share(s) of The Limited's common stock owned of
record on this day. We expect the spin-off to occur on , 1999. The Limited
will mail you certificates representing your proportionate number of whole
shares of our common stock on this day or as soon after this day as
practicable.
In the spin-off, The Limited will distribute 100% of the outstanding
shares of our common stock to its shareholders. Immediately after the spin-off
is completed, The Limited will not own any shares of our common stock, and we
will be an independent public company. We will apply to list our common stock
on the New York Stock Exchange under the ticker symbol " ".
If you have any questions relating to the spin-off, you should contact
EquiServe, First Chicago Division, which is serving as the distribution agent
for the spin-off. The contact information for EquiServe is:
EquiServe
First Chicago Division
Mail Suite 4690, P.O. Box 2532
Jersey City, NJ 07303-2535
(201) 222-4237
Attention: Robbin A. Mayo, Assistant Vice President
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You can also contact The Limited with any questions. The Limited's contact
information is:
The Limited, Inc.
Three Limited Parkway
P.O. Box 16000
Columbus, OH 43216
(614) 415-7076
Attention: Thomas J. Katzenmeyer, Vice President of Investors
Relations
After the spin-off, if you are a shareholder of Too, Inc. and have
questions relating to the spin-off, you can contact us directly. Our contact
information is:
Too, Inc.
3885 Morse Road
Columbus, OH 43219
(614) 479-3610
Attention: Kent A. Kleeberger, Vice President and Chief Financial
Officer
No action is necessary to receive the shares of our common stock to which
you are entitled in the spin-off. You do not need to pay any consideration to
The Limited or to us, and you do not need to surrender any shares of The
Limited's common stock to receive your shares of our common stock.
4
<PAGE>
SUMMARY
Because this is a summary, it does not contain all the information that
may be important to you. You should read the entire information statement,
including our historical and pro forma consolidated financial statements and
the notes to those financial statements included in this information statement.
LIMITED TOO
We are a rapidly growing specialty retailer that sells apparel, underwear,
sleepwear, swimwear, lifestyle and personal care products for fashion-aware,
trend-setting young girls. We have 321 stores in 43 states. We design, source
and market our products under our proprietary "Limited Too" brand name.
In 1987, The Limited established "Limited Too" brand stores adjacent to or
as departments within The Limited stores to provide similar apparel to young
girls, and apparel for infants. From 1987 to the end of fiscal 1995, we
expanded our locations from two stores to 288 stores. In 1996, a new management
team recognized that its core customer had her own emerging sense of style and
revised our strategy to focus on girls approximately 7 to 14 years of age as
our target customer group.
In the period from fiscal 1996 to fiscal 1998, this focused strategy
enabled us to:
o increase net sales to $376.9 million from $258.8 million
o improve our pretax operating income to $28.5 million from a loss of
$(8.9) million
o improve our operating income rate as a percentage of sales to 7.6%
from a loss of (3.4)%
o improve sales per average square foot to $300 from $214
We plan to continue our new store expansion program by opening
approximately 40 new stores per year in 1999 and 2000 and remodeling or
expanding approximately 20 existing stores in 1999.
Business Strengths
We believe that our six core business strengths developed over the last
three years have contributed to our success and will enable us to continue
growing profitably.
o Target Customer Group. We have identified our target customer group
to be girls approximately 7 to 14 years of age who are active,
creative and image-conscious, enjoy shopping and want to describe
themselves as "fun" and "cool". We believe our target customers want
a broad assortment of merchandise for their range of dressing
occasions, including school, leisure activities and parties. To
attract our target customer, we continually update our merchandise
assortment, which includes non-apparel merchandise, such as cosmetics
and lifestyle furnishings for her room. We also create an in-store
atmosphere that is visually appealing and provides an enjoyable, safe
and high-energy shopping experience. We believe that girls interested
in the latest fashions are attracted to our image and are made to
feel secure in their fashion choices when they purchase our brand. At
the same time, we believe that parents defer to many choices that
their daughters make in our stores because they find our products to
be appropriate for their daughters' age.
o Focused and Differentiated Brand. We have created a focused and
differentiated brand image for fashion-aware girls aged 7 to 14 who
follow the latest trends. We believe that the brand's appeal has been
augmented by, and should continue to benefit from, trends that
emphasize the latest fashions and the
5
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aspirational lifestyle of today's girls. We communicate our brand
image through all aspects of our business, including merchandise
assortment and our exciting, colorful in-store presentation. We
believe that the strength of our brand provides opportunities for
increased penetration of current merchandise categories and entry
into newer product categories such as our "GirlCare" line of
toiletries and cosmetics introduced in 1996.
o Entertaining Store Environment. A major element of our recent success
is the consistent store-level execution of our brand strategy. We
design our stores to provide a "theme park" destination in the mall
and to encourage our customers to touch and sample our products. All
of our stores contain a wide variety of merchandise for a "one-stop
shopping" experience, which has been specifically designed to embody
"a store for her" theme. Our stores feature colorful window displays;
photographic sticker booths; ear piercing stations; gumball machines;
and eye-catching photographs. Our newer store formats may also have
our daisy logo on our front signage; a personal care sampling table
in the front of the store at which our customers can experiment with
our "GirlCare" products and consult their friends and our sales
associates; light shows; and mock pay telephones from which our
customers can listen to music or call their friends within the store.
We tightly control our in-store presentation by basing it on detailed
and comprehensive store plans. These plans use visual displays and
fixtures designed to brand our stores in a manner tailored to appeal
to our target customer group.
o Proprietary Design and Merchandising Capabilities. A cornerstone of
our business is our ability to design products which embody our brand
image. We develop substantially all of our merchandise assortment
through our own design group, which allows us to create exclusive
merchandise under our proprietary brand, develop complementary
fashionable outfits, offer a vast array of merchandise within a
fashion season, introduce new non-apparel items and bring our
products to market faster. In addition, because our merchandise is
sold exclusively in our own stores, we are able to control the
presentation and pricing of our merchandise and provide a higher
level of customer service. Our merchandising strategy of offering a
broad assortment allows us to constantly introduce elements of the
latest fashion trends. We believe that these capabilities provide us
with competitive advantages over other brand manufacturers that
market their goods through department and other specialty apparel
stores.
o Proven Management Team. Since early 1996, when some of the senior
members of our current management team assumed responsibility, we
have increased the level of brand awareness and consistently reported
improved financial results. We believe that our management has a
distinct understanding of our customers and is able to execute
design, sourcing and marketing strategies to penetrate our target
customer group. With over 125 years of collective experience in the
retail industry, they have demonstrated a track record of highly
profitable growth which strongly positions us for the future.
o Attentive Customer Service. Our sales associates convey and reinforce
our brand image through their attitude, enthusiasm and awareness of
current fashion trends. We train them to greet each customer, to
inform the customer about new fashion trends, to guide her through
the store and to suggest merchandise to suit the customer's wardrobe
and lifestyle needs. We strive to give each of our young customers
the same level of respect and attention that adult customers expect
in a retail shopping experience.
Growth Strategy
We have implemented a growth strategy to capitalize on our business
strengths. Our growth strategy focuses on four goals: (1) opening approximately
40 new stores per year in 1999 and 2000, (2) remodeling and expanding
approximately 20 existing stores in 1999, (3) increasing comparable store sales
through product extensions and our continued execution of merchandise and other
initiatives to satisfy our target customers' needs and (4) increasing our
distribution channels to include direct marketing through catalog and website
initiatives.
6
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To achieve these goals, we plan to do the following:
o Store Openings, Remodelings and Expansions. Given the strength of our
brand and our customer demographics, our management believes that
there will be approximately 100 to 150 mall sites available for new
stores, with an additional 100 to 150 sites available in smaller
markets, specialty centers and major urban locations. We plan to open
approximately 40 new stores per year in 1999 and 2000. We also plan
to remodel or expand approximately 20 of our existing stores in 1999
and continue our remodeling and expansion program for the next
several years.
o Merchandise Initiatives and Product Extensions. We plan to continue
to increase the variety of sizes offered in many of our tops and
bottoms categories and to continue to develop the new product lines
we recently introduced such as underwear, sleepwear and swimwear;
personal care products under our "GirlCare" line, such as glitter
make-up and nail polish; and lifestyle products and other accessories
for our target customer's room, such as inflatable furniture and
glitter telephones.
o Increase Consumer Feedback and Awareness. An important source of
customer feedback has been our focus groups and other formats for
customer communication, which we intend to continue. We expect to
enhance our customer relationships and increase our brand awareness
through our frequent buyer program and our catalog and website
initiatives. We use our frequent buyer program to obtain customer
information, and our customers will also be asked to provide
information when they register on our website. Additionally, our
frequent buyer program rewards our customers with incentives based on
the frequency of their purchases and incorporates in-store events
such as "Too Punch Toosday". Currently, our frequent buyer database
contains approximately 830,000 names. In May 1999, we intend to
execute our first direct mail campaign that targets not only
customers in our frequent buyer database but prospective customers as
well.
o Expand Distribution Channels. We plan to expand our marketing efforts
by launching our first catalog targeted for the 1999 holiday season
with a planned October mailing. We are also developing an
informational website with an expected launch in the fall of 1999. We
intend to further develop our website to allow our customers to order
our products on-line during the year 2000.
* * *
We were incorporated in Delaware on August 21, 1991. Our principal office
is located at 3885 Morse Road, Columbus, Ohio 43219, and our telephone number
is (614) 479-3500.
THE SPIN-OFF
The following is a brief summary of the terms of the spin-off.
<TABLE>
<S> <C>
Distributing Company................................. The Limited, Inc. After the spin-off, The Limited will not
own any shares of our common stock.
Spun-Off Company..................................... Too, Inc. After the spin-off, Too, Inc. will be an
independent public company.
Primary Purposes of the Spin-Off..................... The Limited has determined that the spin-off is in the best
interests of The Limited, the Limited Too business and
The Limited's shareholders. In reaching this conclusion,
The Limited considered several issues, including:
7
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(1) having two separate public companies will enable
the financial markets to evaluate each company
more effectively, thereby maximizing shareholder
value over the long term for both The Limited and
Too, Inc.
(2) having separate management and ownership
structures for Too, Inc. will provide incentives to
Too, Inc.'s management and direct accountability to
public investors
(3) the spin-off will provide our management with
increased strategic flexibility and decision-making
power to realize the significant growth opportunities
that it has identified
See "The Spin-Off--Background to and Reasons for the
Spin-Off."
Securities to Be Distributed......................... All of the outstanding shares of our common stock. Based
on the number of shares of The Limited's common stock
outstanding as of , 1999, we estimate that
we will distribute approximately million shares
of our common stock to The Limited's shareholders.
Immediately after the spin-off, we estimate that
approximately shareholders of record will
hold shares of our common stock, although some of the
shares may be registered in the name of a single
shareholder who represents a number of shareholders.
Distribution Ratio................................... One share of our common stock for every share(s) of
The Limited's common stock that you hold at the close of
business on , 1999, the record date for the
spin-off.
Record Date.......................................... , 1999 (close of business).
Spin-Off Date........................................ , 1999. The Limited will mail you
certificates representing your proportionate number of
whole shares of our common stock on this day or as soon
after this day as practicable.
Distribution Agent................................... EquiServe, First Chicago Division.
Trading Market and Symbol............................ There has been no trading market for our common stock.
However, we expect that a limited market for shares of
our common stock will develop on or shortly before the
record date for the spin-off, commonly known as a "when
issued" trading market. We will apply to list our common
stock on the New York Stock Exchange under the ticker
symbol " ".
8
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Tax Consequences..................................... Before the spin-off, The Limited will receive an opinion
of counsel that the spin-off should qualify as tax-free to
The Limited and its shareholders for United States federal
income tax purposes. An opinion of counsel is not
binding on the IRS or the courts. See "The Spin-
Off--Material Federal Income Tax Consequences of the
Spin-Off" for a more detailed description of the federal
income tax consequences of the spin-off.
Risk Factors......................................... You should carefully consider the matters described in
the section entitled "Risk Factors" beginning on page 12
in this information statement.
No Fractional Shares................................. We will not distribute any fractional shares of our
common stock. EquiServe will aggregate all fractional
interests, sell them on behalf of shareholders and
distribute the cash proceeds to the shareholders who are
entitled to a fractional interest. See "The Spin-
Off--Description of the Spin-Off."
Relationship Between Too, Inc. and
The Limited After the Spin-Off.................. We and The Limited will enter into a distribution
agreement and other agreements described in the section
entitled "Relationship Between Too, Inc. and The
Limited." We believe that the terms of these agreements
will be similar to terms achievable through arm's length
negotiations. We and The Limited may enter into
additional or modified agreements, arrangements and
transactions after the spin-off, which will be negotiated at
arm's length. In connection with the spin-off, we may
hire personnel or contract with third parties for financial,
treasury, real estate, employee benefit, tax, consulting and
other services.
Our Management and Management
Compensation After the Spin-Off................. The compensation, awards and other benefits payable to
selected members of management after the spin-off are
described in "Management" and "Executive
Compensation."
Dividend Policy...................................... We anticipate that future earnings will be used principally
to support operations and finance the growth of our
business. Thus, we do not intend to pay cash dividends
on our common stock in the foreseeable future.
</TABLE>
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Summary Financial and Operating Data
The following table presents summary historical and pro forma financial as
well as operating data of Too, Inc. for the last five fiscal years. The
information for the fiscal years ended February 3, 1996 and January 28, 1995 is
derived from our unaudited consolidated financial statements.
Before the spin-off, we operated as part of The Limited. Because the data
reflects periods during which we did not operate as an independent company, the
data may not reflect the results of operations or the financial condition which
would have resulted if we had operated as a separate, independent company
during the periods shown. In addition, the data may not necessarily be
indicative of our future results of operations or financial condition.
The data presented in the table below is derived from "Selected
Consolidated Financial and Operating Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our historical
and pro forma consolidated financial statements and the notes to those
financial statements included in this information statement. You should read
these sections for a further explanation of the data summarized here.
Earnings per share data is presented elsewhere in this information
statement on a pro forma basis only. See "Unaudited Pro Forma Consolidated
Financial Statements."
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------------------------------
January 30, January 31, February 1, February 3, January 28,
1999 1998 1997 1996(1) 1995
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share data and
sales per average square foot)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales....................................... $ 376,943 $ 322,150 $ 258,818 $ 214,302 $ 173,787
Gross income(2)................................. 125,412 95,307 60,848 38,191 47,928
General, administrative and store operating
expenses(3).................................. 96,956 83,010 69,702 57,435 44,817
Operating income (loss)......................... 28,456 12,297 (8,854) (19,244) 3,111
Net income (loss)............................... 17,056 7,397 (5,354) (11,544) 1,911
Pro forma net income(4)......................... 14,806
Pro forma diluted weighted average
number of shares(5)..........................
Pro forma diluted net income per share(5).......
Balance Sheet Data:
Inventories..................................... $ 27,565 $ 18,661 $ 20,437 $ 16,046 $ 15,156
Total assets.................................... 87,018 72,198 74,786 72,991 57,765
Pro forma long-term debt........................ 50,000
Pro forma shareholders' equity.................. 1,100
Selected Operating Data:
Comparable store sales increase
(decrease)(6)................................ 15% 20% 8% (4)% 13%
Total net sales growth.......................... 17.0% 24.5% 20.8% 23.3% 18.4%
Gross income rate(7)............................ 33.3% 29.6% 23.5% 17.8% 27.6%
Operating income (loss) rate(7)................. 7.6% 3.8% (3.4)% (9.0)% 1.8%
Total number of stores open at fiscal year end.. 319 312 308 288 212
Total square feet at fiscal year end............ 1,281 1,244 1,224 1,143 838
Sales per average square foot(8)................ $ 300 $ 259 $ 214 $ 207 $ 226
- -------------------
<FN>
(1) Represents the 53-week fiscal year ended February 3, 1996.
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Summary Financial and Operating Data (continued)
(2) Gross income equals net sales less costs of goods sold, occupancy and
buying costs, including charges and allocations made by The Limited to us.
(3) General, administrative and store operating expenses include charges and
allocations made by The Limited to us.
(4) Pro forma net income includes interest expense and financing fees, net of
the related tax benefit, on approximately $51 million of indebtedness we
expect to incur under our new credit facility shortly before the date of
the spin-off. Proceeds from the debt incurred will be used to pay a $50
million dividend to The Limited and $1.25 million of financing fees to the
lenders under our new credit facility.
(5) Pro forma diluted net income per share is based on pro forma net income
and the diluted weighted average number of shares of our common stock
expected to be outstanding immediately after the spin-off plus shares
related to stock options and restricted stock assumed to be granted as of
the date of the spin-off under the Too, Inc. 1999 Stock Option and
Performance Incentive Plan and the Too, Inc. 1999 Non-Associate Director
Stock Plan. The actual number of dilutive options and restricted stock
will vary. Pro forma diluted net income per share is not necessarily
indicative of what actual diluted net income per share would have been if
the spin-off had occurred on the basis assumed.
(6) A store is included in our comparable store sales calculation once it has
completed 52 weeks of operation. Further, stores that are expanded or
downsized more than 20% in square feet are treated as new stores for
purposes of this calculation.
(7) Calculated as a percentage of net sales.
(8) Sales per average square foot is the result of dividing net sales for the
period by average gross square foot, which reflects the impact of opening
and closing stores in different periods throughout the year.
</FN>
</TABLE>
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RISK FACTORS
You should carefully consider each of the following risks and all of the
other information in this information statement. Some of the following risks
relate principally to our spin-off from The Limited. Other risks relate
principally to our business in general and the industry in which we operate.
Finally, other risks relate principally to our corporate documents, such as our
certificate of incorporation and bylaws, as well as the legal environment and
how these affect the ownership of our stock and our ability to declare
dividends. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to
us or that we currently believe to be immaterial may also adversely affect our
business.
If any of the following risks and uncertainties develop into actual
events, our business, financial condition or results of operations could be
materially adversely affected. If this occurs, the trading price of our common
stock could decline, and you may lose all or part of your investment.
This information statement contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including the risks that we face described below and elsewhere
in this information statement.
Risk Factors Relating to Separating Our Company from The Limited
We face the following risks in connection with our spin-off from The
Limited.
We Will No Longer Benefit from the Business Relationships that The Limited
Extends to Us or the Services that The Limited Provides to Us
As one of The Limited's subsidiaries, we are able to benefit from The
Limited's financial strengths and extensive network of business relationships.
After the spin-off, we will be a stand-alone company and will no longer be able
to benefit from The Limited's relationships or use The Limited's services on a
long-term basis. Although we will enter into agreements with The Limited so
that it will continue to provide services to us, these agreements will be of
short duration -- generally up to 12 months. We cannot assure you that after
the expiration of these various arrangements, we will be able to replace these
services in a timely manner and on terms and conditions, including cost, as
favorable as those we received from The Limited.
We May Incur Costs or Be Forced to Relocate Stores Which Are Adjacent to or
Departments Within The Limited Stores
As of April 30, 1999, 131 of our stores were adjacent to or not fully
separated from The Limited stores, including six stores which were departments
within The Limited stores. 127 of our stores occupy space that The Limited, or
an affiliate of The Limited, other than us, has leased from landlords, and we
have no direct lease arrangements with the landlords of these stores. The
Limited may decide to close any or all of these 131 stores without consulting
with us, and The Limited is not obligated to consider the profitability of our
adjacent stores or departments before making its decision.
If The Limited closes one or more of these 131 stores, several things may
happen, including:
o we may, if available and on acceptable terms, lease the entire retail
space that includes our own space and The Limited's store space
directly from the landlord or from The Limited, which may involve
remodeling costs
o we may, if available and on acceptable terms, lease our own store
space directly from the landlord which may involve costs to
physically separate our stores from space occupied by The Limited
stores so that our store space is free-standing. This separation may
involve building walls in the cross-over space between
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the two stores, creating separate back rooms and utilities and in
some instances, creating separate access to corridors
o we may be forced to close our existing location and incur costs to
relocate to an alternative location in the same mall
o we may not be able to obtain alternative space in the same mall on
acceptable terms and may be forced to relocate to another mall, in
which case we would not receive any compensation from The Limited as
described below
o we may incur incremental rent expenses whether we remain in our
current store or relocate to a new store
o we may lose sales during any period that we are remodeling an
existing store or constructing a relocated store
Under an agreement that we will enter into with The Limited in connection
with the spin-off, The Limited would compensate us if The Limited decides to
close any of those 131 stores and we remain in the same mall with a combination
of cash payments and loans for each store that The Limited closes. The
compensation is described under "Relationship between The Limited and Limited
Too--Transitional Services and Separation Agreements -- Store Leases Agreement
- -- Adjacent Stores and Departments."
We estimate that the costs of separation for those stores that are
currently adjacent to The Limited stores would range from $50,000 to $350,000
per store, and would be, on average, approximately $170,000 per store. The
actual costs of separation would depend on the nature of the shared space
involved. For our six stores which are departments within The Limited stores,
we may need to relocate if The Limited closes its stores, which may cost up to
$500,000 in each instance.
We cannot assure you that the amounts that we would receive from The
Limited would be sufficient to cover the costs of separating, relocating or
reimbursing us for incremental rent increases for each store, or that the
estimated costs of separation and relocation accurately reflects what the
actual costs may be. We also cannot assure you that we will be able to enter
into new leases for alternative mall locations on agreeable terms or at all.
We May Not Be Able to Obtain Suitable Real Estate to Implement Our Growth
Strategy
The Limited's expertise in real estate matters and The Limited's size and
reputation as one of the largest specialty retailers in the United States may
have enabled us to obtain lease terms and store sites that were more favorable
than those that we would have been able to obtain on our own. We cannot assure
you that we will be able to achieve the same economies of scale and bargaining
leverage.
110 of the existing 194 direct leases into which we have entered have been
guaranteed by The Limited. In addition, 127 of our stores occupy space that The
Limited, or an affiliate of The Limited, other than us, has leased from
landlords. Under an agreement that we will enter into with The Limited in
connection with the spin-off, as described in "Relationship Between Too, Inc.
and The Limited--Transitional Services and Separation Agreements--Store Leases
Agreement," the lease guarantees that The Limited provides which are in effect
on the date of the spin-off will remain in effect for the remaining initial
term of the lease unless we negotiate the elimination of these guarantees with
the landlord on acceptable terms or if we amend the existing lease. The Limited
will not guarantee any of our new leases that we enter into or any extensions
or renewals of our existing leases after the spin-off.
Some of our stores are governed by leases that require us to notify the
landlord or obtain the landlord's consent for a change of control of the
lessee. We cannot assure you that the landlord will consent to the change of
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control caused by the spin-off. Our failure to renew existing leases on
historical terms or to obtain suitable store sites on attractive terms may
hinder our store expansion plans.
We Will License the "Limited Too" Brand Name from The Limited, Which May
Restrict Our Business
In connection with the spin-off, we and The Limited intend to enter into
an exclusive trademark and service mark license agreement that will allow us to
operate under the "Limited Too" brand name. The agreement will be for an
initial term of five years after the spin-off, renewable annually at our
option. In return, we will be required to provide The Limited with the right to
inspect our stores and distribution facilities and an ability to review and
approve our advertising. The Limited will have the right to terminate the
agreement if:
o we breach any of our obligations under the agreement and do not cure
the breach within 30 days after receiving notice of the breach
o we become bankrupt or insolvent
o we experience a change of control
The agreement will also restrict the way in which we use the licensed
brand in our business. Without The Limited's consent, we will only be able to
use the brand name "Limited Too" in connection with any business in which we
sell to our current target customer group or to infants and toddlers.
If in the future we are unable to continue using the brand "Limited Too",
we may be forced to change our brand name. Because all of our merchandise is
currently sold under the "Limited Too" label and in stores called "Limited
Too", a name change might cause confusion for our customers and adversely
affect our brand recognition, which is a significant part of our business
strategy. We may need to expend substantial resources, which we cannot estimate
at this time, to establish brand recognition if we are required to change our
name.
Our Historical Financial Information May Not Be Representative of Our Results
as a Separate Company
The historical financial information we have included in this information
statement may not reflect what our results of operations, financial position
and cash flows would have been had we been a separate, stand-alone company
during the periods presented or what our results of operations, financial
position and cash flows will be in the future. This is because:
o various adjustments and allocations were made to the historical
financial statements in this information statement because The
Limited did not account for us as a single stand-alone business for
all periods presented
o the historical information does not reflect many significant changes
that will occur in our financial condition, capital structure and
operations as a result of our separation from The Limited
o the historical information does not reflect the indebtedness under
our new credit facility and the costs associated with borrowing under
the facility
We cannot assure you that the adjustments and allocations we have made in
preparing our historical and pro forma consolidated financial statements
appropriately reflect our operations during the periods presented as if we had
operated as a stand-alone company, nor can we predict what the actual effect of
our separation from The Limited will be.
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Our Stock Price May Fluctuate Significantly After the Spin-Off, and You Could
Lose All or Part of Your Investment as a Result
Before the spin-off, there will have been no public market for our common
stock. We will apply to list our common stock on the New York Stock Exchange.
Once issued, we do not know how our common stock will trade in the future.
The market price of our common stock may fluctuate significantly due to a
number of factors, some of which may be beyond our control, including:
o our business profile may not fit the investment objectives of The
Limited's shareholders, causing them to sell our shares after the
spin-off
o actual or anticipated fluctuations in our operating results
o absence of securities analysts covering our company and distributing
research and investment recommendations about our company
o changes in earnings estimated by securities analysts or our ability
to meet those estimates
o the operating and stock price performance of other comparable
companies
o overall stock market fluctuations
o the retail environment
o economic conditions
In particular, the realization of any of the risks described in these
"Risk Factors" could have a significant and adverse impact on the market price
of our common stock. In addition, the stock market in general has experienced
extreme volatility that has often been unrelated or disproportionate to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the trading price of our common stock, regardless of our
actual operating performance. Additionally, if our quarterly results of
operations fluctuate significantly as a result of the seasonality of the retail
industry, the timing and costs of new store openings and remodelings or
expansions of existing stores, the performance of new and existing stores,
merchandise mix and fashion trends, the market price of our common stock may be
affected.
Risk Factors Relating to Our Business
Our business faces the following risks, which include risks relating to
the industry in which we operate. The Limited also faces a number of these same
risks.
We May Not Be Able to Sustain Our Growth Rate Which Could Adversely Affect
Our Business
We have grown rapidly over the past few years. We may not be able to
continue to grow profitably or at rates consistent with our recent past. Our
future growth prospects are dependent upon a number of factors, including:
o the availability of suitable markets and sites for our stores and our
ability to negotiate leases on acceptable terms for those stores
o our ability to fulfill our plans to open new stores and remodel or
expand existing stores
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o our ability to enter new distribution channels, including the launch
of our catalog and the creation of our website
o our ability to attract and retain talented personnel and to expand
our infrastructure to accommodate our growth, including our ability
to maintain high levels of customer service by hiring and training
qualified sales associates
o the capacity to expand or add distribution facilities, the effective
management of our inventory and timely delivery of our merchandise
o our ability to keep up with constantly shifting fashion trends and
develop new and appealing merchandise
We will require substantial capital expenditures to implement our business
strategy, in particular our opening of new stores and our remodeling or
expansion of our existing stores, which we estimate will require capital
expenditures of approximately $23 to $27 million in fiscal 1999. If we do not
generate sufficient cash flow from operations or if we are unable to obtain
sufficient financing under our new credit facility or on other acceptable
terms, we may be required to reduce our planned capital expenditures, which
could have a material adverse effect on our growth prospects and the market
price of our common stock. In the past, our capital needs, including those for
working capital, have been provided by The Limited as part of its overall
capital expenditure and treasury management strategy. After our spin-off from
The Limited, The Limited will no longer provide financing for our operations.
Further, we may not be able to obtain financing at interest rates or on terms
that are as favorable as those enjoyed historically by The Limited.
We May Not Be Able to Maintain Our Comparable Store Sales Growth
Our comparable store sales have fluctuated significantly in the past.
Comparable store sales will continue to fluctuate and may be affected by many
factors, including:
o competition
o economic conditions
o keeping up with fashion trends
o weather conditions
o new store openings in existing markets
o procurement and management of merchandise inventory
o customer response to new and existing styles
o store remodelings and expansions
We may not maintain comparable store sales growth at our current levels.
Our stock price may be materially adversely affected by declines and
fluctuations in our comparable store sales.
The Seasonality of the Retail Industry Could Adversely Affect Our Business
We experience seasonal fluctuations in our net sales and net income, with
a disproportionate amount of our net sales and a majority of our net income
typically realized during our fourth quarter due to sales from the holiday
season. We also generate significant net sales during the "back to school"
period in the third quarter. Any decrease
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in sales or margins during those periods could have material adverse results on
our financial condition and results of operations.
Seasonal fluctuations also affect our inventory levels, since we usually
order merchandise in advance of peak selling periods and sometimes before new
fashion trends are confirmed by customer purchases. We must carry a significant
amount of inventory, especially before the holiday season and "back to school"
selling periods.
We May Be Unable to Compete Favorably in Our Highly Competitive Segment of
the Retail Industry
The girls' retail apparel and accessories industry is highly competitive.
We expect competition in this market to increase, because there are few
barriers to entry in this market and our success may attract additional
competitors. Increased competition could result in pricing pressures, increased
marketing expenditures and loss of our market share, all of which could have a
material adverse effect on our financial condition and results of operations.
We compete for sales primarily with specialty apparel and accessory
retailers, such as GapKids and Claire's, department stores and discount
retailers. Other specialty retailers, such as Abercrombie & Fitch, have
recently begun to enter into the market for pre-teen apparel. In addition to
the traditional store-based retailers, we also compete with direct marketers
who target customers through catalogs and Internet shopping. Direct marketers
also include traditional store-based retailers like us who are expanding into
catalogs and the Internet as additional distribution channels. Some of our
competitors may have greater financial, marketing and other resources available
to them. In many cases, our primary competitors are located in the same
shopping malls as our stores, and in addition to competing for sales, we
compete for favorable site locations and lease terms in shopping malls.
Our Business May Be Adversely Affected If We Lose Key Personnel
We believe that we have benefitted substantially from Leslie H. Wexner's
leadership. Mr. Wexner is the chairman, president and chief executive officer
of The Limited. Mr. Wexner's services with us will terminate after the
spin-off. We have also benefitted significantly from Michael Rayden's
leadership. Mr. Rayden is our president and chief executive officer, and the
loss of his services could have a material adverse effect on our business and
prospects. We expect to enter into an employment agreement with Mr. Rayden
before or simultaneously with the spin-off. See "Management -- Employment
Agreements with Executive Officers."
We May Not Be Able to Keep Up with Fashion Trends
Our success depends in part on our management's ability to anticipate the
fashion tastes of our young customers and to offer merchandise which appeals to
them on a timely and affordable basis. We expect our customers' fashion tastes
to change frequently. If we are unable to successfully anticipate, identify or
react to changing styles or trends, our sales will be lower and we may have
excess inventories. In response, we may be forced to increase our marketing
promotions or price markdowns, which could have a material adverse effect on
our business. Our brand image may also suffer if our young customers believe
that our merchandise misjudgments indicate that we are no longer able to offer
them the latest fashions.
Our Business Is Sensitive to Economic Conditions and Consumer Spending
Our business is sensitive to changes in the overall economic conditions
and consumer spending patterns. Our growth, sales and profitability may be
adversely affected by unfavorable local, regional or national economic
conditions. In addition, shifts in consumer discretionary spending among our
customers for other goods including music, entertainment and electronic
products could also adversely affect our business.
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Mall Traffic and Lease Space Have a Significant Impact on Our Business
Substantially all of our stores are located in regional shopping malls.
Our sales are derived, in part, from the high volume of traffic in those malls.
We benefit from the ability of the mall's "anchor" tenants, generally large
department stores, and other area attractions to generate consumer traffic in
our stores' vicinity and the continuing popularity of malls as shopping
destinations. Sales volume and mall traffic may be adversely affected by
economic downturns in a particular area, competition from non-mall retailers
and other malls where we do not have stores and the closing of anchor
department stores. In addition, a decline in the desirability of the shopping
environment in a particular mall, or a decline in the popularity of mall
shopping among our target consumers, could affect our business.
Since we are primarily a mall-based chain, our future growth is
significantly dependent on our ability to open new stores in desirable mall
locations. We cannot assure you as to when or whether such desirable locations
will become available.
Our Inability to Effectively Address the Year 2000 Issue May Disrupt Our
Business
The Year 2000 issue arises primarily from computer programs, commercial
systems and embedded chips that will be unable to properly interpret dates
beyond 1999. This could result in system failure or miscalculations. The Year
2000 issue may result in our inability to engage in normal business activities
resulting from one or more of the following:
o the loss of communications links with store locations
o disruptions in the movement of inventory to and from our vendors and
distribution center and between store locations
o the failure of our inventory management systems
o the inability to process transactions with customers or to execute
purchase orders with suppliers
o the failure of basic services, such as utilities
Presently, not all of our information systems are Year 2000 ready, and not
all of the third parties with whom we conduct our business have indicated that
their information systems are Year 2000 ready.
We are currently part of the Year 2000 readiness efforts undertaken by The
Limited, which will continue after the spin-off under a services agreement with
The Limited. Working with our management team, The Limited is making changes
to, or replacing, our information systems to make them Year 2000 ready,
including installing new software and hardware to support our inventory
planning, merchandising and finance functions. Various third parties with whom
we conduct business have notified The Limited that they are in the process of
becoming Year 2000 ready. However, if The Limited and these third parties do
not complete this work effectively or on time, we will be materially adversely
affected.
We discuss The Limited's Year 2000 effort, the potential impact of the
Year 2000 on our business, our expected costs to address our Year 2000 issues
and our contingency plans under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Readiness." 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.
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Our Expansion into Catalog and Internet Distribution Channels May Not Be
Successful
Our business strategy includes exploring new channels of distribution,
such as a catalog which we plan to mail in October 1999 for the holiday season
and an informational website which we plan to launch in the fall of 1999. We
have no operating history in these new channels of distribution. We intend to
establish adequate infrastructures to allow these new distribution channels to
become self-sustaining, which includes a plan to hire additional qualified
personnel. The timing of the launch of our website and catalog may be
significantly affected by our ability to develop such infrastructure. In
addition, our efforts to enter into these new channels may place a strain on
our managerial, operational and financial resources. We cannot assure you that:
o we will be able to manage effectively our expansion into these new
channels
o we will be able to establish systems, procedures and controls
adequate to support these channels
o our management will be able to achieve the rapid execution necessary
to fully exploit new market opportunities
We also face competition from established retailers in these new areas.
Our website will initially be informational, although we intend to permit
our customers to order our merchandise on-line in the future, and we intend to
link our on-line business to our catalog business. Our success will depend on
our ability to attract customers and provide them with a superior shopping
experience. In addition, we will need to coordinate the fulfillment and service
of customer orders, for which we have not established an infrastructure.
Currently, few laws or regulations directly apply to access to or commerce
on the Internet. As Internet commerce evolves, federal or state governments may
adopt regulations covering issues such as user privacy, pricing, content and
quality of products and services. If enacted, such laws or regulations, in
particular laws regulating the solicitation, collection or processing of
personal consumer information, could limit the potential for this distribution
channel.
We intend to mail our catalogs to names in our frequent buyer database,
and we may obtain additional names by purchasing or renting qualified names
from other third parties' mailing lists. There has been increasing public
concern regarding the compilation, use and distribution of information about
teens and children. The U.S. Federal Trade Commission recently proposed
regulations to implement the Children's Online Privacy Protection Act of 1998,
which places restrictions on persons, principally list brokers, that sell,
purchase or otherwise use for commercial purposes personal information about
teens (under the age of 16) and children. These and future regulations may
limit our ability to obtain lists of potential customers.
We Will Incur a Significant Amount of Debt Which We May Not Be Able to
Service
We will incur a significant amount of indebtedness in connection with the
spin-off. On a pro forma basis, as of January 30, 1999, we had: (a) total
consolidated indebtedness of approximately $51 million; and (b) $49 million of
borrowings available under our new credit facility, subject to customary
conditions. Our new credit facility, which is likely to be secured, precludes
us from securing additional indebtedness over stipulated amounts. In addition,
as previously described under "--We May Incur Costs or Be Forced to Relocate
Stores Which Are Adjacent To or Departments Within The Limited Stores," we may
also borrow money from The Limited in connection with the closing of our stores
adjacent to or departments within The Limited.
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The level of our indebtedness could have important consequences,
including:
o limiting cash flow available for general corporate purposes because a
portion of our cash flow from operations must be dedicated to
servicing our debt
o limiting our ability to obtain additional financing in the future for
working capital or capital expenditures
o limiting our flexibility to react to competitive and other changes in
our industry and economic conditions generally
Our ability to pay or to refinance our indebtedness will depend upon our
future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond our control.
We anticipate that our operating cash flow, together with money we can
borrow under our new credit facility, will be sufficient to meet anticipated
future operating expenses, to fund capital expenditures and to service our debt
as it becomes due. If we were still unable to meet our debt service
obligations, we may attempt to restructure or refinance our indebtedness or
seek additional equity capital. We cannot assure you that we will be able to
accomplish that on satisfactory terms, if at all.
The Planned Upgrades of the Management Information Systems That We Use May
Not Be Successful
We rely on management information systems that we own or that The Limited
provides to us for all major aspects of our business. After our management
information systems become Year 2000 ready, we expect to upgrade many of these
systems. We will be materially adversely affected if these systems are not
improved, upgraded or expanded on an effective basis or if our systems are
disrupted. Current hardware and network infrastructure is being upgraded
through:
o the creation of store, marketing and customer databases to improve
controls and enhance sales and operational capabilities
o the implementation of a new warehouse management system
o the upgrading of distribution facilities to expand capacity
We may not be able to process our transactions at alternative sites and
platforms after our services agreement with The Limited expires. We cannot
assure you that we will complete our planned upgrades on a timely basis or in a
successful manner.
We Will Need to Comply with Existing and New Regulations that Govern Us
Currently, much of our personal care and lifestyle merchandise are subject
to various regulations stipulated by the U.S. Food and Drug Administration,
Federal Trade Commission and the U.S. Consumer Product Safety Commission. As we
expand our merchandise assortment and increase the number of our suppliers to
accommodate our growth, we may be governed by new regulations that may be more
difficult to comply with.
For example, we are required to meet federal flammability standards for
children's sleepwear. These standards require sleepwear to be flame-resistant,
and if the fabric ignites, for the flame to self-extinguish. Failure to meet
the flammability standards presents a risk of serious burn injuries to
children. We require our suppliers to ensure that these standards are met;
however, they may source products from other suppliers, in particular foreign
suppliers, who, despite our best efforts, may not adhere to these standards. We
may be forced to voluntarily recall the merchandise in question and give full
refunds to our customers.
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In September 1998, in cooperation with the U.S. Consumer Product Safety
Commission, we voluntarily recalled approximately 390,000 children's satin
pajama sets. In January 1999, we voluntarily recalled approximately 17,600
girls' fleece robes. Our supplier incurred all of the costs, not including a
major portion of our lost profits, related to the recalls. These kinds of
recalls may occur in the future and may have adverse effects on sales,
performance, operating results, business opportunities and our reputation.
While we continuously update our standards for our vendor partners to ensure
compliance, we cannot assure you that these standards will be met.
Our Reliance on Foreign Sources of Production May Adversely Affect Our
Business
In 1998, we sourced over 60% of our merchandise from foreign factories
located primarily in East and Southeast Asia. We do not have any long-term
merchandise supply contracts, and many of our imports are subject to existing
or potential duties, tariffs or quotas that may limit the quantity of goods
which may be imported into the United States from countries in that region. We
compete with other companies, including The Limited and The Limited's other
subsidiaries, for production facilities and import quota capacity.
Our business also faces a variety of other risks generally associated with
doing business in foreign markets and importing merchandise from abroad, such
as:
o political instability
o currency and exchange risks
o local business practice and political issues, including issues
relating to compliance with domestic or international labor standards
Our future performance will depend upon these factors, which are beyond our
control. These factors may have a material adverse effect on our business.
Risk Factors Relating to Our Corporate Documents and the Legal Environment
In connection with the ownership of our stock, you should consider the
following risks relating to our corporate documents and the legal environment.
These risks may affect our ability to execute business combinations and change
of control transactions and to declare dividends.
Provisions in Our Corporate Documents Could Delay or Prevent a Change in
Control of Our Company, Which Could Adversely Affect the Price of Our Common
Stock
Our certificate of incorporation and bylaws contain a number of provisions
that could impede a merger, consolidation, takeover or other business
combination involving us or discourage a potential acquiror from making a
tender offer or otherwise attempting to obtain control of us. Those provisions
include:
o a requirement that the holders of at least 75% of our outstanding
common stock must approve a merger or consolidation with persons or
entities that beneficially own at least 5% of our common stock, a
sale of all or substantially all of our assets to those persons or
entities or other control transactions, unless the proposed
transaction is approved by a majority of the directors who were in
office immediately before the time when such ownership was acquired,
or by their approved successors
o a classified board of directors in which the board members are
divided into three classes, each of which serves a staggered
three-year term
o a requirement that only the holders of at least 75% of our
outstanding common stock may approve any amendment or repeal of our
bylaws and specified provisions of our certificate of incorporation
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o an authorization of the adoption of a rights plan that may be
redeemed only by a majority of the directors who were in office when
the rights plan was adopted or by their approved successors
After the spin-off, we expect that Mr. Wexner and his related interests
will own approximately % of the shares of our common stock. This may impede a
change in control of our company without his support.
We will enter into a distribution agreement in connection with the
spin-off which will provide that no person or group may acquire beneficial
ownership of more than 35% of our common stock, unless before the acquisition
takes place, the acquiror has provided to The Limited a guarantee of our
indemnity and other obligations under the distribution agreement and other
agreements. In addition, if any person or group acquires such beneficial
ownership of us, The Limited may immediately stop providing transitional
services.
We Will Not Be Able to Pay Dividends in the Foreseeable Future
We anticipate that future earnings will be used principally to support
operations and finance the growth of our business. Thus, we do not intend to
pay cash dividends on our common stock in the foreseeable future. Payment of
dividends will also be restricted by provisions in our new credit facility. If
our lenders permit us to declare dividends, the dividend amounts, if any, will
be determined by our board. Our board will consider a number of factors,
including our financial condition, capital requirements, funds generated from
operations, future business prospects, applicable contractual restrictions and
any other factors our board may deem relevant.
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THE SPIN-OFF
Background to and Reasons for the Spin-Off
Over the past several years, The Limited's board of directors and senior
management have embarked upon a comprehensive review of The Limited's
organization structure and operations, with the primary goals of generating
maximum value for The Limited's shareholders and focusing its resources on its
key strategic business. To date, The Limited has taken a number of actions in
furtherance of these goals:
o the 1995 initial public offering of common stock of Intimate Brands,
Inc., which consisted of The Limited's Victoria's Secret Stores,
Victoria's Secret Catalogue, Bath & Body Works, Cacique, Penhaligon's
and Gryphon businesses. The offering resulted in a gain of
approximately $649 million. After this offering, The Limited retained
approximately 83% of the economic interests in, and approximately 94%
of the total voting power of, Intimate Brands
o the sale of our interest in approximately $1.3 billion of credit card
accounts receivable owned by World Financial Network National Bank,
The Limited's credit card bank. This transaction was completed in
1995 and resulted in net cash proceeds of approximately $1.2 billion
o the 1995 sale of a 60% interest in World Financial Network National
Bank to an affiliate of Welsh, Carson, Anderson and Stowe VII, L.P.
for approximately $135 million in cash
o a distribution of $1.6 billion of the cash received from the
foregoing three transactions to The Limited's shareholders through an
issuer self tender in March 1996
o the 1996 initial public offering of the Class A common stock of
Abercrombie & Fitch Co. The offering resulted in a gain of
approximately $118 million. After this offering, The Limited retained
approximately 84% of the economic interest in, and approximately 94%
of the total voting power of, Abercrombie & Fitch
o the 1997 public offering of a significant portion of The Limited's
interest in Brylane, Inc., consisting principally of the Lerner and
Lane Bryant catalog businesses. In 1998, The Limited sold its
remaining interest in Brylane for approximately $131 million in cash.
These actions followed the 1993 sale by The Limited of 60% of its
interest in Brylane to an affiliate of Freeman Spogli & Co.
o the 1997 sales of The Limited's interests in:
- the Newport Office Tower in Jersey City, New Jersey to
TrizecHahn Office Properties for approximately $159 million in
cash
- The Mall at Tuttle Crossing in Columbus, Ohio to a unit of
Taubman Centers Inc. for approximately $76 million in cash
o the 1997 sale of Intimate Brands' Penhaligon's business
o the 1997 closure of Intimate Brands' Cacique business
o the 1997 decision to streamline The Limited's Henri Bendel business.
In 1998, The Limited closed all of its Henri Bendel locations other
than its flagship store in New York City
o the complete separation of Abercrombie & Fitch from The Limited in
1998 through an exchange of shares of The Limited's common stock for
shares of the Class A common stock of Abercrombie & Fitch
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owned by The Limited which resulted in the acquisition of 47.1
million shares of The Limited's common stock from The Limited's
shareholders
o the closure of 750 underperforming stores between 1995 and 1998,
primarily in women's apparel, excluding the closure of Cacique stores
In early 1998, the chairman of The Limited informed shareholders that as
part of its ongoing consideration of strategic alternatives, The Limited
intends to streamline operations and focus on core brands. During this time,
The Limited began to explore various transaction structures to continue to
implement these goals with respect to The Limited's interest in our business.
In late 1998, The Limited acknowledged that Limited Too had become an
established business with a unique customer base, a focused brand image and a
profitable growth strategy. It then retained J.P. Morgan Securities Inc. as a
financial adviser, Davis Polk & Wardwell as legal counsel and other advisers to
begin an analysis of various alternatives, including the possibility of
designing, formulating and implementing a plan to separate us from The Limited.
In this strategic review, The Limited worked with its advisers, legal counsel
and accountants to analyze and evaluate issues such as the strategic,
financial, market, credit, tax, accounting and regulatory implications of
various alternative transactions and structures.
After considering these transactions and structures, The Limited's board
gave the approval to proceed with actions toward separating our business from
The Limited by means of a 100% spin-off. That decision by The Limited's board
and its executive committee was based on the following material factors:
o First, The Limited believed that having two separate public companies
would enable the financial markets to evaluate each company more
effectively, thereby maximizing shareholder value over the long term
for both The Limited and Too, Inc.
o Second, The Limited concluded that separate management and ownership
structures for Too, Inc. would provide incentives to Too, Inc.'s
management and direct accountability to public investors.
o Third, The Limited recognized that the spin-off would provide our
management with increased strategic flexibility and decision-making
power to realize the significant growth opportunities that it has
identified.
o Finally, The Limited determined that its distribution of our common
stock would further the various objectives outlined above and that
the complete separation of us from The Limited would be in the best
interests of The Limited, the Limited Too business and The Limited's
shareholders.
The spin-off is intended to allow us to grow as an independent company, since
we have demonstrated that we have a unique customer base, a focused brand image
and a profitable growth strategy. At the same time, our separation allows The
Limited to focus its resources on its other brands where it can add more value.
Description of the Spin-Off
The distribution agreement between The Limited and us provides the general
terms and conditions relating to the spin-off. See "Relationship Between Too,
Inc. and The Limited--Distribution Agreement."
The Limited will effect the spin-off on or about , 1999 by
providing for the delivery of the shares of our common stock to EquiServe,
First Chicago Division, for distribution to each holder of record of The
Limited's common stock at the close of business on the record date.
In the spin-off, each eligible recipient of our shares will receive one
share of our common stock for every share(s) of The Limited's common stock
that the recipient holds at the close of business on the record date for the
spin-off. The actual total number of shares of our common stock to be
distributed will depend on the number of shares of The Limited's common stock
outstanding on the record date. Based on the number of shares of
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The Limited's common stock outstanding as of , 1999, we estimate
that we will distribute approximately million shares of our common stock to The
Limited's shareholders. Immediately after the spin-off, we estimate that
approximately shareholders of record will hold shares of our common stock,
although some of the shares may be registered in the name of a single
shareholder who represents a number of shareholders.
We anticipate that in connection with the spin-off, options related to The
Limited's common stock and restricted shares of its common stock held by
employees of The Limited and Too, Inc. will be equitably adjusted to reflect
the spin-off.
In the spin-off, The Limited will distribute 100% of the outstanding
shares of our common stock to The Limited's shareholders. The shares of our
common stock will be validly issued, fully paid and nonassessable, and the
holders of these shares will not be entitled to preemptive rights. See
"Description of Capital Stock." The Limited will mail you certificates
representing your proportionate number of whole shares of our common stock on
the date of the spin-off or as soon after this day as practicable.
We will not issue any certificates representing fractional shares of our
common stock as part of the spin-off. EquiServe will aggregate all fractional
interests into whole shares and sell them in the open market at then prevailing
prices on behalf of holders who would be entitled to receive fractional
interests. These holders will receive cash payments in the amount of their
proportionate share of the total sale proceeds from the sale of the fractional
shares. EquiServe will pay the proceeds from these sales based upon the average
gross selling price per share of our common stock. See "--Material Federal
Income Tax Consequences of the Spin-Off." The Limited will bear the cost of
commissions incurred in connection with these sales. We anticipate that these
sales will occur as soon after the date of the spin-off as practicable.
The Limited, Too, Inc. or EquiServe will not guarantee any minimum sale
price for the fractional shares of our common stock. Neither we nor The Limited
will pay any interest on the proceeds from the sale of fractional shares.
Material Federal Income Tax Consequences of the Spin-Off
Before the spin-off, The Limited will receive an opinion of Davis Polk &
Wardwell stating that the spin-off should qualify as tax-free to The Limited
and its shareholders under Section 355 of the Internal Revenue Code. The
Limited will not seek a private letter ruling relating to the spin-off from the
IRS.
Assuming that the spin-off qualifies as tax-free for federal income tax
purposes:
o Except as described below with respect to fractional shares,
shareholders of The Limited will not recognize gain or loss as a
result of the spin-off.
o Cash received instead of a fractional share will be treated as
received in exchange for the fractional share. Gain or loss will be
recognized to a recipient shareholder to the extent of the difference
between the shareholder's basis in the fractional share and the
amount received for the fractional share. If the fractional share
interest is held as a capital asset by the recipient shareholder, the
gain or loss will be a capital gain or loss.
o You, as a shareholder of The Limited, will apportion your tax basis
in The Limited's common stock between The Limited's common stock and
our common stock received in the spin-off in proportion to the
relative fair market values of The Limited's common stock and our
common stock on the date of the spin-off.
o If you hold The Limited's common stock as a capital asset as of the
date of the spin-off, your holding period for our common stock
received in the spin-off will include the period during which you
held the common stock which enabled you to receive our common stock
in the spin-off.
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o The Limited generally will not recognize any gain or loss as a result
of the spin-off.
Opinions of counsel are not binding on the IRS or the courts. The IRS may
challenge positions taken based upon an opinion of counsel. Davis Polk &
Wardwell, however, is of the opinion that if the IRS were to assert that the
spin-off did not qualify as tax-free, the IRS should not prevail in a judicial
proceeding in which the issues and facts were properly presented.
If the spin-off does not qualify as tax-free, the fair market value of the
shares of our common stock received by The Limited's shareholders would be
taxable as a dividend to the extent of current-year and accumulated earnings
and profits. As a result, your tax basis in the shares of The Limited's common
stock would not change, and your tax basis in the shares of our common stock
would be their fair market value on the date of the spin-off. In addition, The
Limited would recognize a capital gain equal to the excess of the fair market
value of the shares of our common stock over its basis in these shares.
Current Treasury regulations require each shareholder of The Limited who
receives our common stock in the spin-off to attach a descriptive statement
concerning the spin-off to the shareholder's federal income tax return for the
year in which the spin-off occurs. The Limited, or Too, Inc. on behalf of The
Limited, will make available the required information to each shareholder of
record of The Limited as of the record date for the spin-off.
You should consult your tax adviser regarding the particular federal,
foreign, state and local tax consequences of the spin-off to you.
For a description of the agreements under which we and The Limited have
provided for tax sharing and other tax matters, see "Relationship Between Too,
Inc. and The Limited--Transitional Services and Separation Agreements--Tax
Separation Agreement."
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RELATIONSHIP BETWEEN TOO, INC. AND THE LIMITED
This section of the information statement describes material agreements
between The Limited and us that will govern the ongoing relationships between
the two companies after the spin-off and will provide for an orderly transition
to our status as a separate, independent company. Because this section provides
summaries of these agreements, it does not contain all of the information that
may be important to you. You should read the agreements, which we have filed as
exhibits to the Form 10 of which this information statement forms a part.
We believe that the terms of these agreements will be similar to terms
achievable through arm's length negotiations with third parties. Additional or
modified agreements, arrangements and transactions may be entered into between
The Limited and us after the spin-off, which we will attempt to negotiate at
arm's length as well.
Distribution Agreement
We and The Limited will enter into a distribution agreement in connection
with the spin-off. This agreement will:
o provide for the principal corporate transactions and procedures for
effecting the spin-off
o provide for the allocation of assets and liabilities between The
Limited and us on the effective date of the spin-off
Cross Indemnification
We and The Limited have agreed to indemnify one another against specified
liabilities. We have agreed to indemnify The Limited and its subsidiaries (The
Limited and its subsidiaries being "The Limited's Group") and their directors,
officers and affiliates (collectively, "The Limited's Indemnitees") from and
against any and all damage, loss, liability and expense incurred by any of The
Limited's Indemnitees arising out of or due to our failure to discharge any
obligations or liabilities of us and our subsidiaries (the "Too, Inc.'s Group")
under the distribution agreement, as well as all liabilities, whenever arising,
of the Too, Inc.'s Group, liabilities arising from or in connection with our
conduct of our business or our ownership or use of assets in connection with
our business and liabilities relating to our individual account plan.
The Limited has agreed to indemnify the Too, Inc.'s Group and our
directors, officers and affiliates (collectively, "Too, Inc.'s Indemnitees")
from and against any and all damage, loss, liability and expense incurred by
any of Too, Inc.'s Indemnitees arising out of or due to The Limited's failure
to discharge any obligations or liabilities of The Limited's Group under the
distribution agreement, as well as all liabilities, whenever arising, of The
Limited's Group, liabilities arising from or in connection with the conduct of
the businesses of The Limited's Group, other than our business, or The Limited
Group's ownership or use of assets in connection with their businesses and
liabilities relating to the Limited Group's savings and retirement plan.
In addition, we and The Limited have generally agreed to indemnify each
other and the other's affiliates and controlling persons from specified
liabilities under the securities laws relating to the Form 10 and this
information statement or to contribute under specified circumstances to the
amount paid or payable by the other in respect of the liabilities.
None of these indemnities applies to indemnification for tax liabilities,
which are addressed in the tax separation agreement described below under
"--Transitional Services and Separation Agreements--Tax Separation Agreement."
We do not believe that any of these indemnities will have a material adverse
effect on our business, financial condition or results of operations.
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The distribution agreement also includes procedures for notice and payment
of indemnification claims and generally provides that the indemnifying party
may assume the defense of a claim or suit brought by a third party. Any
indemnification amount paid under the foregoing indemnities is to be paid net
of the amount of any insurance or other amounts that would be payable by any
third party to the indemnified party in the absence of the indemnity and net of
any tax benefit to the indemnified party attributable to the relevant payment
or liability. The indemnification amount will be grossed up so that the
indemnified party receives 100% of the after-tax amount of the payment or
liability.
Conditions to the Spin-Off
The distribution agreement provides that the following conditions must be
satisfied or waived before or as of the date of the spin-off for the spin-off
to occur:
o the SEC must have declared effective the Form 10 filed with it under
the Securities Exchange Act of 1934
o the New York Stock Exchange must have approved the listing of our
common stock, subject to official notice of issuance
o The Limited's board must be satisfied that the spin-off will be paid
out of The Limited's surplus in accordance with Section 170 of the
Delaware General Corporation Law
o The Limited's board must have approved the spin-off and must not have
abandoned, deferred or modified the spin-off at any time before the
spin-off occurs
o The Limited, as our sole shareholder, must have elected our board
o our certificate of incorporation and bylaws must be in effect
o The Limited and we must have entered into the tax separation
agreement and other transitional services and separation agreements
o The Limited must have received an opinion of Davis Polk & Wardwell
relating to the tax-free nature of the spin-off
o our lenders must have made available a new credit facility in an
amount and on the terms satisfactory to The Limited and to us
Transfer of Assets
Assuming that either The Limited or we can obtain the necessary consents
of third parties or governmental or regulatory bodies:
o The Limited will use its best efforts to transfer to the Too, Inc.'s
Group all assets that relate solely to the business of the Too,
Inc.'s Group and that are not already owned by the Too, Inc.'s Group.
We will assume any liabilities associated with these assets.
o We will use our best efforts to transfer to The Limited's Group all
assets that relate solely to the business of The Limited's Group and
that are not already owned by The Limited's Group. The Limited will
assume any liabilities associated with these assets.
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Employee Benefits
The distribution agreement provides that The Limited will generally cease
to have any liability under its employee benefit plans with respect to
employees of the Too, Inc.'s Group after the spin-off. However, the full
account balances of current employees of the Too, Inc.'s Group in The Limited's
qualified and non-qualified plans will be transferred to similar successor
plans of Too, Inc.
Restriction on Solicitation or Employment of Employees
For a period of three years beginning on the date of the spin-off, we and
The Limited agree not to, and to cause our subsidiaries not to:
o solicit or otherwise attempt to induce or influence any associate of
the other party or a subsidiary to leave employment with his or her
then-current employer
o employ any exempt or salaried associate of the other party or a
subsidiary, except for any associate who was assigned solely to a
single store location
Net Investment with The Limited Account
The distribution agreement eliminates all investment accounts and loan
balances between The Limited and its subsidiaries, on the one hand, and us and
our subsidiaries, on the other, outstanding as of the spin-off. For additional
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition--Liquidity and Capital
Resources," "Unaudited Pro Forma Consolidated
Financial Statements" and "Capitalization."
Rights of The Limited If a Third Party Tries to Acquire Us
The distribution agreement generally provides that no person or group may
acquire beneficial ownership of more than 35% of our common stock, unless
before the acquisition takes place, the acquiror has provided to The Limited a
guarantee of our indemnity and other obligations under the distribution
agreement and other agreements. In addition, if any person or group acquires
such beneficial ownership of us, The Limited may immediately stop providing
transitional services.
Access to Information; Provision of Witnesses; Confidentiality
Under the distribution agreement, we and The Limited will, for a
reasonable period of time and with specified exceptions, allow the other party
and their specified representatives reasonable access to all records in our or
its possession relating to the business and affairs of the other party as
reasonably required. Access will be allowed for such purposes as auditing,
accounting, litigation, disclosure, reporting or regulatory compliance. Each
party will also use reasonable efforts to make available to the other its
officers, directors, employees and representatives as witnesses and will
otherwise cooperate with the other party in connection with any proceeding
arising out of its or the other party's business before the spin-off.
Except as otherwise provided in the distribution agreement, we, The
Limited and our respective officers, directors, employees, agents and
representatives will hold all information in our, its or their possession
concerning the other party in strict confidence.
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Transaction Expenses
The Limited will generally be responsible for all transaction expenses
relating to the spin-off that The Limited's Group or the Too, Inc.'s Group
incurs. However, we will be responsible for all fees and expenses incurred in
connection with our new credit facility, which is described under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Description of New Credit Facility."
Transitional Services and Separation Agreements
Our relationship with The Limited will also be governed by agreements that
we will enter into in connection with the spin-off, including:
o a store leases agreement
o a trademark and service mark license agreement
o a services agreement
o a tax separation agreement
o a lease amendment agreement
The material terms of these agreements are described below.
Store Leases Agreement
We and The Limited or its affiliates intend to enter into a store leases
agreement effective prior to or as of the date of the spin-off. Under this
agreement, we will:
o enter into arrangements regarding 127 of our stores where we
occupy space that The Limited or an affiliate of The Limited,
other than us, has leased from landlords (the "Direct Limited
Leases")
o receive compensation from The Limited in the form of cash
payments and loans if The Limited decides to close any of its
131 stores to which we are adjacent and we remain in the same
mall
o compensate The Limited for providing guarantees under our direct
leases for 110 stores (the "Direct Too, Inc. Leases")
Direct Limited Leases. We currently operate 127 stores under the Direct
Limited Leases. Under the store leases agreement, which formalizes our interest
in those spaces, we will be responsible for our pro rata share, based on square
feet occupied, of all costs and expenses (principally fixed rent) under the
Direct Limited Leases. This method of allocating costs and expenses is
consistent in all material respects with the allocation of similar costs and
expenses contained in our historical consolidated financial statements. See our
historical consolidated financial statements and the notes to those financial
statements included in this information statement. Management's estimate of the
store lease and other occupancy costs charge that we would have paid in fiscal
1998 if this agreement had been in effect during that period is approximately
$10.4 million.
Effective at the date of the spin-off, if our store sales in those stores
governed by the Direct Limited Leases exceed threshold sales levels, we will be
required to make additional payments to The Limited in connection with our
interests. The threshold sales level for each store will be determined in the
store leases agreement, and we will pay The Limited a portion of the sales
amount that exceeds the threshold sales level for each store for the remaining
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term of the relevant lease. Management's estimate of the amount that we would
have paid in fiscal 1998 if this agreement had been in effect during that
period is approximately $484,000. If our sales increase in these stores, the
amount of our cash payments would also increase. Assuming a 5.0% comparable
store sales growth for each of our stores operating under the Direct Limited
Leases, we estimate that the amount that we would be required to pay to The
Limited in fiscal 1999 is approximately $591,000.
Under the store leases agreement, we are committed to pay rent and related
costs through the expiration of the associated Direct Limited Leases.
Approximately 100 of the Direct Limited Leases of which we are a part are
scheduled to expire during 2005 or later. We may not assign or sublet our
interest in those premises, except to an affiliate, without The Limited's
consent, which The Limited may withhold in its sole discretion. If The Limited
intends to assign any of the Direct Limited Leases to any non-affiliate, it
will be required to give us 60 days' notice, and we will be allowed to
terminate our interest on that basis.
Adjacent Stores and Departments. As of April 30, 1999, 131 of our stores
were adjacent to The Limited stores, including six stores which were
departments within The Limited stores. As described above, 127 of these stores
are leased to The Limited or an affiliate of The Limited, other than us, and we
have no direct lease arrangements with the landlords of these stores. The
Limited may decide to close any or all of these 131 stores without consulting
with us, and The Limited is not obligated to consider the profitability of our
adjacent stores or departments before making its decision.
If The Limited closes one or more of these 131 stores, several things may
happen, including:
o we may, if available and on acceptable terms, lease the entire
retail space that includes our own space and The Limited's store
space directly from the landlord or from The Limited, which may
involve remodeling costs
o we may, if available and on acceptable terms, lease our own
store space directly from the landlord which may involve costs
to physically separate our stores from space occupied by The
Limited stores so that our store space is free-standing. This
separation may involve building walls in the cross-over space
between the two stores, creating separate back rooms and
utilities and in some instances, creating separate access to
corridors
o we may be forced to close our existing location and incur costs
to relocate to an alternative location in the same mall
o we may not be able to obtain alternative space in the same mall
on acceptable terms and may be forced to relocate to another
mall, in which case we would not receive any compensation from
The Limited as described below
o we may incur incremental rent expenses whether we remain in our
current store or relocate to a new store
o we may lose sales during any period that we are remodeling an
existing store or constructing a relocated store
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Under the store leases agreement, The Limited would compensate us if The
Limited decides to close any of those 131 stores and we remain in the same
mall, with a combination of cash payments and loans for each store that The
Limited closes. The cash payment and loans would vary, depending on the
remaining term of the affected store lease at the time the Limited closes its
adjacent store, as follows:
Cash Loan
Remaining Lease Term Payment Amount
- -------------------- ---------- ----------
Less than one year................................ -- $ 100,000
One to two years.................................. $ 50,000 100,000
Three to four years............................... 100,000 100,000
Greater than four years........................... 100,000 150,000
The loans would be based on market rates and terms. As of April 30, 1999,
approximately 100 of our stores adjacent to or departments within The Limited
stores are under the Direct Limited Leases with remaining terms greater than
four years. In addition, if The Limited closes in the aggregate 98 (75% of the
131 stores) of its stores to which we are adjacent or within which we have
departments and we remain in the same mall (the "Closure Threshold"), we will
receive an additional cash payment of $50,000 for each of our affected stores
with a remaining lease term greater than four years at the time The Limited
closes its store.
We estimate that the costs of separation for those stores that are
currently adjacent to The Limited stores would range from $50,000 to $350,000
per store, and would be, on average, approximately $170,000 per store. The
actual costs of separation would depend on the nature of the shared space
involved. For our six stores which are departments within The Limited stores,
we may need to relocate if The Limited closes its stores, which may cost up to
$500,000 in each instance.
We cannot assure you that the amounts that we would receive from The
Limited would be sufficient to cover the costs of separating, relocating or
reimbursing us for incremental rent increases for each store, or that the
estimated costs of separation and relocation accurately reflects what the
actual costs may be. We also cannot assure you that we will be able to enter
into new leases for alternative mall locations on agreeable terms or at all.
See "Risk Factors--Risk Factors Relating to Separating Our Company from The
Limited--We May Incur Costs or Be Forced to Relocate Stores Which Are Adjacent
to or Departments Within The Limited Stores."
In addition, the agreement will contain other provisions including:
o the party seeking to exercise a renewal option of a lease will pay
the costs of separating the adjacent stores. If both parties seek to
renew the lease, then we will divide the costs of separation equally
o if a party seeks to undertake a significant remodeling project, which
will be defined as a remodeling that costs $160,000 or more, then
that party will pay for the costs of separating the adjacent stores
Lease Guarantees. Approximately 110 of the existing 194 Direct Too, Inc.
Leases into which we have entered have been guaranteed by The Limited. Under
the store leases agreement, the lease guarantees that The Limited provides
which are in effect on the date of the spin-off will remain in effect for the
remaining initial term of the lease, unless we negotiate the elimination of
these guarantees with the landlord on acceptable terms or if we amend the
existing lease. The Limited will not guarantee any of our new leases that we
enter into or any extensions or renewals of our existing leases after the
spin-off.
Some of our stores are governed by leases that require us to notify the
landlord or obtain the landlord's consent for a change of control of the
lessee. We cannot assure you that the landlord will consent to the change of
control caused by the spin-off. See "Risk Factors--Risk Factors Relating to
Separating Our Company from The Limited--We May Not Be Able to Obtain Suitable
Real Estate to Implement Our Growth Strategy."
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Effective at the date of the spin-off, if our store sales in those stores
governed by our Direct Too, Inc. Leases exceed threshold sales levels, we will
be required to make additional payments to The Limited as consideration for the
guarantees that The Limited provides under such leases. The threshold sales
level for each store will be determined in the store leases agreement, and we
will pay The Limited a portion of the sales amount that exceed the threshold
sales level for each store, less any performance rents we are required to pay
to our third-party landlord, for the remaining term of the relevant lease.
Management's estimate of the amount that we would have paid in fiscal 1998 if
this agreement had been in effect during that period is approximately $134,000.
If our sales increase in these stores, the amount of our cash payments would
also increase. Assuming a 5.0% comparable store sales growth for each of our
stores operating under the Direct Too, Inc. Leases, we estimate that the amount
that we would be required to pay to The Limited in fiscal 1999 is approximately
$201,000.
Trademark and Service Mark License Agreement
We and The Limited intend to enter into an exclusive trademark and service
mark license agreement effective as of the date of the spin-off that will allow
us to operate under the "Limited Too" brand name. The agreement will be for an
initial term of five years after the spin-off, renewable annually at our
option. In return, we will be required to provide The Limited with the right to
inspect our stores and distribution facilities and an ability to review and
approve our advertising.
The trademark and service mark license agreement gives The Limited the
right to terminate the agreement if:
o we breach any of our obligations under the agreement and do not cure
the breach within 30 days after receiving notice of the breach
o we become bankrupt or insolvent
o we experience a change of control
Under the trademark and service mark license agreement, without The
Limited's consent, we will only be able to use the brand name "Limited Too" in
connection with any business in which we sell to our current target customer
group or to infants and toddlers. In addition, we may not expand our business
to include merchandise currently offered by The Limited or its subsidiaries,
unless it is for our current target customer group. See "Risk Factors--Risk
Factors Relating to Separating Our Company from The Limited--We Will License
the 'Limited Too' Brand Name from The Limited, Which May Restrict Our
Business."
Services Agreement
We and The Limited intend to enter into a services agreement effective as
of the date of the spin-off. The agreement will relate to transitional services
that The Limited or its subsidiaries or affiliates will provide to us. The
purpose of the services agreement will be to ensure that The Limited continues
to provide the administrative, financial, management and other services that we
require for a limited time. Under this agreement, The Limited's Group will
provide services in exchange for fees which we believe are similar in material
respects to what a third-party provider would charge, and will be based on
several billing methodologies. Under one of these billing methodologies, The
Limited will provide us with services at costs comparable to those charged to
other businesses operated by The Limited from time to time. We will be
obligated to purchase those services at fees generally equal to The Limited's
costs in providing the services plus 5% of the costs.
Management's estimate of the net charge that we would have paid in fiscal
1998 if the services agreement had been in effect during that period is
approximately $9.0 million. This is approximately the amount included in our
historical consolidated financial statements for fiscal 1998. These fees will
be paid monthly in arrears.
The services that The Limited will initially provide to us include:
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o compensation and benefit plan administration
o Year 2000 readiness assistance
o management information systems
o store design services
o merchandise distribution, customs and freight services
o completion of transactions pending before the spin-off related to
identifying store sites and negotiating store leases for up to a year
after the spin-off
o administration of the construction of any of our stores that begins
before December 31, 1999 for up to one year after the spin-off
o tax return preparation services
o treasury services until the earlier of when we establish our own cash
management system or a year after the spin-off
In addition to the identified services, The Limited will agree that any
insurance applicable to our assets, liabilities, business or employees will be
for our benefit as well as theirs. The Limited will agree to use reasonable
efforts to cause us to become a direct beneficiary of all applicable policies
or to arrange for us to be entitled to the benefit of those policies.
The agreement also provides that:
o we will indemnify The Limited from and against all damages arising
out of the services rendered by it or its directors, officers, agents
or employees under the services agreement, except for damages caused
by The Limited's gross negligence or willful misconduct
o we will indemnify The Limited against any liabilities caused by or
arising from The Limited's Year 2000 readiness assistance (see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Readiness--Reasonably Likely Worst
Case Scenario and Contingency Plans")
o we will not make any claims against The Limited caused by or arising
from The Limited's Year 2000 readiness assistance
o we will reimburse The Limited for any amounts paid by The Limited
under any guarantees (other than guarantees under our stores leases
which are separately discussed) or other arrangements supporting our
obligations
o we will not take actions that could materially and adversely affect
our ability to pay any obligations guaranteed or otherwise supported
by The Limited unless appropriate provision is made such that, in the
reasonable judgment of The Limited, The Limited's exposure under any
such guarantee or support arrangement is not materially increased
The provisions covered under the services agreement will generally be for
up to one year after the spin-off, except for:
o compensation and benefit plan administration, which will have a term
of six months after the spin-off
34
<PAGE>
o Year 2000 readiness assistance, which may be extended through the
first anniversary of the spin-off if we are not fully Year 2000 ready
o merchandise distribution and freight services, which will have a term
of three years after the spin-off
o tax return preparation services, which will continue until the
completion of income tax filings for fiscal 1999
o benefits audit report preparation services, which will continue until
the completion of reports for 1999
o treasury services, which will be provided until we develop our own
cash management system which we believe will occur within six months
after the date of the spin-off
Tax Separation Agreement
After the spin-off, we will no longer be included in The Limited's
consolidated group for United States federal income tax reporting purposes. We
and The Limited will enter into a tax separation agreement to reflect our
separation from The Limited with respect to tax matters until the completion of
income tax filings for fiscal 1999. The agreement will reflect each party's
rights and obligations relating to payments and refunds of taxes that are
attributable to periods beginning before and including the date of the spin-off
and any taxes resulting from transactions effected in connection with the
spin-off. With respect to any period before the spin-off, The Limited will:
o continue to be the sole and exclusive agent for us in all matters
relating to the income, franchise, property, sales and use tax
liabilities of the Too, Inc.'s Group
o bear any and all costs relating to state income tax audits, including
tax assessments and any related interest and penalties and any legal,
litigation, accounting or consulting expenses
o continue to have the sole and exclusive responsibility for the
preparation and filing of consolidated federal and consolidated or
combined state income tax returns
o generally have the powers, in The Limited's sole discretion, to
contest or compromise any claim or refund on our behalf
The tax separation agreement will provide for payments between the two
companies for various tax adjustments made after the spin-off that cover tax
liabilities before the spin-off. It will also cover the handling of audits,
settlements, elections, accounting methods and return filing in cases where
both companies have an interest in the results of these activities.
After the spin-off, if one or more persons were to acquire a 50% or
greater interest in either The Limited or us as part of a plan that included
the spin-off, The Limited would recognize gain on the shares of our common
stock that it distributes in the spin-off. To minimize the risk of this gain
recognition, we will agree to refrain from engaging in specified transactions
for two years after the spin-off without first:
o obtaining a ruling from the IRS to the effect that the proposed
transactions will not result in the spin-off being taxable to The
Limited or its shareholders, or
o obtaining an opinion of counsel recognized as an expert in federal
income tax matters and acceptable to The Limited to the same effect
Transactions that may be affected by this restriction relating to an
acquisition of a 50% or greater interest include:
35
<PAGE>
o a liquidation
o a merger or consolidation with, or acquisition by, another company
o issuances and redemptions of shares of our common stock
o the granting of stock options
o the sale, distribution or other disposition of assets in a manner
that would adversely affect the tax consequences of the spin-off
o the discontinuation of material businesses
Lease Amendment Agreement
We currently lease office and warehouse space located at 3885 Morse Road
in Columbus, Ohio from Distribution Land Corp., a wholly owned subsidiary of
The Limited under a lease agreement which is scheduled to expire on June 30,
2000. We intend, on or before the spin-off, to amend that agreement to extend
the term of the lease until two years after the date of the spin-off, with an
additional year available at our option.
Under the lease amendment agreement, we will lease office space at an
average annual rental rate of $11 per square foot and warehouse space at an
average annual rental rate of $2.85. Management believes that these rates are
commensurate with market rates, although we did not seek bids from third
parties. In 1998, we paid approximately $0.6 million under our lease. We will
also remain responsible for the payment of all taxes, insurance and operating
expenses in connection with the premises.
Under the lease amendment agreement, Distribution Land Corp. will have the
right to relocate us under specified circumstances. If we are required to
relocate, Distribution Land Corp. will provide alternative space that is
comparable in quality at the same rent. However, we will be required to bear
the costs associated with the relocation. Distribution Land Corp. will agree to
use reasonable efforts to prevent any such relocation from having to take place
before June 30, 2001.
TRADING MARKET
There has been no public market for our common stock. An active trading
market may not develop or be sustained in the future. However, we expect that a
limited market for shares of our common stock will develop on or shortly before
the record date for the spin-off, commonly known as a "when issued" trading
market. We will apply to list our common stock on the New York Stock Exchange
under the ticker symbol " ".
We cannot predict the prices at which our common stock may trade before
the spin-off on a "when issued" basis or after the spin-off. These prices will
be determined by the marketplace and may be significantly below the book value
per share of our common stock. Prices at which trading in shares of our common
stock occurs may fluctuate significantly. These prices may be influenced by
many factors, including quarter to quarter variations in our actual or
anticipated financial results or those of other companies in the retail
industry or the markets that we serve. In addition, the stock market in general
has experienced extreme price and volume fluctuations that have affected the
market price of many retail stocks in particular and that have often been
unrelated or disproportionate to the operating performance of these companies.
These are just some factors that may adversely affect the market price of our
common stock. See "Risk Factors--Risk Factors Relating to Separating Our
Company from The Limited--Our Stock Price May Fluctuate Significantly After the
Spin-Off, and You Could Lose All or Part of Your Investment as a Result."
36
<PAGE>
Shares of our common stock that you will receive in the spin-off will be
freely transferable, except if you are considered an "affiliate" of us under
Rule 144 under the Securities Act of 1933. Persons who can be considered our
affiliates after the spin-off generally include individuals or entities that
directly, or indirectly through one or more intermediaries, control, are
controlled by, or are under common control with, us. Our affiliates may only
sell common stock received in the spin-off:
o under a registration statement that the SEC has declared effective
under the Securities Act of 1933
o under an exemption from registration under the Securities Act of
1933, such as the exemption afforded by Rule 144
Options to purchase approximately shares of our common stock
will be outstanding immediately after the spin-off. These options will be
granted under the Too, Inc. 1999 Stock Option and Performance Incentive Plan
and the Too, Inc. 1999 Non-Associate Director Stock Plan. See "Executive
Compensation--Too, Inc. 1999 Stock Option and Performance Incentive Plan" and
"Executive Compensation--Too, Inc. 1999 Non-Associate Director Stock Plan."
Shares of our common stock issued upon exercise of these options will be
registered on Form S-8 under the Securities Act of 1933 and will, therefore, be
freely transferable under the securities laws, except by affiliates as
described above.
Except for the shares of our common stock distributed in the spin-off and
the options described above, none of our securities will be outstanding on or
immediately after the spin-off. We have not entered into any agreement or
otherwise committed to register any shares of our common stock under the
Securities Act of 1933 for sale by security holders. None of our common equity
is being, or has been publicly proposed to be, publicly registered or offered
by us, except for:
o the shares registered in connection with the spin-off on the Form 10
of which this information statement forms a part
o common equity offered under employee benefit plans
DIVIDENDS
We anticipate that future earnings will be used principally to support
operations and finance the growth of our business. Thus, we do not intend to
pay cash dividends on our common stock in the foreseeable future. Payment of
cash dividends will also be restricted by provisions in our new credit
facility. If our lenders permit us to declare dividends, the dividend amounts,
if any, will be determined by our board. Our board will consider a number of
factors, including our financial condition, capital requirements, funds
generated from operations, future business prospects, applicable contractual
restrictions and any other factors our board may deem relevant.
37
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Before the spin-off, we operated as part of The Limited. The following
unaudited pro forma consolidated financial statements provide the historical
consolidated financial statements for us, as adjusted for the spin-off and the
related transactions and events described in the notes to the unaudited pro
forma consolidated financial statements. You should read the unaudited pro
forma consolidated financial statements together with our historical
consolidated financial statements and the notes to those consolidated financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this information statement.
The assumptions and other matters that we note in the above paragraph and
in the notes to the unaudited pro forma consolidated financial statements
include the following:
o the spin-off as described elsewhere in this document
o the unaudited pro forma consolidated statement of income gives effect
to the spin-off as if it had occurred on February 1, 1998 and the
unaudited pro forma consolidated balance sheet gives effect to the
spin-off as if it had occurred on January 30, 1999
o long-term financing proceeds of $50 million which will be used to pay
a $50 million dividend to The Limited
o short-term financing proceeds of $1.25 million which will be used to
pay $1.25 million of financing fees to the lenders under our new
credit facility
Management believes that the assumptions that we have used provide a
reasonable basis on which to present the unaudited pro forma consolidated
financial statements.
We are providing unaudited pro forma consolidated financial statements for
informational purposes only. You should not construe them to be indicative of
our results of operations or financial condition had the spin-off and the
related transactions and events been completed on the dates assumed. They may
not reflect the results of operations or financial condition which would have
resulted had we been operated as a separate, independent company during such
periods. Finally, they are not necessarily indicative of our future results of
operations or financial condition.
38
<PAGE>
Too, Inc.
Unaudited Pro Forma Consolidated Statement of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended January 30, 1999
-----------------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
-------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Net sales...................................................... $ 376,943 $ 376,943
Costs of goods sold, occupancy and buying costs............. 251,531 251,531
------------- ------------
Gross income................................................... 125,412 125,412
General, administrative and store operating expenses........ 96,956 96,956
------------- ------------
Operating income............................................... 28,456 28,456
Interest expense............................................ -- $ 3,750 (2a) 3,750
------------- ------------
Income before income taxes..................................... 28,456 24,706
Provision for (benefit from) income taxes................... 11,400 (1,500) (2b) 9,900
------------- ----------- ------------
Net income..................................................... $ 17,056 $ (2,250) $ 14,806
============= =========== ============
Pro forma net income per share:
Basic.......................................................
Diluted..................................................... (2c)
Assumed weighted average number of shares:
Basic.......................................................
Diluted.....................................................
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
39
<PAGE>
Too, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
At January 30, 1999
-----------------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
-------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash......................................................... $ 987 $ 50,000 (3a) $ 987
(50,000) (3c)
1,250 (3b)
(1,250) (3b)
Accounts receivable.......................................... 1,440 1,440
Inventories.................................................. 27,565 27,565
Store supplies............................................... 5,237 5,237
Other........................................................ 582 582
------------ ------------
Total current assets...................................... 35,811 35,811
Property and equipment, net.................................. 44,894 44,894
Deferred income taxes........................................ 6,313 6,313
Other assets................................................. -- 1,250 (3b) 1,250
------------ ------------
Total assets................................................. $ 87,018 $ 88,268
============ ============
Liabilities and Shareholders' Equity Current liabilities:
Accounts payable............................................. $ 3,108 $ 3,108
Accrued expenses............................................. 22,377 22,377
Income taxes payable......................................... 8,932 8,932
Borrowings under revolving credit agreement.................. -- 1,250 (3b) 1,250
------------ ------------
Total current liabilities................................. 34,417 35,667
Long-term debt............................................... -- 50,000 (3a) 50,000
Other long-term liabilities.................................. 1,501 1,501
Shareholders' equity:
Net investment by The Limited................................ 51,100 (50,000) (3c)
Common stock................................................. -- (3d)
Paid in capital.............................................. -- --
------------ ------------
Total shareholders' equity................................ 51,100 1,100
------------ ------------
Total liabilities and shareholders' equity................ $ 87,018 $ 88,268
============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
40
<PAGE>
TOO, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The following summary of pro forma adjustments is based on available
information and various estimates and assumptions. We and The Limited believe
that these assumptions provide a reasonable basis for presenting all of the
significant effects of the spin-off and the related transactions and events and
that the pro forma adjustments give appropriate effect to those assumptions and
are properly applied in the unaudited pro forma consolidated financial
statements.
Historical amounts for us were derived from our historical consolidated
financial statements included in this information statement, which are adjusted
as described below.
2. Pro Forma Consolidated Statement of Income
(a) To record interest expense on approximately $51 million of
indebtedness that we expect to incur under our new credit facility shortly
before the date of the spin-off plus a charge for the financing fees paid in
connection with the indebtedness. The financing fee is assumed at 125 basis
points, amortized straight-line over an expected term of five years. Interest
expense was calculated using a weighted average expected borrowing rate of
approximately 7.0%, based on the London Interbank Offered Rate plus a spread. A
1/2 percentage point change in the borrowing rate would change interest expense
by $250,000.
(b) To record the tax effect of the pro forma interest expense adjustment
at an estimated effective tax rate of 40.0%.
(c) The issuance of the estimated million shares plus shares
related to options and restricted stock assumed to be granted as of the date of
the spin-off under the Too, Inc. 1999 Stock Option and Performance Incentive
Plan and the Too, Inc. 1999 Non-Associate Director Stock Plan. The actual
number of dilutive options and restricted stock may vary.
3. Pro Forma Consolidated Balance Sheet
(a) To reflect approximately $51 million of indebtedness we expect to
incur under our new credit facility shortly before the date of the spin-off.
Proceeds will be used to pay a $50 million dividend to The Limited.
(b) To reflect borrowings under our revolving credit agreement, proceeds
of which will be used to pay financing fees to the lenders under our new credit
facility.
(c) To reflect payment of a $50 million dividend to The Limited.
(d) To reflect the issuance of an estimated million shares of
common stock, par value $.01 per share, as of , 1999. Paid in capital
represents the excess historical carrying values of our net assets at the date
of the spin-off over the amount reflected as common stock.
41
<PAGE>
CAPITALIZATION
The following table presents our consolidated capitalization as of January
30, 1999 and as adjusted to give effect to the spin-off and the related
transactions and events described in the notes to our unaudited pro forma
consolidated balance sheet under "Unaudited Pro Forma Consolidated Financial
Statements" as if the spin-off and the related transactions and events had been
consummated on January 30, 1999.
Management believes that the assumptions used provide a reasonable basis
on which to present our consolidated capitalization. You should read the
capitalization table below together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our historical consolidated
financial statements and the "Unaudited Pro Forma Consolidated Financial
Statements" and the notes to those consolidated financial statements included
in this information statement.
We are providing the capitalization table below for informational purposes
only. You should not construe them to be indicative of our capitalization or
financial condition had the spin-off and the related transactions and events
been completed on the date assumed. The capitalization table below may not
reflect the capitalization or financial condition which would have resulted had
we been operated as a separate, independent company during such period and is
not necessarily indicative of our future capitalization or financial condition.
<TABLE>
<CAPTION>
January 30, 1999
----------------------------
Pro Forma
Historical (Unaudited)
------------ -----------
(in thousands)
<S> <C> <C>
Short-term debt................................................................... -- $ 1,250
Long-term debt.................................................................... -- 50,000
----------- -----------
Total indebtedness............................................................. -- $ 51,250
=========== ===========
Shareholders' equity:
Net investment by The Limited.................................................. $ 51,100
Common stock, par value $.01 per share; 100 million shares authorized;
million shares issued and outstanding(1)....................................
Paid in capital................................................................
----------- -----------
Total shareholders' equity ................................................. 51,100 1,100
----------- -----------
Total capitalization........................................................ $ 51,100 $ 51,100
=========== ===========
Debt to total capitalization(2)................................................... -- 1.00
- -------------------
<FN>
(1) The number of shares of our common stock outstanding reflects (a) the
spin-off ratio times (b) the number of shares of The Limited's common
stock outstanding as of January 30, 1999.
(2) Debt-to-total capitalization has been computed by dividing total
indebtedness by total capitalization.
</FN>
</TABLE>
42
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents selected historical and pro forma financial
as well as operating data of Too, Inc. for the last five fiscal years. The
information for the fiscal years ended February 3, 1996 and January 28, 1995 is
derived from our unaudited consolidated financial statements.
Before the spin-off, we operated as part of The Limited. Because the data
reflects periods during which we did not operate as an independent company, the
data may not reflect the results of operations or the financial condition which
would have resulted if we had operated as a separate, independent company
during the periods shown. In addition, the data may not necessarily be
indicative of our future results of operations or financial condition.
The data presented in the table below is derived from "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our historical and pro forma consolidated financial statements and the notes to
those consolidated financial statements included in this information statement.
You should read these sections for a further explanation of the data summarized
here.
Earnings per share data is presented elsewhere in this information
statement on a pro forma basis only. See "Unaudited Pro Forma Consolidated
Financial Statements."
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------------------
January 30, January 31, February 1, February 3, January 28,
1999 1998 1997 (1996(1) 1995
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share data and
sales per average square foot)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.......................................... $ 376,943 $ 322,150 $ 258,818 $ 214,302 $ 173,787
Gross income(2).................................... 125,412 95,307 60,848 38,191 47,928
General, administrative and store operating
expenses(3)..................................... 96,956 83,010 69,702 57,435 44,817
Operating income (loss)............................ 28,456 12,297 (8,854) (19,244) 3,111
Net income (loss).................................. 17,056 7,397 (5,354) (11,544) 1,911
Pro forma net income(4)........................... 14,806
Pro forma diluted weighted average
number of shares(5).............................
Pro forma diluted net income per share(5)..........
Balance Sheet Data:
Inventories........................................ $ 27,565 $ 18,661 $ 20,437 $ 16,046 $ 15,156
Total assets....................................... 87,018 72,198 74,786 72,991 57,765
Pro forma long-term debt........................... 50,000
Pro forma shareholders' equity..................... 1,100
Selected Operating Data:
Comparable store sales increase
(decrease)(6).................................. 15% 20% 8% (4)% 13%
Total net sales growth............................. 17.0% 24.5% 20.8% 23.3% 18.4%
Gross income rate(7)............................... 33.3% 29.6% 23.5% 17.8% 27.6%
Operating income (loss) rate(7).................... 7.6% 3.8% (3.4)% (9.0)% 1.8%
Total number of stores open at fiscal year end..... 319 312 308 288 212
Total square feet at fiscal year end............... 1,281 1,244 1,224 1,143 838
Sales per average square foot(8)................... $ 300 $ 259 $ 214 $ 207 $ 226
- -------------------
<FN>
(1) Represents the 53-week fiscal year ended February 3, 1996.
43
<PAGE>
(2) Gross income equals net sales less costs of goods sold, occupancy and
buying costs, including charges and allocations made by The Limited to us.
(3) General, administrative and store operating expenses include charges and
allocations made by The Limited to us.
(4) Pro forma net income includes interest expense and financing fees, net of
the related tax benefit, on approximately $51 million of indebtedness we
expect to incur under our new credit facility shortly before the date of
the spin-off. Proceeds from the debt incurred will be used to pay a $50
million dividend to The Limited and $1.25 million of financing fees to the
lenders under our new credit facility.
(5) Pro forma diluted net income per share is based on pro forma net income
and the diluted weighted average number of shares of our common stock
expected to be outstanding immediately after the spin-off plus shares
related to stock options and restricted stock assumed to be granted as of
the date of the spin-off under the Too, Inc. 1999 Stock Option and
Performance Incentive Plan and the Too, Inc. 1999 Non-Associate Director
Stock Plan. The actual number of dilutive options and restricted stock
will vary. Pro forma diluted net income per share is not necessarily
indicative of what actual dilutive net income per share would have been if
the spin-off had occurred on the basis assumed.
(6) A store is included in our comparable store sales calculation once it has
completed 52 weeks of operation. Further, stores that are expanded or
downsized more than 20% in square feet are treated as new stores for
purposes of this calculation.
(7) Calculated as a percentage of net sales.
(8) Sales per average square foot is the result of dividing net sales for the
period by average gross square foot, which reflects the impact of opening
and closing stores in different periods throughout the year.
</FN>
</TABLE>
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our historical
consolidated financial statements and the notes to those consolidated financial
statements included in this information statement and "Unaudited Pro Forma
Consolidated Financial Statements." For the purposes of the following
discussion, unless the context otherwise requires, "Too, Inc.", "Limited Too",
"we", "our" and "us" refer to Too, Inc. and our subsidiaries.
General
In 1987, The Limited established "Limited Too" brand stores adjacent to or
as departments within The Limited stores to provide similar apparel to young
girls, and also apparel for infants. Our initial target consumer was the mother
who shopped at The Limited and wanted to purchase similar apparel for her
daughter. From 1987 to the end of fiscal 1995, we expanded our locations from
two stores to 288 stores. After several years of inconsistent performance, as
indicated by a $(19.2) million operating loss in 1995, The Limited brought in
some new members of our current management team in 1996. Our current management
team recognized that its core customer had her own emerging sense of style and
revised our strategy to focus on girls approximately 7 to 14 years of age as
our target customer group. Since then, we have consistently improved our
financial performance.
In the period from fiscal 1996 to fiscal 1998, we:
o increased net sales to $376.9 million from $258.8 million
o improved our pretax operating income to $28.5 million from a loss of
$(8.9) million
o improved our operating income rate as a percentage of sales to 7.6%
from a loss of (3.4)% by increasing sales volume, improving gross
income and slowing the growth in general, administrative and store
operating expenses
o improved sales per average square foot to $300 from $214
The strong growth and improved profitability during this period resulted from
an increase in comparable store sales and gross income as we improved our
merchandise assortment and merchandise margins and strengthened our brand
awareness.
Results of Operations
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................................................. 100.0% 100.0% 100.0%
Costs of goods sold, occupancy and buying costs............................ 66.7 70.4 76.5
----- ----- -----
Gross income............................................................... 33.3 29.6 23.5
General, administrative and store operating expenses....................... 25.7 25.8 26.9
----- ----- -----
Operating income (loss).................................................... 7.6 3.8 (3.4)
Provision for (benefit from) income taxes.................................. 3.1 1.5 (1.3)
----- ----- -----
Net income (loss).......................................................... 4.5% 2.3% (2.1)%
===== ===== =====
</TABLE>
45
<PAGE>
Financial Summary
Below, you will find summarized financial data for the fiscal periods
shown:
<TABLE>
<CAPTION>
Fiscal Year Ended % Change
------------------------------------- ----------------
January 30, January 31, February 1, 1997- 1996-
1999 1998 1997 1998 1997
----------- ----------- ----------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales (millions).................................... $ 376.9 $ 322.2 $ 258.8 17% 24%
Comparable store sales increase(1)...................... 15% 20% 8%
Sales per average square foot(2)........................ $ 300 $ 259 $ 214 16% 21%
Sales per average store (thousands)..................... $ 1,204 $ 1,039 $ 849 16% 22%
Average store size at fiscal year end (square feet)..... 4,015 3,987 3,974
Total square feet at fiscal year end (thousands)........ 1,281 1,244 1,224
Number of stores:
Beginning of year.................................... 312 308 288
Opened............................................... 10 7 27
Closed............................................... (3) (3) (7)
-------- -------- --------
End of period........................................ 319 312 308
======== ======== ========
- -------------------
<FN>
(1) A store is included in our comparable store sales calculation once it has
completed 52 weeks of operation. Further, stores that are expanded or
downsized more than 20% in square feet are treated as new stores for
purposes of this calculation.
(2) Sales per average square foot is the result of dividing net sales for the
period by average gross square foot, which reflects the impact of opening
and closing stores in different periods throughout the year.
</FN>
</TABLE>
Net Sales
Net sales for 1998 increased 17% to $376.9 million from $322.2 million in
1997. The increase was primarily attributable to a 15% increase in comparable
store sales and the net addition of seven stores. During the third quarter of
fiscal 1997, we exited the infant merchandise category because it was
inconsistent with a store environment that appeals to our target customer.
Therefore, excluding infant sales in 1997, we experienced a 24% increase in
comparable store sales over the prior year. While sales increased across
virtually all merchandise categories, add-on (principally underwear, sleepwear
and swimwear), lifestyles, personal care products under our "GirlCare" product
line and tops experienced increases of 65%, 61%, 27% and 25%, respectively. Net
sales productivity increased 16% to $300 per average square foot.
Net sales for 1997 increased 24% to $322.2 million from $258.8 million in
1996. The increase was primarily attributable to a 20% increase in comparable
store sales with the balance arising from the net addition of four stores.
While sales increased in most merchandise categories, the increase of personal
care products, add-on and lifestyles in the overall mix accounted for nearly
half of the sales increase over the prior year. Net sales per average square
foot increased 21% to $259 per square foot.
Gross Income
The gross income rate, expressed as a percentage of net sales, increased
to 33.3% in 1998 from 29.6% in 1997. The increase in rate was attributable to
an increase in initial markup on merchandise and a decrease in buying and
occupancy costs, expressed as a percentage of net sales, due to the leverage
achieved through higher comparable store sales. The improvement in these margin
components was slightly offset by an increase in markdowns experienced during
the fall season.
46
<PAGE>
For fiscal 1997, the gross income rate improved to 29.6% from 23.5% in
1996. The increase in rate was attributable to improved merchandise margins as
higher initial markups on merchandise were partially offset by higher markdowns
and a decline in the rate for buying and occupancy costs as a result of an
increase in comparable store sales.
General, Administrative and Store Operating Expenses
General, administrative and store operating expenses, expressed as a
percentage of net sales, improved slightly to 25.7% in 1998 from 25.8% in 1997.
The favorable leveraging of these expenses associated with improved sales
productivity was partially offset by an increase in overhead allocations from
The Limited and central distribution center costs.
General, administrative and store operating expenses, expressed as a
percentage of net sales, improved to 25.8% in 1997 from 26.9% in 1996, due to
the favorable leveraging of expenses associated with improved per store
productivity.
Operating Income (Loss)
The operating income (loss) rate, expressed as a percentage of net sales,
was 7.6%, 3.8% and (3.4%) in fiscal 1998, 1997 and 1996. The improvement in
1998 over 1997 and 1997 as compared to 1996 was due principally to the
improvement in merchandise margins, and the positive leveraging of buying and
occupancy expenses arising from increases in comparable store sales.
Also, 1997 showed further improvement over 1996 due to the favorable
leveraging of general, administrative and store operating expenses associated
with the increase in comparable store sales.
Seasonality and Quarterly Fluctuations
As illustrated in the table below, our business is highly seasonal, with
significantly higher sales, gross income and net income realized during the
fourth quarter, which includes the holiday selling season. See "Risk
Factors--Risk Factors Relating to Our Business--The Seasonality of the Retail
Industry Could Adversely Affect Our Business."
<TABLE>
<CAPTION>
1998 Quarters First Second Third Fourth
- ------------- ------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales.................................................. $ 82,257 $ 74,746 $ 96,720 $ 123,220
% of full year.......................................... 21.8% 19.8% 25.7% 32.7%
Gross income............................................... $ 24,900 $ 24,060 $ 29,908 $ 46,544
% of full year.......................................... 19.9% 19.2% 23.8% 37.1%
Net income................................................. $ 189 $ 240 $ 4,248 $ 12,379
% of full year.......................................... 1.1% 1.4% 24.9% 72.6%
1997 Quarters First Second Third Fourth
- ------------- ------------ ------------ ------------ ------------
(dollars in thousands)
Net sales.................................................. $ 65,646 $ 61,263 $ 86,430 $ 108,811
% of full year.......................................... 20.4% 19.0% 26.8% 33.8%
Gross income............................................... $ 15,625 $ 15,163 $ 23,995 $ 40,524
% of full year.......................................... 16.4% 15.9% 25.2% 42.5%
Net income (loss).......................................... $ (1,686) $ (1,619) $ 2,018 $ 8,684
% of full year.......................................... (22.8)% (21.9)% 27.3% 117.4%
</TABLE>
47
<PAGE>
Financial Condition
Our recent improvement in operating income over the last two years
provides evidence of increased financial strength and flexibility. A more
detailed discussion of liquidity, capital resources and capital requirements
follows.
Liquidity and Capital Resources
Cash provided by operating activities and cash funding from The Limited's
centralized cash management system have historically provided the resources to
support operations, including seasonal requirements and capital expenditures.
See "Relationship Between Too, Inc. and The Limited." Cash requirements for
operating purposes during the year and for capital expenditures were met from
this source. We will continue to utilize the centralized cash management system
after the spin-off under a services agreement until the earlier of when we
establish our own system or a year after the spin-off. See "Relationship
Between Too, Inc. and The Limited--Transitional Services and Separation
Agreements--Services Agreement."
Below, you will find a summary of our working capital position and
capitalization.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Net cash provided by operating activities..................................... $ 17,361 $ 30,294 $ 13,764
Working capital (deficit)..................................................... 1,394 (8,137) 4,990
Capitalization
Net investment by The Limited.............................................. 51,100 37,773 54,400
Cash flow to capital investment (net cash provided by operating activities 1.21 6.34 1.62
divided by capital expenditures)...........................................
</TABLE>
Net cash provided by operating activities totaled $17.4 million, $30.3
million and $13.8 million for 1998, 1997 and 1996, respectively.
In 1998, the $17.4 million net cash provided by operating activities
decreased from 1997. Net income before depreciation and amortization increased
$9.6 million. However, the increase in inventories in 1998 coupled with a
decrease in income taxes more than offset the $9.6 million increase from
operations. The $16.5 million improvement in cash provided by operating
activities in 1997 over 1996 was due primarily to the increase in net income
from operations.
Investing activities were for capital expenditures, which were primarily
for new and remodeled stores.
Historically, financing activities consisted primarily of activity through
The Limited's centralized cash management system. See Note 7 to the
Consolidated Financial Statements included in this information statement.
Capital Expenditures
Capital expenditures, primarily for new and remodeled stores, totaled
$14.3 million, $4.8 million and $8.5 million for 1998, 1997 and 1996,
respectively.
We anticipate spending between $28 to $34 million in 1999 for capital
expenditures, of which $23 to $27 million will be for new stores, remodeling or
expansion of existing stores and related improvements. We intend to add
approximately 145,000 square feet in 1999, which will represent an 11% increase
over year end 1998. We anticipate that the increase will result from the
opening of approximately 40 new stores and the remodeling or expansion of 20
stores. We estimate that the average cost for leasehold improvements, furniture
and fixtures for
48
<PAGE>
stores to be opened in 1999 will be approximately $405,000 per store, after
giving effect to landlord allowances. Average pre-opening costs per store,
which will be expensed as incurred, are expected to be less than $20,000. In
addition, inventory purchases are expected to average approximately $100,000
per store.
We expect that substantially all future capital expenditures will be
funded by net cash provided by operating activities.
Description of New Credit Facility
Effective as of the date of the spin-off, we expect to have a secured
credit facility for $100 million against which $50 million is expected to be
drawn to pay a $50 million dividend to The Limited. The remainder of the new
credit facility will be available to fund working capital requirements and for
general corporate purposes. The new credit facility will consist of a $50
million four- to five-year term facility and a $50 million four- to five-year
revolving credit facility. The credit facility is expected to contain customary
representations and warranties and affirmative, negative and financial
covenants. We expect that interest rates for the credit facility will be based
on the London Interbank Offered Rate plus a spread.
Impact of Inflation
Our results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, we believe
that the effects of inflation, if any, on our results of operations and
financial condition have been minor.
Year 2000 Readiness
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. We are currently part of the Year 2000 readiness efforts
undertaken by The Limited, which will continue after the spin-off under a
services agreement with The Limited. The Limited uses a variety of proprietary
and third-party computer technologies -- both hardware and software -- directly
in its businesses. The Limited also relies on numerous third parties and their
systems' ability to address the Year 2000 issue. The Limited's critical
information technology 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 Limited is using both internal and external resources to complete
its Year 2000 initiatives.
Readiness
In order to address the Year 2000 issue, The Limited 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: (1) awareness, (2) assessment, (3)
renovation/development, (4) validation and (5) implementation. There are
several areas of focus:
o Renovation of legacy systems. All five stages of Year 2000
implementation for renovation of legacy systems are nearly complete
or have been completed for significant information technology systems
at The Limited's businesses, including our material applications.
o Installation of new software packages to replace legacy systems at
five of The Limited's operating businesses. Replacement of
significant legacy systems with new software packages has been
completed for two of The Limited's businesses and is underway and
near completion for three others, including us. The validation and
implementation stages of these new systems are expected to be
completed in or before the second quarter of 1999.
49
<PAGE>
o 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 Limited and its
subsidiaries with merchandise for resale, supplies for operational
purposes and services. The Limited identified key vendors, suppliers
and service providers and is making inquiries to determine their Year
2000 status. The Limited has obtained assurances from a number of its
key vendors regarding their Year 2000 status and expects to complete
this process in mid-1999. In addition, The Limited is in the process
of conducting on-site assessments of certain key vendors to further
assess such vendors' progress and expects to complete this process by
mid-1999. Also, The Limited, along with other major retail
organizations, is participating in a national industry Year 2000
survey of over 80,000 suppliers and vendors.
o Evaluating facilities and distribution equipment with embedded
computer technology. The Limited and its subsidiaries use various
facilities and distribution equipment with embedded computer
technology, such as conveyors, elevators, security systems, fire
protection systems and energy management systems. The Limited's
assessment of these systems is in process and all stages of its
efforts are expected to be completed in the second quarter of 1999.
Cost to Address the Year 2000 Issue
Our total expenditures incurred through 1998 related to remediation,
testing, conversion, replacement and upgrading system applications were
approximately $7.3 million, of which approximately $5.2 million represents
capital assets which will be amortized principally over a period of five years
beginning in May 1999. In addition, we have incurred internal payroll costs
(not separately identified) relating to the Year 2000 initiatives. Additional
expenditures are expected to range from $3.5 million to $3.8 million through
2000, of which approximately $3.1 million will be capitalized. Total
incremental expenses, primarily depreciation and amortization of new package
systems, are not expected to have a material impact on our financial condition
during 1999 and 2000.
Reasonably Likely Worst Case Scenario and Contingency Plans
The Limited believes that the reasonably likely worst case scenario would
involve short-term disruptions of systems affecting its supply and distribution
channels. The Limited is in the early stages 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
ready. The Limited expects to finalize these contingency plans by mid-1999.
At the present time, we and The Limited are not aware of any Year 2000
issues that are expected to materially affect our products, services,
competitive position or financial performance. However, despite The Limited's
significant efforts to make its systems, facilities and equipment Year 2000
ready, the readiness of third-party service providers and vendors (including,
for instance, governmental entities and utility companies) is beyond its
control. 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.
Adoption of New Accounting Standards
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Statement of Position 98-1 requires that certain external costs
and internal payroll and payroll related costs be capitalized during the
application development and implementation stages of a software development
project and amortized over the software's useful life. Statement of Position
98-1 is effective in the first quarter of 1999, and we do not anticipate that
it will have a material adverse effect on our results of operations.
50
<PAGE>
Additionally, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," in
April 1998. Statement of Position 98-5 requires that entities expense start-up
costs and organization costs as they are incurred. Statement of Position 98-5
is effective in the first quarter of 1999 and we do not anticipate that it will
have a material adverse effect on our results of operations.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Any forward-looking statements contained in this information statement or
made by our management involve risks and uncertainties and may change based on
various important factors. The following factors, among others, in some cases
have affected and in the future could affect our financial performance and
actual results and could cause actual results for 1999 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements:
o changes in consumer spending patterns
o overall economic conditions
o consumer preferences
o the impact of competition and pricing
o changes in weather patterns
o political stability, currency and exchange risks and changes in
existing or potential duties, tariffs or quotas
o the availability of suitable store locations at appropriate terms
o the ability to develop new merchandise
o the ability to hire and train personnel, including sales associates
Any forward-looking statements as to costs and dates relating to the Year
2000 effort are forward-looking and are based on our current best estimates
that may be proven incorrect as additional information becomes available. Our
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
us and the collateral effects of the Year 2000 issues on our business partners
and customers. While we believe that our assumptions are reasonable, we caution
that it is impossible to predict factors that could cause actual costs or
timetables to differ materially from the expected results.
51
<PAGE>
BUSINESS
Limited Too is a rapidly growing specialty retailer that sells apparel,
underwear, sleepwear, swimwear, lifestyle and personal care products for
fashion-aware, trend-setting young girls. We have 321 stores in 43 states. We
design, source and market our products under our proprietary "Limited Too"
brand name. In fiscal 1998, we opened 10 new stores and remodeled or expanded
15 existing stores.
In 1987, The Limited established "Limited Too" brand stores adjacent to or
as departments within The Limited stores to provide similar apparel to young
girls, and also apparel for infants. From 1987 to the end of fiscal 1995, we
expanded our locations from two stores to 288 stores. In 1996, a new management
team recognized that its core customer had her own emerging sense of style and
revised our strategy to focus on girls approximately 7 to 14 years of age as
our target customer group.
Our merchandise includes:
o casual clothing, such as jeans and other jeanswear and bottoms, knit
tops and T-shirts containing our brand name or other graphics,
dresses and outerwear
o accessories, such as costume jewelry, hair ornaments, slippers, key
chains, wallets, backpacks, purses and watches
o lifestyle products, such as inflatable furniture, lamps, writing
instruments, folders and posters
o personal care products under our "GirlCare" line, such as glitter
cosmetics, body splash and anti-bacterial hand gel
o add-on, such as underwear, sleepwear and swimwear
Business Strengths
We believe that our six core business strengths developed over the last
three years have contributed to our success and will enable us to continue
growing profitably.
Target Customer Group. We have identified our target customer group to be
girls approximately 7 to 14 years of age who are active, creative and
image-conscious, enjoy shopping and want to describe themselves as "fun" and
"cool". We believe our target customers want a broad assortment of merchandise
for their range of dressing occasions, including school, leisure activities and
parties. To attract our target customer, we continually update our merchandise
assortment, which includes non-apparel merchandise, such as cosmetics and
lifestyle furnishings for her room. We also create an in-store atmosphere that
is visually appealing and provides an enjoyable, safe and high-energy shopping
experience. We believe that girls interested in the latest fashions are
attracted to our image and are made to feel secure in their fashion choices
when they purchase our brand. At the same time, we believe that parents defer
to many choices that their daughters make in our stores because they find our
products to be appropriate for their daughters' age.
Focused and Differentiated Brand. We have created a focused and
differentiated brand image for fashion- aware girls aged 7 to 14 who follow the
latest trends. We believe that the brand's appeal has been augmented by, and
should continue to benefit from, trends that emphasize the latest fashions and
the aspirational lifestyle of today's girls. We communicate our brand image
through all aspects of our business, including merchandise assortment and our
exciting, colorful in-store presentation. We believe that the strength of our
brand provides opportunities for increased penetration of current merchandise
categories and entry into newer product categories such as our "GirlCare" line
of toiletries and cosmetics introduced in 1996.
52
<PAGE>
Entertaining Store Environment. A major element of our recent success is
the consistent store-level execution of our brand strategy. We design our
stores to provide a "theme park" destination in the mall and to encourage our
customers to touch and sample our products. All of our stores contain a wide
variety of merchandise for a "one-stop shopping" experience, which has been
specifically designed to embody "a store for her" theme. Our stores feature
colorful window displays; photographic sticker booths; ear piercing stations;
gumball machines; and eye-catching photographs. Our newer store formats may
also have:
o our daisy logo on our front signage
o a personal care sampling table in the front of the store at which our
customers can experiment with our "GirlCare" products and consult
their friends and our sales associates
o light shows
o mock pay telephones from which our customers can listen to music or
call their friends within the store
We tightly control our in-store presentation by basing it on detailed and
comprehensive store plans. These plans use visual displays and fixtures
designed to brand our stores in a manner tailored to appeal to our target
customer group.
Proprietary Design and Merchandising Capabilities. A cornerstone of our
business is our ability to design products which embody our brand image. We
develop substantially all of our merchandise assortment through our own design
group, which allows us to:
o create exclusive merchandise under our proprietary brand
o develop complementary fashionable outfits
o offer a vast array of merchandise within a fashion season
o introduce new non-apparel items
o bring our products to market faster
In addition, because our merchandise is sold exclusively in our own
stores, we are able to control the presentation and pricing of our merchandise
and provide a higher level of customer service. Our merchandising strategy of
offering a broad assortment allows us to constantly introduce elements of the
latest fashion trends. We believe that these capabilities provide us with
competitive advantages over other brand manufacturers that market their goods
through department and other specialty apparel stores.
Proven Management Team. Since early 1996, when some of the senior members
of our current management team assumed responsibility, we have increased the
level of brand awareness and consistently reported improved financial results.
We believe that our management has a distinct understanding of our customers
and is able to execute design, sourcing and marketing strategies to penetrate
our target customer group. With over 125 years of collective experience in the
retail industry, they have demonstrated a track record of highly profitable
growth which strongly positions us for the future.
Attentive Customer Service. Our sales associates convey and reinforce our
brand image through their attitude, enthusiasm and awareness of current fashion
trends. We train them to greet each customer, to inform the customer about new
fashion trends, to guide her through the store and to suggest merchandise to
suit the customer's wardrobe and lifestyle needs. We strive to give each of our
young customers the same level of respect and attention that adult customers
expect in a retail shopping experience.
53
<PAGE>
Growth Strategy
We have implemented a growth strategy to capitalize on our business
strengths. Our growth strategy focuses on four goals:
o opening approximately 40 new stores per year in 1999 and 2000
o remodeling or expanding approximately 20 existing stores in 1999
o increasing comparable store sales through product extensions and our
continued execution of merchandise and other initiatives to satisfy
our target customers' needs
o increasing our distribution channels to include direct marketing
through catalog and website initiatives.
Below, we summarize the principal ways by which we plan to achieve these
goals:
Store Openings, Remodelings and Expansions. We began our new store
expansion program in 1997, with the opening of seven new stores (four of which
were in our newest "GirlPower" format) and the opening of ten new stores in
1998. Given the strength of our brand and our customer demographics, our
management believes that there will be approximately 100 to 150 mall sites
available for new stores, with an additional 100 to 150 sites available in
smaller markets, specialty centers and major urban locations. We intend to
continue our store expansion program by opening approximately 40 new stores per
year in 1999 and 2000. Substantially all of the stores to be opened in 1999
will be in regional shopping malls, as we believe that malls provide a heavy
and steady flow of our target customers. We intend to open new stores in
non-major cities as well as part of our expansion into smaller markets, which
has proved to be successful.
We also plan to remodel or expand approximately 20 of our existing stores
in 1999 into our "GirlPower" store format and continue our remodeling and
expansion program for the next several years.
Merchandise Initiatives and Product Extensions. We plan to continue to
increase the variety of sizes offered in many of our tops and bottoms
categories and to continue to develop the new product lines we recently
introduced including add-on such as underwear, sleepwear and swimwear; personal
care products under our "GirlCare" line, such as glitter make-up and nail
polish; and lifestyle products and other accessories for our target customer's
room, such as inflatable furniture and glitter telephones.
We believe that our ability to design and market new merchandise quickly
and effectively has been a key element of our success. In recent years, we have
significantly broadened our assortment in existing categories to increase
volume and productivity. In 1999, we will continue to expand key categories. We
also plan to continue to increase the variety of sizes offered. These changes
in our product mix allow us to offer a broader assortment of merchandise to our
customers.
Increase Consumer Feedback and Awareness. An important source of customer
feedback has been our focus groups and other formats for customer
communication, which we intend to continue. We expect to enhance our customer
relationships and increase our brand awareness through our frequent buyer
program and our catalog and website initiatives. We use our frequent buyer
program to obtain customer information, and our customers will also be asked to
provide information when they register on our website. Additionally, our
frequent buyer program rewards our customers with incentives based on the
frequency of their purchases and incorporates in-store events such as "Too
Punch Toosday". Currently, our frequent buyer database contains approximately
830,000 names. We plan to increase this database by having our sales associates
continue to encourage customers to complete customer profile cards when they
obtain frequent buyer cards, allowing Internet browsers to provide their
profile information on-line and obtaining names from Visa and MasterCard, since
over 600,000 of our customers use these two credit cards. To further develop
our marketing efforts, we are working to improve the effectiveness of our
frequent buyer
54
<PAGE>
database. In May 1999, we intend to execute our first direct mail campaign that
targets not only customers in our frequent buyer database but prospective
customers as well.
Expand Distribution Channels. We are committed to enhancing our brand
recognition and plan to expand our marketing efforts in the following areas.
o Catalog. We are currently working with a number of third parties
regarding the establishment of fulfillment infrastructures, catalog
production and circulation plans in order to launch a catalog for the
1999 holiday season with a planned October mailing. We will use our
frequent buyer database as the primary source for our catalog mailing
lists. In addition, we may purchase or rent qualified names from
other third parties' mailing lists to increase our circulation
quantities.
o Website. We plan to create a fun, informational website with an
expected launch in the fall of 1999. Because more customers,
especially customers within our target demographic group, are turning
to the Internet to access consumer information and make retail
purchases, we believe that an attractive website will be critical to
our brand-recognition efforts and, in turn, our sales growth. We
intend to further develop our website to allow our customers to order
our products on-line during the year 2000.
The Industry
We believe that our target customer group is under-served in the specialty
apparel retailer market since no other retailer focuses exclusively on a single
gender in the 7 to 14 age group. Industry sources estimate that the amount
spent on apparel in our target customer group grew from $7.2 billion in fiscal
1995 to $8.2 billion in fiscal 1998, or at a compound annual rate of
approximately 4%. Our 21% compound annual growth in net sales, which includes
non-apparel merchandise during this period, has outpaced that of the industry.
Industry sources also estimate that no single retailer has more than 9% of the
market share for our target customer group. We believe that the size and
changing dynamics of our market, coupled with our business strengths and growth
strategies, should provide significant opportunities for growth and increased
market share in the future.
Our Stores
Existing Store Environments
Our stores and point-of-sale marketing are designed to convey the
principal elements and personality of our brand -- creativity, fashion
awareness and excitement for increasingly independent girls. We thoughtfully
plan and coordinate our store design, furniture, fixtures and music to create a
shopping experience that is consistent with the "Limited Too" lifestyle and
caters to our target customer group. We believe that our customers experience
our stores as entertaining and multisensory destinations, in which they feel
welcomed and pampered.
As of the end of fiscal 1998, we had four store formats:
o 139 of our stores, or 44%, were modeled to be consistent with The
Limited store design using the same black marble and black woodgrain
cabinets
o 121 of our stores, or 38%, were substantially similar to The Limited
store design with a front signage that includes a red script "Too"
o 30 of our stores, or 9%, also had a front signage that includes a red
script "Too" but with blond wood and light-colored fixtures
o 29 of our stores, or 9%, were developed in our newest format, or what
we refer to as "Girl Power"
55
<PAGE>
In fiscal 1998, the average sales per store were substantially higher for
stores with the "GirlPower" format compared to stores with the other three
formats.
We vary the extent of the presentation detail of our stores depending on
the customer demographic or the traffic volume of a particular mall. This
enables us to be cost-effective in recognizing each store's ability to support
additional features while maintaining a uniformly positive shopping experience
for our customers.
For each store format, we maintain a uniform appearance consistent with
that particular store format throughout our store base, in terms of merchandise
display and location on the selling floor. Store managers receive detailed
store plans that dictate fixture and merchandise placement to ensure uniform
execution of the merchandising strategy at the store level and the portrayal of
our brand in a manner designed to appeal to our target customer group.
Standardization of store design and merchandise presentation also creates cost
savings in store furnishings, maximizes usage and productivity of selling space
and allows us to efficiently open new stores.
Each year, we have four major floor sets with matching window displays to
correspond with our spring, summer, "back to school" and December holiday
periods. Every two to three weeks, our management coordinates and directs our
stores to modify these floor sets, and usually the window displays at the same
time, by highlighting different merchandise and moving displays to different
areas within the store. These frequent changes enable us to profile new
merchandise while fostering our brand image as featuring the "hottest"
fashions.
Our sales associates are a central element in creating our stores'
distinctive atmosphere. In addition to providing a high level of customer
service, our sales associates reflect the energetic attitude of our brand and
culture. In conjunction with other components of the store environment, we
believe that our sales associates significantly contribute to a store
atmosphere that is consistent with making it a "store for her" -- our target
customer.
Store Remodeling and Expansion Program
Our stores are located principally in regional shopping malls, as we
believe that malls provide a heavy and steady flow of our target customers. At
January 30, 1999, we operated 319 stores nationwide, averaging over 4,000 gross
square feet, with approximately 3,200 selling square feet. For the number of
store locations in each state, see "-- Properties." The table below highlights
the store expansion strategy that we have pursued:
<TABLE>
<CAPTION>
Fiscal Year Ended
At ------------------------------------------------------
April 30, January January February February January
1999 30, 1999 31, 1998 1, 1997 3, 1996 28, 1995
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Number of stores:
Beginning of year.............................. 319 312 308 288 212 184
Opened......................................... 9 10 7 27 78 31
Closed......................................... 7 3 3 7 2 3
Remodeled...................................... 6 15 -- -- -- --
Total square feet at fiscal year end (thousands).. -- 1,281 1,244 1,224 1,143 838
Average store size at fiscal year end (square
feet).......................................... -- 4,015 3,987 3,974 3,969 3,953
Sales per average square foot(1).................. -- $ 300 $ 259 $ 214 $ 207 $ 226
- -------------------
<FN>
(1) Sales per average square foot is the result of dividing net sales for the
period by average gross square foot, which reflects the impact of opening
and closing stores in different periods throughout the year.
</FN>
</TABLE>
In addition to opening new stores, we are in the process of remodeling or
expanding some of our stores into our new "GirlPower" store format. The
remodeling process for our stores that are adjacent to or departments within
The Limited stores may involve building walls in the cross-over space between
the two stores, creating separate
56
<PAGE>
back rooms and utilities and in some instances, creating separate access to
corridors to make them into free-standing stores completely separate from The
Limited. Management believes that remodeling or expansion has a positive impact
on our sales and intends to leverage our unique opportunity to increase
profitability through remodeling or expanding existing stores.
We plan to open approximately 40 new stores per year in 1999 and 2000, of
which nine have been opened as of April 30, 1999, and we have also signed
leases for an additional ten stores. We have identified all of the 21 stores
remaining to be opened in 1999 and expect all of them to be in operation before
the holiday season. We also plan to remodel or expand approximately 20 of our
existing stores in 1999.
In evaluating real estate locations we consider a variety of criteria.
Regional malls are measured based on:
o location of the mall and proposed stores within the mall
o strength of anchor stores
o the fashion and quality mix of other specialty tenants
o population and income characteristics of the surrounding area
In addition to regional stores, we intend to expand our stores in smaller
markets where we believe the potential return on sales in these locations will
be high. We may also consider specialty centers and upscale strip malls, major
urban centers for non-mall locations and retail outlets for additional store
sites.
A key element of our new store strategy is to open new stores with trained
managers in place. The vast majority of managers of new stores have prior
experience in our existing stores in either the manager or assistant manager
position.
Store Economics
Our average costs for remodeling or expanding existing stores were
$470,000 per store in fiscal 1998. We estimate that the average cost for
leasehold improvements, furniture and fixtures for stores to be opened in 1999
will be approximately $405,000 per store, after adjusting for landlord
allowances. Average pre-opening costs per store, which will be expensed as
incurred, are expected to be less than $20,000. In addition, inventory
purchases are expected to average approximately $100,000 per store.
New stores opened in fiscal 1998 have typically exceeded management's
store operating profitability and return on asset targets to date. In addition,
12 out of 15 remodeled stores have exceeded their targets, with 10 of those
stores increasing their volume an aggregate of 33% over the previous year since
the reopening date without materially changing their gross square footage.
New Distribution Channels
As part of our growth strategy, we intend to launch a catalog and a
website as new distribution channels for our products:
o Catalog. We intend to launch our first catalog for the holiday season
of 1999 with an October mailing of 1.5 million copies of our premiere
issue. We have hired a vice president of catalog operations to head
this effort and are in the process of hiring additional personnel. In
addition, we have engaged third parties to assist us with print
production and other creative services, circulation and third-party
fulfillment. Our catalog format will consist primarily of merchandise
content with some space devoted to articles and other editorial
content. We will use our frequent buyer database as the primary
source for our catalog
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mailing lists. In addition, we may purchase or rent qualified names
from other third parties' mailing lists to increase our circulation
quantities. We intend to execute a direct-mail campaign in May 1999
to test our circulation quantities and our database. During the year
2000, we intend to publish up to six catalogs.
o Website. Because more customers, especially customers within our
target demographic group, are turning to the Internet to access
consumer information and make retail purchases, we believe that an
attractive website will be critical to our brand and, in turn, our
sales growth. We are working to launch an informational website by
the fall of 1999. During the year 2000, we intend for our customers
to be able to order our products on-line. We also intend to use our
website as an additional method of increasing our customer database
because we will allow Internet browsers to register with us at their
option by providing their customer profile information on-line.
See "Risk Factors--Risk Factors Relating to Our Business--Our Expansion
into Catalog and Internet Distribution Channels May Not Be Successful" for a
description of the risks that we face in launching these new distribution
channels.
Merchandising
Product Mix
We design and sell all of our apparel under our proprietary "Limited Too"
brand. Our merchandise assortment covers a broad array of classifications in
girls' apparel, including jeans and other jeanswear and bottoms, knit tops,
T-shirts, shorts, skirts, dresses and outerwear. For many of these products, we
have a basic item that we sell at a low price point and more elaborate versions
that we sell at higher price points. To make our customers feel more secure in
their fashion choices, we generally display our merchandise as complete outfits
(for example, tops and bottoms displayed together), instead of displaying
garments together with type (for example, sweaters with other sweaters). Our
outfits are complemented by matching accessories and other related items which
we believe helps promote higher sales volume through multiple unit sales.
In addition to apparel and add-on, our other product categories are:
o related accessories including costume jewelry, hair ornaments,
slippers, key chains, wallets, backpacks, purses and watches
o our "GirlCare" line including toiletries, such as shower gel and body
splash; accessories, such as hairbrushes and manicure sets; and
cosmetics, such as glitter nail polish and lip gloss. These
"GirlCare" products are generally displayed prominently in our stores
on personal care sampling tables in the front of the stores so that
our customers can experiment with our products and consult their
friends and our sales associates. A substantial portion of this
merchandise category is under $10 so that our target customer can
spend her own money
o our lifestyle products including products for her room such as
inflatable furniture, candles, lamps and posters, as well as small
toys, candy, stickers and stationery
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The following table summarizes our merchandise mix by major category as a
percentage of net sales for the years 1996 to 1998:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Apparel....................................................................... 72.1% 71.0% 75.0%
Add-on (e.g., underwear, sleepwear and swimwear), accessories and
lifestyle products......................................................... 21.6 17.7 14.7
"GirlCare" products........................................................... 6.3 5.8 2.3
Infant........................................................................ -- 5.5 8.0%
----- ----- -----
Total................................................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
We believe that there are significant opportunities to increase volume
through both increased penetration of existing classifications and addition of
new merchandise classifications. Management believes that our ability to design
and market new merchandise quickly and effectively has been a key element of
our success. In recent years, we have broadened our assortment in existing
categories to increase volume and productivity. In 1999, we will continue to
expand key categories. An example is an increased number of sizes offered to
the 7 to 14 age group. Starting in late spring of 1998, we have added "3", "5"
and "7" junior sizes, slim sizes in bottoms and "XXL" and "XXXL" sizes for
tops.
Our point-of-sale information system allows management to track the
performance of merchandise items on a stock-keeping units basis. Reorder
"triggers" are used to replenish inventory of strong selling items. In
addition, performance by store at a stock-keeping units level is tracked to
allow inventory to be replenished based on differences in selling trends by
store.
Product Design
A cornerstone of our business is our ability to design products which
embody our brand image. Since 1996, one of our major strategies has been to
develop an internal design group. Between 1996 and 1998, the design group has
grown from a staff of two to more than 18.
The product development process begins as senior management in the
merchandising and design areas develop seasonal merchandise themes and
concepts. These concepts are used to create line lists of items that are then
developed by the designers. Designs cover not only fabric content,
specifications and colors, but also labels, hang tags and other descriptive
marketing. In developing concepts and designs, our executives identify trends
through domestic and foreign travel, retail shopping and awareness of
activities favored by our target customer group.
We develop substantially all of our merchandise assortment through our own
design group, which allows us to create exclusive merchandise and offer a vast
array of merchandise within a fashion season. In addition, because our
merchandise is sold exclusively in our own stores, we are able to control the
presentation and pricing of our merchandise, provide a higher level of customer
service and closely monitor retail sell-through, which provides competitive
advantages over other brand manufacturers that market their goods through
department and other specialty apparel stores.
Product Timeliness
Since the inception of the "Limited Too" brand, we have catered to the
fashion-aware customer by providing the latest fashions featured in movies,
television and publications aimed at our target customer group. At the same
time, we believe that we can reach a broader market by appealing to mainstream
consumers who seek to feel secure in their fashion choices, rather than
experimenting with uncertain styles. We believe that this strategy is
consistent with our philosophy of responding to and respecting our customers'
fashion preferences as opposed to attempting to establish new fashion trends.
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As part our strategy to deliver our merchandise in a timely manner, we
strive to stock our inventory with new merchandise reflecting the latest
fashion or trends on a continual basis.
Marketing and Promotion
Our marketing and promotional strategies are consistent with our focused
and differentiated brand. To appeal to the fun-loving nature of our target
customer group, we have created several promotional programs:
Colorful Window Displays. We concentrate our advertising efforts on our
colorful window displays. We place bright, cheerful graphics or photographs in
at least one of our display windows, the size of which span almost the entire
window. We change our displays frequently and often pursue holiday themes. We
believe our window displays attract customer attention in a busy mall
environment and immediately allow shoppers to recognize our store as a place
for young girls. Our in-store displays include a series of distinctive color
photographs that are enlarged and prominently displayed throughout the stores.
These photographs contain images of young girls engaged in popular social
activities which we believe reinforce the peer-acceptance quality of our brand.
Frequent Buyer Program. Our ongoing frequent buyer program uses a
wallet-sized punch card (the "Frequent Buyer Card") that can be punched up to
ten times for every purchase over $20 made in our stores. On the first Tuesday
of every month, through our "Too Punch Toosday" program, customers receive two
punches on their Frequent Buyer Card for purchases made. For every ten punches,
a customer will receive a coupon for $20 off her next purchase. Through April
1999, approximately 2.0 million Frequent Buyer Cards have been fully punched
and redeemed since the program began in September 1996. In fiscal 1998,
approximately 27% of all transactions used a Frequent Buyer Card in the
purchase, and approximately 10% of all transactions used a Frequent Buyer Card
that was redeemed, an increase from 7.2% in fiscal 1997. In order to receive a
Frequent Buyer Card, our customers are asked to fill out an information sheet
containing their name, address, birthday and their sister's name. We use such
information to establish our frequent buyer database, which in 1998 contained
approximately 830,000 names.
"Too Bucks" Program. Our event-oriented frequent buyer program occurs
three times a year around Easter, the fall "back to school" period and
Christmas. The program provides customers who purchase $50 or more in our
stores with $25 off coupons which can be used toward purchases over $50 made
during the two or three weeks after distribution. Aggregating the three
campaigns, the coupons are distributed for approximately 15 weeks and redeemed
for seven weeks; therefore, the campaign is part of our promotion strategy for
22 weeks of the year. For fiscal 1998, approximately 45% of the coupons were
redeemed.
Sales Associates
Customer service is a defining feature of our corporate culture and one of
our core business strengths. We believe that knowledgeable and enthusiastic
sales associates have a direct impact on our customers' perception of the
brand. Thus, we focus significant resources on the selection and training of
sales associates. Our sales associates are expected to convey and reinforce our
brand image through their attitude, enthusiasm and awareness of current fashion
trends.
Our sales associates are required to be familiar with the full range of
our merchandise. They are trained to be particularly sensitive to the needs of
our target customer and the concerns of her parents. Our sales associates
provide a high level of customer service by talking with our customers,
assisting them in putting together fashionable outfits and related accessories
and helping them experiment with our "GirlCare" products. We encourage our
sales associates to focus primarily on being friendly and helpful rather than
aggressively pursuing a sale. We minimize sales associates' time spent on
administrative functions by centrally determining merchandise display and
replenishment, markdowns and labor scheduling. By emphasizing friendliness,
product knowledge and personal attention, management believes that we have
established a reputation for a high level of customer service.
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The typical management of one of our stores consists of one store manager
and two to three assistant managers. We compensate our district and store
managers with a base salary plus a performance bonus based primarily on store
sales. Our store, district and regional managers spend a majority of their work
week on our selling floors, providing leadership through coaching the staff and
assisting customers.
At January 30, 1999, we had approximately 6,200 sales associates, of whom
approximately 800 were full-time salaried sales associates and approximately
300 were full-time hourly sales associates. A significant number of sales
associates are hired on a seasonal basis to meet demand during holiday
gift-buying seasons. The balance were part-time hourly associates. None of our
sales associates is represented by a labor union. We believe that our
relationship with our sales associates is good.
Sourcing
We use a variety of sourcing arrangements. Historically, our largest
apparel supplier has been Mast Industries, Inc., a wholly owned subsidiary of
The Limited. Mast Industries supplied approximately 29% of the apparel that we
purchased in 1998 and will supply approximately 30% of our 1999 business. We
believe that all transactions that we have entered into with Mast Industries
have been on terms that would have been obtained on an arm's length basis since
we treat them as if they were a third party. We were not, and will not be,
obligated to source products through Mast Industries.
In 1998, we sourced over 60% of our merchandise from foreign factories
located primarily in East and Southeast Asia. We do not have any long-term
merchandise supply contracts, and many of our imports are subject to existing
or potential duties, tariffs or quotas that may limit the quantity of goods
which may be imported into the United States from countries in that region. We
compete with other companies, including The Limited and The Limited's other
subsidiaries, for production facilities and import quota capacity. In addition,
although the General Agreement on Tariffs and Trade adopted on December 8, 1994
requires the elimination of duties, tariffs and quotas on apparel and textile
products by January 1, 2005, the GATT treaty is not expected to have any
meaningful effect on the import of merchandise used in our business for several
years. We attempt to monitor manufacturing to ensure that no one company or
country is responsible for a disproportionate amount of our merchandise.
We typically transact business on an order-by-order basis and do not
maintain any long-term or exclusive commitments or arrangements to purchase
from any vendor. We believe that we have good relationships with our vendors
and that, as the number of our stores increases, there will be adequate sources
to produce a sufficient supply of quality goods in a timely manner and on
satisfactory economic terms. See "Risk Factors--Risk Factors Relating to Our
Business--Our Reliance on Foreign Sources of Production May Adversely Affect
Our Business."
Central Store Planning
Our store design and construction operations are handled centrally by
Limited Store Planning, the store planning division of The Limited. Limited
Store Planning is organized into teams comprised of designers, construction
managers, architects, purchasing agents and financial personnel who are
responsible for all phases of store design and construction. Teams are assigned
to work with the senior management of a specific retail business of The
Limited, including us, and to develop and implement store designs that are
consistent with and promote the image of a given retail business. We intend to
enter into an agreement under which The Limited will continue to provide such
services to us on a basis consistent with past practices for a year following
the spin-off. The Limited will charge us fees based on its costs in providing
such services plus 5% of the costs. See "Relationship Between Too, Inc. and The
Limited--Transitional Services and Separation Agreements--Services Agreement."
We intend to add in-house staff and contract for outside services before the
services agreement expires.
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Central Real Estate Management
The Limited's real estate division centrally handles our real estate
operations, including all aspects of lease negotiations. We intend to enter
into an agreement under which The Limited will continue to provide such
services to us on a basis consistent with past practices for a year following
the spin-off. The Limited will charge us fees based on its costs in providing
such services plus 5% of the costs. See "Relationship Between Too, Inc. and The
Limited--Transitional Services and Separation Agreements--Services Agreement."
We intend to add in-house staff and contract for outside services before the
services agreement expires.
Potential new stores, locations, expansions and relocations are identified
by us and by The Limited's real estate division. In choosing new sites for
retail stores, The Limited's real estate division provides us with financial
details regarding the proposed lease arrangement. We then evaluate the net
required investment and potential rates of return relative to our established
hurdle rates before we sign the lease and approve the store for construction.
The actual construction of the store is managed by Limited Store Planning.
Although the real estate division retains control over the allocation of space
within a given mall among the various retail businesses of The Limited,
including us, each individual business is entitled to reject any transaction
negotiated by the real estate division of The Limited. Real estate decisions
are based on a number of factors, including:
o location of the mall and proposed store location within the mall
o consistency with our target customer group and market
o sales and profit potential
o the overall economic condition, demographic characteristics of the
market and shopping patterns of the market
o the identity of the other tenants in close proximity
o the availability of acceptable lease terms
We also consider a variety of other criteria related to the malls in which
we locate our stores. Although our arrangement with The Limited may raise the
potential for conflicts of interest, management believes that the arrangement
has provided us with a significant competitive strength. Given The Limited's
substantial size, our management believes that The Limited has been able to
obtain lease terms and store sites on our behalf that were more favorable than
those that we would have been able to obtain on our own. At the same time,
management has been able to draw from The Limited's experience. While we
believe that the transitional period will give us ample time to develop our own
resources in these areas, we cannot assure you we will be able to achieve the
same economies of scale and bargaining leverage as does The Limited. In
addition, some of our direct leases which are guaranteed by The Limited may be
affected. See "Risk Factors--Risk Factors Relating to Separating Our Company
from The Limited--We May Not Be Able to Obtain Suitable Real Estate to
Implement Our Growth Strategy."
Merchandise Distribution
Our distribution operations are managed in a warehouse leased from
Distribution Land Corp., a wholly owned subsidiary of The Limited. See
"Relationship Between Too, Inc. and The Limited--Transitional Services and
Separation Agreements--Lease Amendment Agreement." The warehouse is located in
Columbus, Ohio. Once the warehouse receives any merchandise, the merchandise is
inspected, packed for delivery to the stores and forwarded to a central
shipping facility operated by Limited Distribution Services Inc., a wholly
owned subsidiary of The Limited, which also provides engineering services to
the warehouse.
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Limited Distribution Services also maintains a worldwide logistics network
of agents and space availability arrangements to support the in-bound movement
of merchandise into the warehouse. The outbound shipping system consists of
common carrier line routes connecting the distribution complex to a network of
delivery agents. Each store receives several deliveries each week and receives
daily deliveries during the peak holiday shopping season. We believe that this
delivery schedule ensures more frequent deliveries than those of our smaller
competitors. Limited Distribution Services does not own or operate trucks or
trucking facilities.
We intend to enter into an agreement under which Limited Distribution
Services will continue to provide such services to us on a basis consistent
with past practices for three years. The Limited will charge us fees based on
its costs in providing such services plus 5% of the costs. See "Relationship
Between Too, Inc. and The Limited --Transitional Services and Separation
Agreements--Services Agreement."
Management Information Systems
Our management information systems and electronic data processing systems
consist of a full range of retail, financial and merchandising systems,
including:
o credit
o inventory distribution and control
o sales reporting
o accounts payable
o merchandise reporting
o distribution
o financial reporting
Our information system is uniquely structured to address the needs of our
business. The Limited owns some of the equipment used in the management
information systems. We intend to enter into an agreement under which The
Limited will continue to provide these information technology services to us on
a basis consistent with past practices for a year following the spin-off. The
Limited will charge us fees generally based on its costs in providing such
services plus 5% of the costs. See "Relationship Between Too, Inc. and The
Limited--Transitional Services and Separation Agreements--Services Agreement."
Our merchandise reporting system updates sales information on a daily
basis by polling the information from each store's point-of-sale, or POS,
terminals. Our POS system consists of registers providing price look-up,
scanning of bar-coded tickets and credit authorization. Through daily two-way
electronic communication with each store:
o sales information, payroll hours, store-initiated inventory transfers
and details of physical inventory counts are uploaded to the host
system
o price changes are downloaded to in-store POS devices
o we are able to send electronic mail
We evaluate information obtained through daily reporting to implement
merchandising decisions regarding markdowns and allocation of merchandise.
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Current hardware and network infrastructure in being upgraded through:
o the creation of store, marketing and customer databases to improve
controls and enhance sales and operational capabilities
o the implementation of a new warehouse management system
o the upgrading of distribution facilities to expand capacity
We may not be able to complete our planned upgrades on a timely basis or in a
successful manner. See "Risk Factors--Risk Factors Relating to Our
Business--The Planned Upgrades of the Management Information Systems That We
Use May Not Be Successful."
Trademarks and Service Marks
A wholly owned subsidiary of The Limited owns the brand name "Limited
Too", which is registered in the United States and in numerous foreign
countries. We intend to enter into a trademark and service mark license
agreement that will allow us to operate under the "Limited Too" brand name in
connection with our business. The agreement will be for an initial term of five
years after the spin-off, renewable annually at our option. See "Relationship
Between Too, Inc. and The Limited--Transitional Services and Separation
Agreements--Trademark and Service Mark License Agreement."
We are the owner in the United States of trademarks and service marks used
to identify our merchandise and services, other than our brand name. Many of
these merchandise marks are registered in the United States Patent and
Trademark Office. These merchandise marks are important to us, and we intend
to, directly or indirectly, maintain these marks and their registrations.
However, we may choose not to renew a registration of one or more of our
merchandise marks if we determine that the mark is no longer important to our
business. We do not believe that any material claims of infringement or other
challenges to our right to register or use our merchandise marks in the United
States in a manner consistent with our current practices are pending.
We also conduct business in foreign countries, principally because a
substantial portion of our merchandise is manufactured outside the United
States. We own registrations of our merchandise marks in foreign countries to
the degree necessary to protect these marks, although there may be restrictions
on the use of our marks in a limited number of foreign jurisdictions.
We have not licensed any of our trademarks or service marks to any other
entity.
Competition
Although no other specialty apparel retailer focuses exclusively on our
target customers, all aspects of our business are highly competitive since
other retailers offer merchandise designed for our customers.
Our primary competitors target the same customer group and include:
o other specialty apparel and accessory retailers, such as GapKids,
abercrombie and Claire's
o department stores, such as J.C. Penney's
o discount retailers, such as Target and Kohl's
Newly emerging store-based retailers may provide additional competition to
the existing competitive market.
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In addition to the traditional store-based retailers, we also compete with
direct marketers who target customers through catalogs and Internet shopping.
Direct marketers also include traditional store-based retailers like us who are
expanding into catalogs and the Internet as additional distribution channels.
We believe that the principal bases upon which we compete are design,
price, service, selection, quality and distribution channels:
o Design. We believe that we have a significant advantage over our
competitors in this area because substantially all of our merchandise
is designed internally and sold exclusively through our stores. See
"--Merchandising--Product Design."
o Price. We determine appropriate initial markups for all items and
determine when prices should be lowered so that older inventory can
make way for new inventory.
o Service. Our sales associates are expected to personify our brand
image through their attitude, enthusiasm and awareness of current
fashion trends. See "--Sales Associates."
o Selection. We offer a wide range of apparel for our target customer
group, as well as a broad assortment of non-apparel items, including
related accessories, personal care products under our "GirlCare" line
and lifestyle products, such as furnishings for our target customer's
room. See "--Merchandising--Product Mix."
o Quality. Because we target fashion-aware customers, quality is
important to us. Currently, we believe that we source our merchandise
from reliable suppliers and we require our suppliers to test our
products to ensure that they comply with federal and state standards
and regulations.
o Distribution Channels. Our exciting stores located throughout the
United States are our premiere distribution channel for our
merchandise. See "--Our Stores--Existing Store Environment" and
"--Properties." As part of our growth strategy, we intend to launch a
catalog and a website as new distribution channels for our products.
See "--Our Stores--New Distribution Channels."
We believe that we have significant competitive advantages because of high
consumer recognition, acceptance of our brand name, our strong presence in the
major shopping malls in the United States, our history with The Limited and the
experience of our management team and sales associates. Most of our competitors
provide clothing to both boys and girls. We believe that among single-gender
retailers, we are the only specialty retailer to specifically target girls
approximately 7 to 14 years of age. This unique aspect of our retail strategy
contributes to our "just for her" brand image. However, some of our competitors
have greater financial, marketing and other resources available to them. We
cannot assure you that we will be able to compete successfully with them in the
future, particularly in distribution channels in which we have less experience,
such as catalogs and the Internet. See "Risk Factors--Relating to Our
Business--Our Expansion into Catalog and Internet Distribution Channels May Not
Be Successful."
Properties
Our main offices are located in Columbus, Ohio. These headquarters are
owned by Distribution Land Corp., a wholly owned subsidiary of The Limited, and
leased to us. See "Relationship Between Too, Inc. and The Limited
- --Transitional Services and Separation Agreements--Lease Amendment Agreement."
We believe that our facilities are well maintained, in good operating condition
and adequate for our current needs.
As of April 30, 1999, we operated 321 stores, which are located primarily
in shopping malls throughout the United States. Of these stores, 194 were
leased directly from third parties -- principally shopping mall developers --
and 127 are governed by leases where the tenant is The Limited or an affiliate
of The Limited, other than us. See
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"Relationship Between Too, Inc. and The Limited--Transitional Services and
Separation Agreements--Store Leases Agreement." We believe that as
approximately 98% of our stores are located in shopping malls, there are growth
opportunities for expansion to free-standing locations.
Leases with third parties are typically between 10 and 15 years in
duration. In most cases, the business unit pays an annual base rent plus a
contingent rent based on the store's annual sales in excess of pre-established
performance milestones. Leases with The Limited or an affiliate of The Limited,
other than us, are on terms that represent the proportionate share of the base
rent payable in accordance with the underlying lease plus the portion of any
contingent rent payable in accordance with the underlying lease attributable to
our performance.
Some of the leases that we enter into are guaranteed by The Limited. See
"Risk Factors--We May Not Be Able to Obtain Suitable Real Estate to Implement
Our Growth Strategy."
The map below provides the number of stores by state that we operate in
the continental United States as of January 30, 1999:
[GRAPHIC OMITTED -- MAP]
Environmental Matters
Various federal, state and local environmental protection and health and
safety laws and regulations govern our activities, including the manufacture
and transportation of our products and the disposal of waste. We also could be
held responsible as owners or operators of real property for all of the costs
relating to any contamination at our past or present facilities. These laws
often impose liability even if the owner or operator did not know of, or was
not responsible for, the contamination.
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Based on our present knowledge and current laws and regulations, we do not
believe that environmental matters are likely to have a material adverse effect
on our business, assets or financial condition. However, if we become aware of
additional facts or if the laws change, environmental matters could become
material to us.
Litigation
We are a defendant in lawsuits 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 Limited and some of its subsidiaries,
including us, 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 records 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, where the matter remains
pending.
Although it is not possible to predict with certainty the eventual outcome
of any litigation, in the opinion of management, the foregoing proceeding is
not expected to have a material adverse effect on our financial position or
results of operations.
Employees
As of January 30, 1999, we had approximately 6,400 employees, of whom
approximately 1,300 were employed full-time and 5,100 were part-time employees.
We also hire temporary employees during the peak "back to school" and holiday
seasons. We believe that we have good relationships with our employees.
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MANAGEMENT
The following table provides material information concerning our board of
directors and our executive officers who will be serving or in office as of the
date of the spin-off.
Name Age Position
- ---- --- --------
Michael W. Rayden..... 50 President and Chief Executive Officer and Director
Sally A. Boyer........ 38 Vice President--Merchandising Operations
Kent A. Kleeberger.... 47 Vice President and Chief Financial Officer
Kathleen C. Maurer.... 39 Vice President--Human Resources
James C. Petty........ 40 Vice President--Stores
David A. Krinsky...... 50 Director
James U. McNeal....... 67 Director
Michael W. Rayden. Mr. Rayden has served as our President and Chief
Executive Officer since March 1996. For the past 28 years, Mr. Rayden's career
has been focused on the retail industry. Before joining us, he served as the
President, Chief Executive Officer and Chairman of the Board of Pacific Sunwear
of California, Inc. from 1990 to 1996, the President and Chief Executive
Officer of The Stride Rite Corporation from 1987 to 1989 and the President and
Chief Executive Officer of Eddie Bauer Inc. from 1984 to 1987. In connection
with the spin-off, Mr. Rayden will be elected a director.
Sally A. Boyer. Ms. Boyer has served as our Vice President--Merchandising
Operations since May 1998. Ms. Boyer previously held various positions with us
and The Limited, including as our Vice President--Planning and Distribution
from 1995 to 1998. Before joining The Limited in 1991, she served as a
Financial Consultant for Andersen Consulting from 1990 to 1991, a Merchandise
Planner for The Limited from 1989 to 1990 and Merchandise Controller of
Youthland, Inc. from 1984 to 1989.
Kent A. Kleeberger. Mr. Kleeberger joined us as Vice President and Chief
Financial Officer in March 1998 after a 10-year career with The Limited,
including Victoria's Secret Catalogue. From 1995 to 1998, Mr. Kleeberger served
as Corporate Controller of The Limited. Before that, he was Vice President and
Controller of Victoria's Secret Catalogue after having worked there for
approximately four years. Before joining The Limited in 1988, he held various
positions, including Senior Manager, Audit, with Peat Marwick during his
13-year tenure.
Kathleen C. Maurer. Ms. Maurer has served as our Vice President--Human
Resources since April 1996 after serving 13 years in the human resources sector
of the retail apparel industry. Before her current position with us, Ms. Maurer
was the Vice President--Human Resources of Structure from 1991 to 1996, a
Director of Human Resources of Express from 1985 to 1991 and a Personnel
Administrator of The Limited from 1984 to 1985.
James C. Petty. Mr. Petty has served as our Vice President--Stores since
June 1997. Mr. Petty previously held various positions involving store
management and operations with Old Navy Inc., Banana Republic, Inc. and The
Gap, Inc. during his 13-year tenure with The Gap and its subsidiaries,
including Vice President--Store Operations of Old Navy from 1994 to 1997 and
Vice President--Store Operations of Banana Republic from 1991 to 1994.
David A. Krinsky. Mr. Krinsky is a member of the firm of O'Melveny & Myers
LLP in Newport Beach, California. Before joining that firm as a partner in
1994, he was a partner at the law firm of Pettis, Tester, Kruse & Krinsky. He
practices as a business and securities lawyer.
James U. McNeal. Dr. McNeal has been Professor of Marketing at Texas A&M
University since 1967. Dr. McNeal established the Department of Marketing and
was head of this department from 1967 to 1975. Dr. McNeal is a frequent
consultant to public companies and the federal government. Since 1976, he has
been a marketing consultant specializing in marketing to children as consumers.
68
<PAGE>
Before the spin-off, we will amend our certificate of incorporation to
provide for a classified board consisting of a total of five directors. Members
of our board will be divided into three classes and will serve staggered
three-year terms. The term of office of ("Class A") will expire at
the 2000 annual meeting of shareholders (expected to occur in the second
quarter of 2000). The term of office of ("Class B") will expire at
the 2001 annual meeting of shareholders. The term of office of ("Class C")
will expire at the 2002 annual meeting of shareholders.
Our board will have an audit committee, consisting entirely of independent
directors, which will review the results and scope of the audit and other
services provided by our independent accountants. In addition, our board will
have a compensation committee, comprised of two or more members of our board
who qualify as "outside directors" within the meaning of Section 162(m) of the
Internal Revenue Code. The compensation committee will determine the
compensation, including salaries, bonuses, restricted stock and option grants,
for our executive officers.
Compensation of Directors
Directors who are not associates of Too, Inc. will receive an annual
retainer of $10,000 per year (increased by $1,500 for each committee chair
held), plus a fee of $1,000 for each board meeting attended ($400 for a
telephonic meeting). As committee members, they will also receive $600 per
committee meeting attended ($200 for a telephonic meeting). Each action in
writing that our board or any committee of our board takes entitles each
director on the board or the committee to be paid $200. Associates and officers
who are directors receive no additional compensation for services rendered as
directors. Under the Too, Inc. 1999 Non-Associate Director Stock Plan, each
director who is not an associate of Too, Inc. will:
o receive an initial grant to purchase of 5,000 shares of our common
stock
o receive annual grants of options to purchase 1,000 shares of our
common stock at a price equal to the fair market value of the shares
at the date of grant
o be paid 50% of the annual retainer in shares of Too, Inc.'s common
stock
Employment Agreements with Executive Officers
Before or simultaneously with the spin-off, we expect to enter into an
employment agreement with Mr. Rayden, our President and Chief Executive
Officer. We also anticipate that after the spin-off, we will enter into
employment agreements, which could include non-compete covenants, with some of
our other named executive officers.
Shares Eligible for Future Sale
Shares of our common stock that you will receive in the spin-off will be
freely transferable, except if you can be considered an "affiliate" of us under
Rule 144 under the Securities Act of 1933. Persons who can be considered our
affiliates after the spin-off generally include individuals or entities that
directly, or indirectly through one or more intermediaries, control, are
controlled by, or are under common control with, us. Our affiliates may only
sell common stock received in the spin-off pursuant to an effective
registration statement under the Securities Act of 1933 or pursuant to an
exemption from registration under the Securities Act of 1933, such as the
exemption afforded by Rule 144.
69
<PAGE>
EXECUTIVE COMPENSATION
Summary
The following table presents specific information regarding the
compensation that The Limited has paid for the period indicated to:
o Michael W. Rayden, our President and Chief Executive Officer
o Sally A. Boyer, our Vice President--Merchandising Operations
o Kent A. Kleeberger, our Vice President and Chief Financial Officer
o Kathleen C. Maurer, our Vice President--Human Resources
o James C. Petty, our Vice President--Stores
who have become our executive officers. Before the named individuals became our
executive officers, they were associates of The Limited. The named executive
officers will not continue their employment with The Limited after the
spin-off. After the spin-off, we anticipate that we will make future awards of
options to purchase our common stock and restricted shares of our common stock
to a number of our executive officers, including the named executive officers
under the Too, Inc. 1999 Stock Option and Performance Incentive Plan described
below. The Limited paid the compensation stated below to these individuals
because of their employment with The Limited.
The principal components of each named executive officer's cash
compensation from The Limited have been:
o the annual base salary
o a bonus
as shown in the "Summary Compensation Table." The bonus amounts represent
amounts that the compensation committee of The Limited's board approved for
each named individual based on the performance of The Limited and us during
1998. The long-term compensation shown in the "Summary Compensation Table" was
provided under The Limited, Inc. 1993 Stock Option and Performance Incentive
Plan (as amended and restated from time to time, "The Limited's Stock Plan"),
which provides for various types of awards such as options to acquire common
stock of The Limited and restricted common stock of The Limited. The Limited
will be responsible for payments relating to equity-based awards relating to
The Limited's common stock that it granted before the spin-off. We will pay all
of the other compensation to be paid to our named executive officers after the
spin-off.
Immediately after the spin-off, the annual base salaries and annual bonus
opportunities of the named executive officers will be at the levels as was
determined by The Limited's compensation committee. Subsequently, the annual
base salary and the annual bonus opportunity of the named executive officers
will be determined by our compensation committee. We anticipate that the base
salary that we pay to the named executive officers and to all other executive
officers will initially be generally comparable to present levels of base
salary received from The Limited, subject to such adjustments as may be
determined in the normal course of business. In addition, in connection with
the spin-off, we anticipate that we will adopt a number of compensation plans.
Under the Too, Inc. 1999 Non-Associate Director Stock Plan described below, on
the effective date of the spin-off and on the day of each annual meeting of our
shareholders beginning after the spin-off, we will grant options to purchase
shares of our common stock to each of our non-associate directors. Under the
Too, Inc. 1999 Incentive Compensation Plan described below, our named executive
officers and other eligible associates will be eligible to receive cash bonuses
based on attainment by us of specified performance goals.
70
<PAGE>
All of the named executive officers will be eligible to participate in our
Stock Option and Performance Incentive Plan and our Incentive Compensation
Plan, under which we anticipate granting incentive compensation awards after
the spin-off.
We also expect that in connection with the spin-off, options to purchase
shares of The Limited's common stock will be equitably adjusted to reflect the
spin-off. These equitable adjustments may involve:
o adjustments of the exercise price and number of shares subject to the
options, or
o conversion into options to purchase our common stock, or
o a combination of both
We also anticipate that The Limited will make equitable adjustments to
restricted shares of The Limited's common stock to reflect the spin-off.
The following table presents specific information regarding the
compensation that The Limited has paid for the period indicated to all of the
persons listed below who have become our executive officers.
Long-Term Incentive Plans--Awards in Fiscal 1998
No awards were granted in respect of fiscal 1998 to the named executive
officers, other than the restricted stock performance awards granted in shares
of The Limited's common stock to our named executive officers, as disclosed in
the "Summary Compensation Table."
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
----------------------------------------------- ---------------------------------------------
Securities
Fiscal Other Annual Restricted Underlying All Other
Year Bonus Compensation Stock Awards Options Awarded Compensation
Name of Principal Position (1) Salary ($)(2) ($)(3) ($)(4) (#)(5) ($)(6)
- -------------------------- ------ ------------ ---------- ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael W. Rayden
President and Chief
Executive Officer..... 1998 $ 669,231 $1,188,250 $ 12,383 $ 141,311 101,770 $ 189,819
Sally A. Boyer
Vice President--
Merchandising
Operations............ 1998 216,538 157,520 -- 122,615 5,088 43,993
Kent A. Kleeberger
Vice President and
Chief Financial
Officer............... 1998 237,308 171,840 -- 183,923 10,177 42,982
Kathleen C. Maurer
Vice President--
Human Resources....... 1998 193,846 139,620 -- 122,615 5,089 44,271
James C. Petty
Vice President--
Stores................ 1998 238,846 171,840 -- 183,923 5,089 14,940
- -------------------
<FN>
(1) Under rules promulgated by the SEC, since we were not a reporting company
during the three immediately preceding fiscal years, only the information
with respect to the most recent completed fiscal year is noted in the
"Summary Compensation Table."
(2) Represents for fiscal 1998 the aggregate of the performance-based
incentive compensation for the spring and fall selling seasons.
(3) Represents reimbursement of taxes on term life insurance premiums paid on
behalf of Mr. Rayden.
71
<PAGE>
(4) Represents for each executive officer the restricted stock awards for
fiscal 1998 under The Limited's Stock Plan. The information in the table
is based on the closing price of The Limited's common stock on the date
that the awards were made.
On June 1, 1998, 4,266 restricted shares of The Limited's Common Stock
were granted to Mr. Rayden. The per share value of The Limited's common
stock on this date was $33.125. This award was granted in connection with
the May 1998 spin-off of Abercrombie & Fitch. The vesting of this award is
the same as the vesting of the previously granted restricted stock awards
to which this adjustment grant relates.
On February 1, 1999, 3,580, 5,370, 3,580 and 5,370 restricted shares of
The Limited's common stock were granted to Ms. Boyer, Mr. Kleeberger, Ms.
Maurer and Mr. Petty, respectively, based on business performance for
fiscal 1998. The per share value of The Limited's common stock on this
date was $34.25. These awards vest 10% on the grant date and 20%, 30% and
40% on the first through third anniversaries of the grant date, in each
case, subject to continued employment with The Limited.
Dividends will not be paid or accrue with respect to shares of restricted
stock until such shares vest.
As of January 30, 1999, the aggregate restricted stock holdings and the
value of such holdings for each of the named executive officers were: Mr.
Rayden, 245,286 shares, $8,370,385; Ms. Boyer, 9,017 shares, $307,705; Mr.
Kleeberger, 7,826 shares, $267,062; Ms. Maurer, 9,017 shares, $307,705;
and Mr. Petty,10,770 shares, $367,526 (based on the $34.125 fair market
value of a share of The Limited's common stock as of Friday, January 29,
1999).
(5) Options have been adjusted to reflect the May 1998 spin-off of Abercrombie
& Fitch.
(6) Includes employer matching and supplemental contributions allocated to
each executive officer's account under qualified and non-qualified defined
contribution plans maintained by The Limited during the 1998 calendar year
in the amount of $176,294, $40,840, $41,558 and $41,118 and $11,808, for
Mr. Rayden, Ms. Boyer, Mr. Kleeberger, Ms. Maurer and Mr. Petty,
respectively. We anticipate that after the spin-off, the named executive
officers will continue to participate in similar plans that we will adopt.
Includes term life insurance premiums in the amount of $13,525 paid on
behalf of Mr. Rayden.
Includes one-time cash payments related to the May 1998 spin-off of
Abercrombie & Fitch. The payments are in the amount of $3,153, $1,424,
$3,153 and $3,132 to Ms. Boyer, Mr. Kleeberger, Ms. Maurer and Mr. Petty,
respectively.
</FN>
</TABLE>
Stock Options
The following table sets forth material information regarding options to
acquire The Limited's common stock that The Limited granted to the named
executive officers during The Limited's 1998 fiscal year.
Option Grants in Fiscal Year 1998 (1)
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value at
------------------------------------------------------------- Assumed Annual Rates of Stock
Percentage of Price Appreciation for Option
Securities Total Options Term(3)
Underlying Granted to ------------------------------
Options Associates in Exercise Price Expiration
Name Granted(3)(2) Fiscal Year Per Share($) Date 5%($) 10%($)
- --------------------------- ------------- ------------- -------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Rayden.......... 101,770 2.41% $ 26.6532 2/2/08 $ 1,784,086 $ 4,447,559
Sally A. Boyer............. 5,088 0.12% 26.6532 2/2/08 89,196 222,356
Kent A. Kleeberger......... 7,633 0.18% 26.6532 2/2/08 133,811 333,578
2,544 0.06% 27.9429 3/23/08 46,756 116,558
Kathleen C. Maurer......... 5,089 0.12% 26.6532 2/2/08 89,213 222,400
James C. Petty............. 5,089 0.12% 26.6532 2/2/08 89,213 222,400
- -------------------
<FN>
(1) All options granted relate to shares of The Limited's common stock.
72
<PAGE>
(2) On February 2, 1998, options were granted to Mr. Rayden, Ms. Boyer, Mr.
Kleeberger, Ms. Maurer and Mr. Petty pursuant to The Limited's Stock Plan.
The options granted to Mr. Rayden vest 10%, 10%, 10%, 15%, 20% and 35% on
the first through sixth anniversaries of the grant date, respectively,
subject to continued employment with The Limited. The options granted to
Ms. Boyer, Mr. Kleeberger, Ms. Maurer and Mr. Petty become exercisable in
four equal annual installments commencing on the first anniversary of the
grant date, in each case, subject to the holder's continued employment
with The Limited.
On March 23, 1998, options were granted to Mr. Kleeberger pursuant to The
Limited's Stock Plan. These options become exercisable in four equal
annual installments commencing on the first anniversary of the grant date,
subject to continued employment with The Limited.
Options have been adjusted to reflect the May 1998 spin-off of Abercrombie
& Fitch.
(3) The assumed rates of growth were selected by the SEC for illustrative
purposes only and are not intended to predict or forecast future stock
prices.
</FN>
</TABLE>
The following table provides information relating to the number and value
of shares of The Limited's common stock subject to options held by the named
executive officers as of January 30, 1999.
Aggregated Option Exercises in 1998 Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options at Fiscal Year-
Shares Options at Fiscal Year-End (#) End($)(2)
Acquired on Value Realized ------------------------------ ------------------------------
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------ ------------ -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Rayden............. -- -- 36,636 382,656 $ 552,725 $ 4,968,111
Sally A. Boyer................ -- -- 13,484 12,977 226,774 175,198
Kent A. Kleeberger............ 18,000 $ 152,426 13,610 20,482 218,089 247,061
Kathleen C. Maurer............ -- -- 17,809 12,214 260,845 162,490
James C. Petty................ -- -- 2,544 12,722 36,194 146,620
- -------------------
<FN>
(1) Calculated on the basis of the number of shares exercised, multiplied by
the excess of the fair market value of a share of The Limited's common
stock on the date of exercise over the exercise price of such option.
(2) Value is calculated on the basis of the number of shares of The Limited's
common stock subject to each such option multiplied by the excess of the
$34.125 fair market value of a share of The Limited's common stock at
fiscal year-end over the exercise price of such option.
</FN>
</TABLE>
Options have been adjusted to reflect the spin-off of Abercrombie & Fitch
in May 1998.
Too, Inc. 1999 Incentive Compensation Plan
We anticipate that before the spin-off occurs, our board will adopt, and
The Limited, as our sole shareholder, will approve, effective on the completion
of the spin-off, the Too, Inc. 1999 Incentive Compensation Plan. This plan is
intended to satisfy the applicable provisions of Section 162(m) of the Internal
Revenue Code. Our compensation committee will select those key executives of
our company with significant operating and financial responsibility and who are
likely to be "covered employees" within the meaning of Section 162(m) for the
relevant fiscal year to be eligible to receive seasonal or annual incentive
compensation payments under the plan.
73
<PAGE>
Before the beginning of each spring and fall selling season, our
compensation committee may establish our performance goals. The performance
goals that our compensation committee selects will be based on one or more of
the following:
o shareholder return
o return on equity
o return on investment
o price of our common stock or the stock of any affiliate
o sales productivity
o comparable store sales growth
o economic profit
o net income growth
o market share
These factors will have a minimum performance standard below which, and a
maximum performance standard above which, no payments will be made. Our
compensation committee may base our performance goals on an analysis of
historical performance and growth expectations for the business, financial
results of other comparable businesses, and progress towards achieving the
long-range strategic plan for our business. These objectives and determination
of results are based entirely on financial measures, and discretion may not be
used to modify award results. Our compensation committee may not use any
discretion to modify results except as permitted under Section 162(m) of the
Internal Revenue Code.
Annual incentive compensation targets established for eligible executives
will range from 10% to 150% of base salary. Incentive compensation targets
would equal a percentage of an eligible executive's total compensation as
established by the pay guidelines. Executives earn their target incentive
compensation if the business achieves the established performance goals. The
target incentive compensation percentage for each executive is based on the
following:
o the level of the officer's position
o the functional responsibility of the officer's position
o competitive practices
in that order of priority. For the named executive officers, annual incentive
compensation targets can range from 30% to 150% of base salary. Incentive
compensation paid to executives can range from zero to double their targets,
based upon the extent to which performance goals are achieved. Except as
permitted by Section 162(m) of the Internal Revenue Code, the minimum level at
which an executive would earn any incentive payment, and the level at which an
executive would earn the maximum incentive payment of double the target, are
established by our compensation committee before the commencement of each bonus
period. Actual payouts must be based on a preestablished interpolation based on
these minimum and maximum levels and the performance goals.
The maximum dollar amount to be paid for any year under our Incentive
Compensation Plan to each participant may not exceed $3,000,000.
74
<PAGE>
Too, Inc. 1999 Stock Option and Performance Incentive Plan
We anticipate that before the spin-off occurs, our board will adopt, and
The Limited, as our sole shareholder, will approve, effective on the completion
of the spin-off, the Too, Inc. 1999 Stock Option and Performance Incentive
Plan. This section of the information statement describes the material
provisions of the plan. Because this section is a summary, it does not contain
all of the information that may be important to you. You should read our Stock
Option and Performance Incentive Plan, which we have filed as an exhibit to the
Form 10 of which this information statement forms a part.
Purpose of Plan
The purpose of our Stock Option and Performance Incentive Plan is to
attract and retain the best available executive and key management associates
for us and our subsidiaries and to encourage the highest level of performance
by such associates, thereby enhancing our value for the benefit of our
shareholders. The plan is also intended to motivate executive and key
management associates to contribute to our future growth and profitability and
to reward their performance in a manner that provides them with a means to
increase their holdings of our common stock and aligns their interests with the
interests of our shareholders.
Administration of Plan
Our Stock Option and Performance Incentive Plan will be administered by
our compensation committee. Our compensation committee will have the power, in
its discretion, to grant awards under the plan, to determine the terms of these
awards, to interpret the provisions of the plan and to take any action that it
deems necessary or advisable for the administration of the plan.
Eligibility and Participation
Eligibility to participate in our Stock Option and Performance Incentive
Plan is limited to our named executive officers and key executive management
associates and those of our subsidiaries. Participation in the plan is at the
discretion of our compensation committee and will be based upon the associate's
present and potential contributions to our success and such other factors as
our compensation committee deems relevant. No associate may be granted in any
calendar year awards covering more than 1,100,000 shares of our common stock.
Type of Awards Under Our Stock Option and Performance Incentive Plan
The Stock Option and Performance Incentive Plan provides that our
compensation committee may grant awards to eligible associates in any of the
following forms, subject to such terms, conditions and provisions as our
compensation committee may determine to be necessary or desirable:
o incentive stock options
o nonstatutory stock options
o stock appreciation rights
o restricted shares of our common stock
o performance shares
o performance units
o unrestricted shares of our common stock
75
<PAGE>
o tax reimbursement payments
Number of Authorized Shares
We have authorized a maximum of _______ shares of our common stock for our
associates and those of our subsidiaries under the Stock Option and Performance
Incentive Plan during the term of the plan. Corresponding tax reimbursement
payments also may be awarded at the discretion of our compensation committee.
Our compensation committee may adjust the number and class of shares available
under the plan and/or subject to outstanding awards to prevent dilution or
enlargement of rights in the event of various changes in our capitalization.
Term of Our Stock Option and Performance Incentive Plan
Unless earlier terminated by our board, our Stock Option and Performance
Incentive Plan will terminate on the tenth anniversary of the earlier of the
adoption of the plan by our board or the date of the spin-off.
Amendment and Termination
Our board may suspend, amend, modify or terminate our Stock Option and
Performance Incentive Plan at any time. Any repricing of outstanding options,
other than antidilution or equitable adjustments, must be approved by our
shareholders.
Too, Inc. 1999 Non-Associate Director Stock Plan
We anticipate that, before the spin-off occurs, our board will adopt and
The Limited, as our sole shareholder, will approve, effective on the completion
of the spin-off, the Too, Inc. 1999 Non-Associate Director Stock Plan. This
section of the information statement describes the material provisions of the
plan. Because this section is a summary of these provisions, it does not
contain all of the information that may be important to you. You should read
the Non-Associate Director Stock Plan, which we have filed as an exhibit to the
Form 10 of which this information statement forms a part.
Purpose of Plan and Administration
The purpose of the Non-Associate Director Stock Plan is to promote our
interests and those of our shareholders by increasing the proprietary interest
of non-associate directors in our growth and performance.
Our board will administer the Non-Associate Director Stock Plan. Subject
to the provisions of the plan, our board will be authorized to interpret the
plan, to establish, amend and rescind any rules and regulations relating to it
and to make all other determinations necessary or advisable for its
administration. However, our board will have no discretion with respect to the
selection of directors to receive options, the number of shares of our common
stock subject to any such options, the purchase price of these options or the
timing or term of grants of options. The determinations of our board in the
administration of the plan will be final and conclusive.
Eligibility
The Non-Associate Director Stock Plan provides for awards of nonqualified
options to our directors who are not associates of us or our affiliates
("Eligible Directors").
Types of Awards
Under the Non-Associate Director Stock Plan, on the date of initial
election to our board, each Eligible Director will be granted an option to
purchase 5,000 shares of our common stock with a fair market value exercise
price. Subsequently, on the day of each annual meeting of our shareholders
beginning after the spin-off, each
76
<PAGE>
Eligible Director will be granted an option to purchase 1,000 shares of our
common stock as of the day of the annual meeting at a per share exercise price
equal to the fair market value of a share of our common stock on this date.
Each option will:
o vest in annual 25% increments beginning on the first anniversary of
the grant date
o expire on the earlier of the tenth anniversary of the date of grant
and one year from the date on which an optionee ceases to be an
Eligible Director
The exercise price per share of common stock shall be 100% of the fair market
value per share on the date the option is granted. The exercise price of
options must be satisfied in cash.
In addition, the Non-Associate Director Stock Plan provides that each
Eligible Director may receive 50% of his or her annual retainer in unrestricted
shares of our common stock in quarterly installments, valued as of the last
business day of each fiscal quarter beginning after the date of the spin-off.
Number of Authorized Shares
We have authorized a maximum of 50,000 shares of our common stock to grant
options and to award shares of our common stock instead of giving an Eligible
Director 50% of his or her annual retainer under the Non-Associate Director
Stock Plan. Shares of our common stock subject to options that are forfeited,
terminated or canceled will again be available for awards. The shares of our
common stock to be delivered under the plan will be made available from the
authorized but unissued shares of our common stock or from treasury shares. The
number and class of shares available under the plan and/or subject to
outstanding options may be adjusted by our board to prevent dilution or
enlargement of rights in the event of various changes in our capitalization.
Transferability
The options granted under the Non-Associate Director Stock Plan may not be
assigned or transferred, except by will or the laws of descent and distribution
or pursuant to a qualified domestic relations order.
Shares issued in payment of the annual retainer are transferable.
Term of Plan
Our board may not grant any shares under the Non-Associate Director Stock
Plan after the tenth annual meeting of our shareholders after the date of the
spin-off.
Amendments
Our board may amend the Non-Associate Director Stock Plan as it deems
advisable or to conform to any change in any law or regulation applicable to
the plan subject, to the extent deemed necessary or desirable to comply with
applicable law, to the approval of our shareholders.
77
<PAGE>
SECURITY OWNERSHIP OF THE LIMITED AND TOO, INC.
The Limited beneficially and of record holds, and will hold before the
spin-off, all of the outstanding shares of our common stock. Below, you will
find a table with information as of February 28, 1999 providing the number of
shares of The Limited's common stock beneficially owned by:
o each of our directors and nominees as directors
o each of our named executive officers
o all of our directors and named executive officers as a group
To our knowledge, other than as disclosed below, there are no persons or
entities that own more than 5% of the outstanding common stock of The Limited.
The table also provides the number of shares of our common stock that each
such person or entity would own immediately after the spin-off on a pro forma
basis. To our knowledge, unless we state otherwise, each person or entity has
sole voting and investment power with respect to the shares set forth opposite
the person's name.
<TABLE>
<CAPTION>
Too, Inc.
The Limited Pro Forma
----------------------------------------- --------------------------
Number of
Number of Shares Percent of Shares Percent of
Beneficially Outstanding Beneficially Outstanding
Beneficial Owner Owned(1) Shares Owned Shares
- ---------------- ----------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
The Limited's Directors and Named Executive
Officers(2)
Leslie H. Wexner.................................... 58,625,235 (3)(4)(5) 25.8%
Kenneth B. Gilman................................... 449,302 (3)(5) *
Martin Trust........................................ 2,505,229 (3)(5) *
Arnold F. Kanarick.................................. 166,594 (3) *
V. Ann Hailey....................................... 34,914 *
Eugene M. Freedman.................................. 6,430 *
E. Gordon Gee....................................... 3,492 *
David T. Kollat..................................... 202,492 *
Claudine B. Malone.................................. 4,517 *
Leonard A. Schlesinger.............................. 3,492 *
Donald B. Shackelford............................... 72,430 (5) *
Allan R. Tessler.................................... 22,694 (5) *
Abigail S. Wexner................................... 1,009 *
Raymond Zimmerman................................... 8,692 (6) *
All Directors and Named Executive Officers of The
Limited as a Group (14 persons)..................... 62,106,522 (3)(7) 27.2
Too, Inc.'s Directors and Named Executive
Officers(8)
Michael W. Rayden................................... 70,995 *
Kent A. Kleeberger.................................. 18,890 *
Sally A. Boyer...................................... 22,136 *
Kathleen C. Maurer.................................. 30,458 *
James C. Petty...................................... 4,816 *
David A. Krinsky.................................... -- --
James U. McNeal..................................... -- --
All Directors and Officers of Too, Inc. as a Group (9
persons)............................................
78
<PAGE>
- -------------------
<FN>
(*) Less than 1%.
(1) Of the shares of stock shown as beneficially owned, the following shares
are not currently owned but are subject to options which were outstanding
on February 28, 1999 and were exercisable within 60 days after that: Mr.
Wexner, 437,610; Mr. Gilman, 253,981; Mr. Trust, 165,884; Mr. Kanarick,
127,210; Ms. Hailey, 26,714; Mr. Freedman, 1,271; Dr. Gee, 1,272; Mr.
Kollat, 1,272; Ms. Malone, 1,272. Dr. Schlesinger, 1,272; Mr. Shackelford,
1,272; Mr. Tessler, 1,272; Ms. Wexner, 254; Mr. Zimmerman, 1,272; Mr.
Rayden, 49,866; Ms. Boyer, 19,081; Mr. Kleeberger, 17,378; Ms. Maurer,
22,516; and Mr. Petty, 3,816. The foregoing information does not reflect
any adjustments to the options to be made as a result of the spin-off.
(2) The address of each director and named executive officer of The Limited is
c/o The Limited, Inc., Three Limited Parkway, Columbus, Ohio 43230.
(3) Includes the following number of shares held as of February 28, 1999 in an
employee benefit plan under which the participant has the power to dispose
or withdraw shares: Mr. Wexner, 539,436; Mr. Gilman, 34,270; Mr. Kanarick,
422; Mr. Trust, 29,077; and all directors and named executive officers of
The Limited as a group, 603,205. Also includes the following number of
shares held as of February 28, 1999 in an employment benefit plan under
which the participant has the power to dispose or withdraw shares: Mr.
Kleeberger, 282; Ms. Maurer, 2,708; and all directors and named executive
officers of Too, Inc. as a group, 3,090.
(4) Includes 350,000 shares held by Health and Science Interests II, 883,317
shares held by the Wexner Foundation, 81,081 shares held by the Harry,
Hannah & David Wexner Trust, 5,000,000 shares held by the Harry, Hannah,
David & Sarah Wexner Trust and 18,750,000 shares held by The Wexner
Children's Trust. Mr. Wexner disclaims beneficial ownership of the shares
held by Health and Science Interests II and the Wexner Foundation. Mr.
Wexner shares investment and voting power with others with respect to
shares held by the Wexner Foundation.
(5) Includes the following number of shares owned by family members, as to
which beneficial ownership is disclaimed: Mr. Gilman, 1,117; Mr.
Shackelford, 18,955; Mr. Tessler, 202; and Mr. Trust, 207,890.
(6) Includes 1,200 shares which are Mr. Zimmerman's pro rata share of 3,600
shares owned by a corporation of which Mr. Zimmerman is president and a
33% shareholder plus 2,000 shares held by a partnership which is 45% owned
by Mr. Zimmerman and 45% owned by his wife.
(7) Includes 1,461,481 shares, as to which beneficial ownership is disclaimed.
(8) The address of each director and named executive officer of Too, Inc. is
c/o Too, Inc., 3885 Morse Road, Columbus, Ohio 43219.
</FN>
</TABLE>
79
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock will consist of:
o 100 million shares of our common stock, par value $.01 per share
o 50 million shares of our preferred stock, of which no shares are
outstanding as of the date of this information statement
Below, you will find a description of the material provisions of our
certificate of incorporation affecting the relative rights of our common and
preferred stock. Because this description is a summary, it does not contain all
of the information that may be important to you. You should read our
certificate of incorporation, which we have filed as an exhibit to the Form 10
of which this information statement forms a part.
Common Stock
Voting Rights
The holders of our common stock will be entitled to one vote per share on
all matters to be voted on by shareholders. Holders of our common stock will
not be entitled to cumulate their votes in the election of directors.
Generally, all matters on which shareholders will vote must be approved by a
majority of the votes entitled to be cast by all shares of common stock present
in person or represented by proxy, subject to any voting rights granted to
holders of any preferred stock. However, our certificate of incorporation
includes some supermajority requirements, including:
o a requirement that the holders of at least 75% of our outstanding
common stock must approve a merger or consolidation with persons or
entities that beneficially own at least 5% of our common stock, a
sale of all or substantially all of our assets to those persons or
entities or other control transactions, unless the proposed
transaction is approved by a majority of the directors who were in
office immediately before the time when such ownership was acquired,
or by their approved successors
o a requirement that the vote of 75% of our outstanding voting shares
is required to remove a director for cause
o a requirement that only the holders of at least 75% of our
outstanding common stock may approve any amendment or repeal of our
bylaws and specified provisions of our certificate of incorporation
Dividends
We anticipate that future earnings will be used principally to support
operations and finance the growth of our business. Thus, we do not intend to
pay cash dividends on our common stock in the foreseeable future. Payment of
dividends will also be restricted by provisions in our new credit facility. If
our lenders permit us to declare dividends, the dividend amounts, if any, will
be determined by our board. Our board will consider a number of factors,
including our financial condition, capital requirements, funds generated from
operations, future business prospects, applicable contractual restrictions and
any other factors our board may deem relevant.
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<PAGE>
Other Rights
If we are liquidated, dissolved or wound up, we will pay the full amounts
required to be paid to holders of shares of any outstanding preferred stock
before we make any payments to holders of shares of our common stock. All
holders of shares of our common stock are entitled to share ratably in any
assets available for distribution to these holders, after all of our other
creditors have been satisfied.
No shares of our common stock may be redeemed. Holders of shares of our
common stock do not have any preemptive rights to purchase additional shares of
our common stock.
Immediately after the spin-off, all of the outstanding shares of our
common stock will be validly issued, fully paid and nonassessable.
Preferred Stock
We may issue preferred stock from time to time in one or more series and
with the terms of each series stated in the resolutions providing for the
designation and issue of the series that our board adopts. Our certificate of
incorporation authorizes our board to determine the dividend, voting,
conversion, redemption and liquidation preferences, rights, privileges and
limitations pertaining to each series of preferred stock that we issue. Without
seeking any shareholder approval, our board may issue preferred stock with
voting and other rights that could adversely affect the voting power of the
holders of our common stock and could have anti-takeover effects. Specifically,
our certificate of incorporation authorizes our board to adopt a rights plan
with continuing director provisions, which means that the rights plan may be
redeemed only by:
o a majority of directors who were in office when the rights plan was
adopted
o their successors whose nomination is recommended or approved by a
majority of those directors
The ability of our board to adopt a rights plan to issue preferred stock
without shareholder approval could delay, defer or prevent a change in control
of us or the removal of existing management.
We do not have any shares of preferred stock outstanding as of the date of
this information statement.
Transfer Agent
The transfer agent and registrar for our common stock is First Chicago
Trust Company of New York. The contact information for First Chicago is:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
(800) 317-4445
81
<PAGE>
STATUTORY, CHARTER AND BYLAW PROVISIONS
Below, you will find a description of the provisions of our certificate of
incorporation and bylaws that may have anti-takeover effects and may delay,
defer or prevent a tender offer or takeover attempt that a shareholder might
consider in its best interest, including those attempts that might result in a
premium over the market price for the shares held by shareholders. Because this
description is a summary, it does not contain all of the information that may
be important to you. You should read our certificate of incorporation and
bylaws, which we have filed as exhibits to the Form 10 of which this
information statement forms a part.
Classified Board of Directors
Our certificate of incorporation provides for our board to be divided into
three classes of directors. The term of office of the first class expires at
the 2000 annual meeting, the term of office of the second class expires at the
2001 annual meeting and the term of office of the third class expires at the
2002 annual meeting. At each annual meeting held after 2002, a class of
directors will be elected to replace the class whose term has then expired. As
a result, approximately one-third of the members of our board will be elected
each year and, except as described above, each of the directors will serve a
staggered three-year term. See "Management." Moreover, our certificate of
incorporation provides that directors may be removed only for cause, upon the
vote of 75% of our outstanding voting shares, as permitted by the Delaware
General Corporation Law only in the case of a corporation having a classified
board.
These provisions could prevent a shareholder (or group of shareholders)
having majority voting power from obtaining control of our board until the
second annual shareholders' meeting following the date that the shareholder
obtains majority voting power. Thus, these provisions may discourage a
potential acquiror from making a tender offer or otherwise attempting to obtain
control of us.
Shareholder Action by Written Consent; Special Meetings
Our certificate of incorporation provides that no action may be taken by
the shareholders except at an annual or special meeting of shareholders. As a
result, our shareholders may not take any action by written consent instead of
a meeting. Our bylaws provide that special meetings of our shareholders may
only be called by our board or the chairperson of our board. These provisions
may make it more difficult for shareholders to take an action that our board
opposes.
Advance Notice Provisions
Our bylaws establish an advance written notice procedure for shareholders
seeking:
o to nominate candidates for election as directors at any annual
meeting of shareholders
o to bring business before an annual meeting of our shareholders
Our bylaws provide that only persons who are nominated by our board, or by
a shareholder who has given timely written notice to our secretary before the
meeting to elect directors, will be eligible for election as our directors. Our
bylaws also provide that the business to be conducted at any meeting of
shareholders must be brought either by our board or by a shareholder in
compliance with the written notice procedures. In the case of an annual meeting
of shareholders, a shareholder must give timely written notice to our secretary
of its intention to bring business before the meeting, which is then considered
by our board.
Under our bylaws, for any shareholder notice to be timely, we must receive
the notice between 120 days to 150 days before the first anniversary of our
last proxy statement. Under our bylaws, a shareholder's notice must also
contain the information specified in the bylaws. These provisions may preclude
or deter some shareholders
82
<PAGE>
from bringing matters before a shareholders' meeting or from making nominations
for directors at an annual meeting.
Preferred Stock
Under our certificate of incorporation, our board will have the authority,
without further shareholder approval:
o to create one or more series of preferred stock
o to issue shares of preferred stock in a series up to the maximum
number of shares of preferred stock authorized
o to determine the preferences, rights, privileges, qualifications,
limitations and restrictions of any series, including the dividend
rights, voting rights, conversion privileges, rights and terms of
redemption, liquidation preferences, the number of shares
constituting any series and the designation of any series
With this authority, our board could create and issue a series of
preferred stock with such rights, privileges or restrictions as it may decide
upon and could adopt a rights plan. Our board is also authorized to adopt a
rights plan that may be redeemed only by a majority of the directors who were
in office when the plan was adopted (or by their successors whose nomination is
recommended or approved by a majority of those directors). These actions could
have the effect of discriminating against an existing or prospective
shareholder who beneficially owns, or tenders for, a substantial amount of
shares of our outstanding common stock. One possible effect of authorized, but
unissued and unreserved, shares of capital stock could be to ensure the
continuity of management by rendering it more difficult for a potential
acquiror to obtain control of us. If we issue shares of our capital stock, we
may be able to delay or prevent a change in control of us without any further
action by our shareholders.
Amendment of Charter and Bylaw Provisions
Our certificate of incorporation provides that our board may adopt,
repeal, alter, amend or rescind any provision of our bylaws. Our certificate of
incorporation also provides that only the holders of at least 75% of the total
number of votes entitled to vote generally in the election of directors may
adopt, repeal, alter, amend or rescind bylaw provisions.
The affirmative vote of holders of at least 75% of the total number of
votes entitled to vote generally in the election of directors is also required
for any amendment, modification or repeal of the provisions of our certificate
of incorporation or bylaws relating to:
o the amendment of our certificate of incorporation
o classified board provisions
o the prohibition on action by written consent
o the limitation of liability
o the election and removal of directors
o a vote required to effect specified business combinations
o the authorization of a rights plan that may be redeemed only by a
majority of the directors who were in office when the plan was
adopted or by their approved successors
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<PAGE>
o the right to call special meetings
o indemnification of officers and directors
In all other cases, our charter may be amended by the affirmative vote of 50%
of the number of votes entitled to vote generally in the election of directors.
Delaware General Corporation Law
Because we are a Delaware corporation, Section 203 of the Delaware General
Corporation Law applies to us. Section 203 provides that, except for
transactions specified in Section 203, a corporation will not engage in any
"business combination" with any "interested shareholder" for a three-year
period after the date that the shareholder became an interested shareholder
unless:
o before the date that the shareholder became an interested
shareholder, the board approved either the business combination or
the transaction which resulted in the shareholder becoming an
interested shareholder
o upon completion of the transaction which resulted in the shareholder
becoming an interested shareholder, the interested shareholder owned
at least 85% of the voting stock of the corporation outstanding at
the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding, shares owned by:
- persons who are both directors and officers
- employee stock plans in some circumstances
o on or after the date that the shareholder became an interested
shareholder, the business combination is approved by the board of the
corporation and authorized at an annual or special meeting of
shareholders by the affirmative vote of at least 66% of the
outstanding voting stock which is not owned by the interested
shareholder
A "business combination" includes a merger, consolidation, asset sale or
other transaction resulting in a financial benefit to an interested
shareholder. An "interested shareholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
a corporation's outstanding voting stock.
Section 203 makes it more difficult under some circumstances for an
interested shareholder to effect a business combination with us for a
three-year period, although our shareholders may elect to exclude us from the
restrictions imposed under Section 203.
The restrictions imposed by Section 203 will not apply to a corporation in
some circumstances, including if:
o the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203
o twelve months have passed after the corporation, by action of its
shareholders holding a majority of the shares entitled to vote,
amends its certificate of incorporation expressly electing not to be
governed by Section 203
We have not elected to opt out of Section 203. Thus, the restrictions imposed
by Section 203 will apply to us.
84
<PAGE>
Liability and Indemnification of Directors and Officers
Delaware General Corporation Law, our certificate of incorporation and our
bylaws contain provisions relating to the limitation of liability and
indemnification of our directors and officers. We describe these provisions
below.
Our certificate of incorporation provides that our directors are not
personally liable to us or our shareholders for monetary damages for breach of
their fiduciary duties as directors to the fullest extent permitted by Delaware
law. Existing Delaware law permits the elimination or limitation of directors'
personal liability to us or our shareholders for monetary damages for breach of
their fiduciary duties as directors, except liability for:
o any breach of a director's duty of loyalty to us or our shareholders
o acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law
o any transaction from which a director derived improper personal
benefit
o the unlawful payment of dividends
o unlawful stock repurchases or redemptions
Because of these exculpation provisions, shareholders may be unable to
recover monetary damages against directors for actions taken by them that
constitute negligence or that otherwise violate their fiduciary duties as
directors, although it may be possible to obtain injunctive or other equitable
relief with respect to such actions. If equitable remedies are not available to
shareholders, shareholders may not have an effective remedy against a director
in connection with the director's conduct.
Our bylaws also provide that we will indemnify and hold harmless any
person who was or is a party or is threatened to be made a party to, or is
involved in, any threatened, pending or completed civil, criminal,
administrative or investigative action, suit or proceeding by reason of the
fact that the person:
o is or was one of our directors or officers
o is or was serving at our request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise or as a member of any committee or similar body
to the fullest extent permitted by Delaware Law. We will also pay the expenses
incurred in connection with any such proceeding in advance of its final
disposition to the fullest extent authorized by Delaware Law. This right to
indemnification will be a contract right. We may, by action of our board,
provide indemnification to our employees and agents to the extent and to the
effect that our board determines to be appropriate and authorized by Delaware
law.
We intend to purchase and maintain insurance on behalf of any person who:
o is or was one of our directors, officers, employees or agents
o is or was serving at our request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise
against any liability asserted against and incurred by the person in any such
capacity, or arising out of the person's status as such, whether or not we
would have the power or obligation to indemnify the person against such
liability under our bylaws.
85
<PAGE>
INDEPENDENT ACCOUNTANTS
The Limited has appointed PricewaterhouseCoopers LLP as our independent
accountants to audit our historical consolidated financial statements included
in this information statement for fiscal years 1998, 1997 and 1996.
PricewaterhouseCoopers LLP has served as The Limited's independent accountants
throughout the periods covered by the consolidated financial statements
included in this information statement.
86
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC the Form 10 with respect to the shares of our
common stock that The Limited's shareholders will receive in the spin-off. This
information statement does not contain all of the information contained in the
Form 10 and the exhibits and schedules to the Form 10. Some items are omitted
in accordance with the rules and regulations of the SEC. For additional
information relating to us and the spin-off, reference is made to the Form 10
and the exhibits to the Form 10, which are on file at the offices of the SEC.
Statements contained in this information statement as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance, if the contract or document is filed as an exhibit, reference is made
to the copy of the contract or other documents filed as an exhibit to the Form
10. Each statement is qualified in all respects by the relevant reference.
You may inspect and copy the Form 10 and the exhibits to the Form 10 that
we have filed with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, DC 20549, as well as at the Regional Offices of the
SEC at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Room. In addition, the SEC maintains an Internet site at
http://www.sec.gov, from which you can electronically access the Form 10,
including the exhibits and schedules to the Form 10.
Because of the spin-off, we will be required to comply with the full
informational requirements of the Securities Exchange Act of 1934. We will
fulfill our obligations with respect to these requirements by filing periodic
reports and other information with the SEC.
87
<PAGE>
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS OF LIMITED TOO, INC.
Report of Independent Accountants..........................................F-2
Consolidated Statements of Operations......................................F-3
Consolidated Balance Sheets................................................F-4
Consolidated Statements of Cash Flows......................................F-5
Notes to Consolidated Financial Statements.................................F-6
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of Limited Too, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and cash flows present fairly, in
all material respects, the consolidated financial position of Limited Too, Inc.
and its subsidiaries at January 30, 1999 and January 31, 1998, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 30, 1999 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these consolidated statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Columbus, Ohio
April 22, 1999
F-2
<PAGE>
LIMITED TOO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Net sales.................................................................. $ 376,943 $ 322,150 $ 258,818
Costs of goods sold, occupancy and buying costs......................... 251,531 226,843 197,970
---------- ---------- ----------
Gross income............................................................... 125,412 95,307 60,848
General, administrative and store operating expenses.................... 96,956 83,010 69,702
---------- ---------- ----------
Operating income (loss).................................................... 28,456 12,297 (8,854)
---------- ---------- ----------
Provision for (benefit from) income taxes.................................. 11,400 4,900 (3,500)
---------- ---------- ----------
Net income (loss).......................................................... $ 17,056 $ 7,397 $ (5,354)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-3
<PAGE>
LIMITED TOO, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
Fiscal Years Ended
-----------------------
January 30, January 31,
1999 1998
---------- -----------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................................ $ 987 $ 1,649
Accounts receivable.................................................................. 1,440 1,090
Inventories.......................................................................... 27,565 18,661
Store supplies....................................................................... 5,237 3,701
Other................................................................................ 582 183
--------- ---------
Total current assets.................................................................... 35,811 25,284
Property, plant and equipment, net...................................................... 44,894 42,871
Deferred income taxes................................................................... 6,313 4,043
--------- ---------
Total assets............................................................................ $ 87,018 $ 72,198
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................................................... $ 3,108 $ 2,454
Accrued expenses..................................................................... 22,377 21,391
Income taxes payable................................................................. 8,932 9,576
--------- ---------
Total current liabilities............................................................... 34,417 33,421
Other long-term liabilities............................................................. 1,501 1,004
Commitments and contingencies
Net investment by The Limited .......................................................... 51,100 37,773
--------- ---------
Total liabilities and shareholder's equity ............................................. $ 87,018 $ 72,198
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-4
<PAGE>
LIMITED TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ...................................................... $ 17,056 $ 7,397 $ (5,354)
Impact of other operating activities on cash flows
Depreciation and amortization........................................ 10,563 10,626 9,959
Change in assets and liabilities
Inventories........................................................ (8,904) 1,776 (4,391)
Accounts payable and accrued expenses.............................. 1,640 235 8,441
Income taxes....................................................... (2,914) 9,448 4,468
Other assets and liabilities....................................... (80) 812 641
--------- --------- ---------
Net cash provided by operating activities............................ 17,361 30,294 13,764
--------- --------- ---------
Investing activities
Capital expenditures.................................................... (14,294) (4,780) (8,504)
--------- --------- ---------
Cash used for investing activities................................... (14,294) (4,780) (8,504)
Financing activities
Decrease in net investment by The Limited............................... (3,729) (24,024) (5,213)
--------- --------- ---------
Net cash used for financing activities............................... (3,729) (24,024) (5,213)
Net increase (decrease) in cash............................................ (662) 1,490 47
Cash, beginning of year................................................. 1,649 159 112
--------- --------- ---------
Cash, end of year....................................................... $ 987 $ 1,649 $ 159
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-5
<PAGE>
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statements Presentation
The accompanying financial statements include the accounts of Limited Too,
Inc. and its subsidiaries ("Limited Too" or the "Company") and reflect the
Company's assets, liabilities, results of operations and cash flows on a
historical cost basis. The Company was established in 1987 and is a
wholly-owned subsidiary of The Limited, Inc.
Limited Too is a specialty retailer that sells apparel, underwear,
sleepwear, swimwear, lifestyle and personal care products for girls aged seven
to fourteen years and has stores in approximately 40 states. The Company has
one reportable segment which includes all of its products.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Limited Too
and all significant subsidiaries which are more than 50% owned and controlled.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Fiscal year
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are designated in the financial statements and notes by the
calendar year in which the fiscal year commences. The results for fiscal years
1998, 1997 and 1996 represent the 52-week periods ended January 30, 1999,
January 31, 1998 and February 1, 1997.
Inventories
Inventories are principally valued at the lower of average cost or market,
on a first-in first-out basis, utilizing the retail method.
Store Supplies
The initial inventory of supplies for new stores including, but not
limited to, hangers, signage, security tags, packaging and point-of-sale
supplies is capitalized at the store opening date. Subsequent shipments are
expensed, except for new merchandise presentation programs, which are
capitalized.
Advertising
Advertising costs consist of in-store photographs and promotions in
selected national publications and are expensed at the time the promotion first
appears in media or in the store. Advertising costs amounted to $55,000,
$323,000 and $292,000 in 1998, 1997 and 1996.
F-6
<PAGE>
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and equipment
Depreciation and amortization of property and equipment are computed for
financial reporting purposes on a straight-line basis, using service lives
ranging principally from 7 to 10 years for building improvements and 3 to 10
years for other property and equipment. The cost of assets sold or retired and
the related accumulated depreciation or amortization are removed from the
accounts with any resulting gain or loss included in net income. Maintenance
and repairs are charged to expense as incurred. Major renewals and betterments
that extend service lives are capitalized. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that full
recoverability is questionable. Factors used in the valuation include, but are
not limited to, management's plans for future operations, recent operating
results and projected cash flows.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method. Under this method, deferred tax
assets and liabilities are recognized based on the difference between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect in the years in which those temporary
differences are expected to reverse. Under SFAS No. 109, the effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company is included in The Limited's consolidated Federal and certain
state income tax groups for income tax reporting purposes and is responsible
for its proportionate share of income taxes calculated upon its Federal taxable
income at a current estimate of the annual effective tax rate.
Revenue recognition
Sales are recorded upon purchase by customers.
Store pre-opening expenses
Pre-opening expenses related to new store openings are charged to
operations as incurred.
Fair value of financial instruments
The recorded values of financial instruments, including cash, accounts
receivable and accounts payable, approximate fair value due to their short
maturity.
Earnings per share
Historical earnings per share data is omitted from the consolidated
statements of operations as it is not meaningful.
F-7
<PAGE>
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates in the Preparation of Financial Statements
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. Since actual results may differ from
those estimates, the Company revises its estimates and assumptions as new
information becomes available.
Adoption of New Accounting Standards
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP requires that certain external costs and
internal payroll and payroll related costs be capitalized during the
application development and implementation stages of a software development
project and amortized over the software's useful life. The SOP is effective in
the first quarter of 1999 and the Company does not anticipate that this SOP
will have a material adverse effect on the Company's results of operations.
Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities,"
was issued in April 1998. The SOP requires that entities expense start-up costs
and organization costs as they are incurred. The SOP is effective in the first
quarter of 1999 and the Company does not anticipate that this SOP will have a
material adverse effect on the Company's results of operations.
3. Property and Equipment
Property and equipment, at cost, consisted of (in thousands):
1998 1997
-------- --------
Furniture, fixtures and equipment......................... $ 69,523 $ 62,581
Leaseholds and improvements............................... 28,950 28,186
-------- --------
Total..................................................... 98,473 90,767
Less: accumulated depreciation and amortization........... 53,579 47,896
-------- --------
Property and equipment, net............................... $ 44,894 $ 42,871
======== ========
4. Leased Facilities and Commitments
Annual store rent is comprised of a fixed minimum amount, plus contingent
rent based on a percentage of sales exceeding a stipulated amount. Store lease
terms generally require additional payments covering taxes, common area costs
and certain other expenses.
F-8
<PAGE>
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of rent expense for 1998, 1997 and 1996 follows (in thousands):
1998 1997 1996
-------- -------- --------
Fixed minimum................................. $ 28,916 $ 28,198 $ 27,400
Contingent.................................... 375 296 435
-------- -------- --------
Total store rent.............................. 29,291 28,494 27,835
Equipment and other........................... 880 879 925
-------- -------- --------
Total rent expense............................ $ 30,171 $ 29,373 $ 28,760
======== ======== ========
Rent expense includes charges from The Limited and its subsidiaries for
store, office and warehouse space. Limited Too is committed to noncancelable
leases with remaining terms of one to fourteen years. These commitments
primarily include store leases with an initial term of ten to fifteen years.
Certain store leases have been guaranteed by The Limited. A summary of minimum
rent commitments under noncancelable leases follows (in thousands):
1999............................................................... $ 29,247
2000............................................................... 28,909
2001............................................................... 28,457
2002............................................................... 27,479
2003............................................................... 26,578
Thereafter......................................................... 69,585
5. Accrued Expenses
Accrued expenses consisted of (in thousands):
1998 1997
--------- --------
Compensation, payroll taxes and benefits................ $ 5,907 $ 6,133
Rent.................................................... 7,187 5,922
Taxes, other than income................................ 2,252 1,310
Other................................................... 7,031 8,206
-------- --------
Total................................................... $ 22,377 $ 21,391
======== ========
6. Income Taxes
Limited Too consolidated financial statements reflect a charge (benefit)
for federal and state income taxes as if Limited Too had been subject to tax on
a separate company basis during the periods presented.
F-9
<PAGE>
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
This provision for (benefit from) income taxes consisted of (in
thousands):
1998 1997 1996
--------- --------- ---------
Currently payable
Current:
Federal.................................. $ 12,326 $ 7,804 $ (3,045)
State.................................... 2,832 1,790 (762)
-------- -------- --------
15,158 9,594 (3,807)
Deferred:
Federal.................................. (2,893) (3,800) 230
State.................................... (865) (894) 77
-------- -------- --------
(3,758) (4,694) 307
-------- -------- --------
Total provision (benefit)...................... $ 11,400 $ 4,900 $ (3,500)
======== ======== ========
A reconciliation between the statutory federal income tax rate and the
effective income tax rate follows:
1998 1997 1996
---- ---- ----
Federal income tax rate................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax effect...... 4.5 4.5 4.5
Other items, net.......................................... 0.5 0.3 --
---- ---- ----
Total..................................................... 40.0% 39.8% 39.5%
==== ==== ====
Income taxes payable included current deferred tax assets of $2,980 and
$800 at January 30, 1999 and January 31, 1998.
Income tax obligations (benefits) are treated as having been settled
through the net investment by The Limited account as if the Company were filing
its income tax returns on a separate company basis. Such amounts were $14,314,
$(4,548) and $(7,968) for 1998, 1997 and 1996.
The effect of temporary differences which give rise to deferred income tax
balances was as follows (in thousands):
1998 1997
--------- ---------
Tax under book depreciation............................ $ 3,204 $ 1,865
Rent................................................... 2,476 1,737
Inventory.............................................. 881 160
Other.................................................. 2,732 1,081
--------- ---------
Total deferred income taxes............................ $ 9,293 $ 4,843
========= =========
No valuation allowance has been provided for deferred tax assets because
management believes that it is more likely than not that the full amount of the
net deferred tax assets will be realized in the future.
F-10
<PAGE>
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Related Party and Equity Transactions
Transactions between Limited Too and The Limited and its wholly-owned
subsidiaries have primarily consisted of the following:
Merchandise purchases
Capital expenditures
Inbound and outbound shipping
Store leasing, construction and management
Distribution center, MIS and home office expenses
Corporate services and centrally managed benefits
Information with regard to these transactions is as follows:
Significant purchases are made from Mast, a wholly-owned subsidiary of The
Limited. Purchases are also made from Gryphon, an indirect subsidiary of The
Limited. Mast is a contract manufacturer and apparel importer while Gryphon is
a developer of fragrance and personal care products and also a contract
manufacturer. Prices are negotiated on a competitive basis by merchants of
Limited Too with Mast, Gryphon and manufacturers.
Limited Too's inbound and outbound transportation expenses are managed
centrally by Limited Distribution Services, a wholly owned subsidiary of The
Limited. Inbound freight is charged to Limited Too based on actual receipts and
related charges, while outbound freight is charged based on a percentage of
cartons shipped.
Limited Too's real estate operations, including all aspects of lease
negotiations and ongoing dealings with landlords and developers, are handled
centrally by the real estate division of The Limited ("Real Estate Division").
Real Estate Division expenses are allocated to Limited Too based on a
combination of Limited Too's pro rata share of new and remodeled store
construction projects and open selling square feet. Additionally, Limited Too
is charged rent expense, common area maintenance charges and utilities for
stores shared with other consolidated subsidiaries of The Limited. The charges
are based on square footage and represent the proportionate share of the
underlying leases with third parties.
Limited Too is charged for usage of certain of The Limited's MIS
facilities. Limited Too is also charged rent expense and utilities for certain
distribution and home office space occupied.
Limited Too's store design and construction operations are coordinated
centrally by the store planning division of The Limited ("Store Planning
Division"). The Store Planning Division facilitates the design and construction
of the stores and upon completion transfers the stores to Limited Too at actual
cost net of allowance. Store Planning Division expenses are charged to Limited
Too based on a combination of Limited Too's pro rata share of new and remodeled
store construction projects and open selling square feet.
The Limited provides certain services to Limited Too including, among
other things, certain tax, treasury, legal, corporate secretary, accounting,
auditing, corporate development, risk management, associate benefit plan
administration, human resource and compensation, government affairs and public
relation services. Identifiable costs are charged directly to Limited Too. All
other services-related costs not specifically attributable to an operating
business have been allocated to Limited Too based upon a percentage of sales.
F-11
<PAGE>
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Limited Too has participated in The Limited's centralized cash management
system. Under this system, cash received from Limited Too operations was
transferred to The Limited's centralized cash accounts and cash disbursements
were funded from the centralized cash accounts on a daily basis. No interest
has been charged or earned on the cash management account.
Management believes the charges and allocations described above are fair
and reasonable. However, these charges and allocations are not necessarily
indicative of the amounts that would have been or that will be recorded by
Limited Too on a stand-alone basis.
The following table summarizes the related party transactions between
Limited Too and The Limited and its other wholly owned subsidiaries, for the
periods indicated (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Merchandise purchases.................................. $ 58,456 $ 42,255 $ 39,171
Capital expenditures................................... 11,818 2,359 7,964
Inbound and outbound shipping.......................... 6,023 5,702 4,290
Store leasing, construction and management............. 50,044 23,044 21,856
Distribution center, MIS and home office expenses...... 9,140 6,675 5,948
Corporate services and centrally managed benefits...... 13,920 9,153 8,792
--------- --------- ---------
$ 149,401 $ 89,188 $ 88,021
========= ========= =========
</TABLE>
The following is a summary of the activity in the net investment by The
Limited account (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance...................................... $ 37,773 $ 54,400 $ 64,967
Transactions with related parties...................... 149,401 89,188 88,021
Centralized cash management............................ (167,444) (108,664) (85,266)
Settlement of income taxes............................. 14,314 (4,548) (7,968)
Net income (loss)...................................... 17,056 7,397 (5,354)
--------- --------- ---------
Ending balance......................................... $ 51,100 $ 37,773 $ 54,400
========= ========= =========
</TABLE>
The Company has no arrangements with The Limited which result in the
Company's guarantee, pledge of assets or stock to provide security for The
Limited's debt obligations.
8. Retirement Benefits
The Company participates in a qualified defined contribution retirement
plan and a nonqualified supplemental retirement plan sponsored by The Limited.
Participation in the qualified plan is available to all associates who have
completed 1,000 or more hours of service with the Company during certain
12-month periods and attained the age of 21. Participation in the nonqualified
plan is subject to service and compensation requirements. The Company's
contributions to these plans are based on a percentage of the associates'
eligible annual compensation. The cost of these plans was $1.2 million, $1.9
million and $1.6 million in 1998, 1997 and 1996.
F-12
<PAGE>
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Employee Benefits
Officers and key employees were granted options to participate in The
Limited's stock option and restricted stock plans. Compensation expense related
to restricted stock awards has been reflected in the financial statements and
amounted to $1.2 million and $1.0 million in 1998 and 1997.
Limited Too adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," effective with the 1996 financial
statements, but elected to continue to measure compensation expense in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense for The Limited stock options has been
recognized. If compensation had been determined based on the estimated fair
value of The Limited options granted since 1995, consistent with the
methodology in SFAS No. 123, the pro forma effects on net income would have
been a reduction of approximately $375 thousand in 1998, $225 thousand in 1997
and $45 thousand in 1996.
The weighted-average per share fair value of The Limited options granted
($6.61, $5.22 and $4.83 during 1998, 1997 and 1996) was used to calculate the
pro forma compensation expense. The fair value was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996: dividend yields of 2.2%, 3.1% and 2.8%;
volatility of 29%, 27% and 31%; risk-free interest rates of 5%, 6% and 5.25%;
assumed forfeiture rates of 20%, 15% and 20% and expected lives of 6.0 years,
7.0 years and 5.0 years. The pro forma effect on net income for 1997 and 1996
is not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation expense
related to grants made before 1995.
10. Legal Matters
There are various claims, lawsuits and pending actions against Limited Too
incident to the operations of its business. It is the opinion of management
that the ultimate resolution of these matters will not have a material effect
on Limited Too's results of operations, cash flows or financial position.
11. Quarterly Financial Data (Unaudited) (in thousands)
First Second Third Fourth
-------- -------- -------- ---------
1998 Quarter
Net sales.............................. $ 82,257 $ 74,746 $ 96,720 $ 123,220
Gross income........................... 24,900 24,060 29,908 46,544
Net income............................. 189 240 4,248 12,379
First Second Third Fourth
-------- -------- -------- ---------
1997 Quarter
Net sales.............................. $ 65,646 $ 61,263 $ 86,430 $ 108,811
Gross income........................... 15,625 15,163 23,995 40,524
Net income (loss)...................... (1,686) (1,619) 2,018 8,684
F-13
<PAGE>
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Subsequent Events (Unaudited)
On May 3, 1999, the Company announced its plans to establish its Limited
Too business as a fully independent public company under the name Too,
Inc. The business will be separated via a 100% spin-off which is expected
to occur in late July or August 1999.
Before the spin-off, Limited Too will pay a $50 million dividend to The
Limited. Prior to the date of the spin-off, the Company expects to have a
$100 million credit facility in place, proceeds from which will fund the
dividend.
In connection with the spin-off, Too, Inc. and The Limited plan to enter
into various transitional services agreements, including a store leases
agreement, trademark and service mark license agreement, a services
agreement, a tax separation agreement and a lease amendment agreement.
F-14
<PAGE>
TOO, INC.
Item 15. Exhibits.
Exhibit
Number Description
- ------- -----------
2.1 Form of Distribution Agreement by and between The Limited, Inc. and
Too, Inc.*
3.1 Amended and Restated Articles of Incorporation of Too, Inc.*
3.2 Amended and Restated Bylaws of Too, Inc.*
4.1 Specimen Certificate of Common Stock of Too, Inc.*
10.1 Form of Credit Agreement among the Too, Inc., the banks listed in the
Credit Agreement and Morgan Guaranty Trust Company of New York, as
Agent.*
10.2 Form of Store Leases Agreement by and between The Limited, Inc. and
Too, Inc.*
10.3 Form of Trademark and Service Mark License Agreement by and between
The Limited, Inc. and Too, Inc.*
10.4 Form of Services Agreement by and between The Limited, Inc. and Too,
Inc.*
10.5 Form of Tax Separation Agreement by and between The Limited, Inc. and
Too, Inc.*
10.6 Form of Lease Amendment Agreement by and between The Limited, Inc.
and Too, Inc.*
10.7 Form of Too, Inc. 1999 Incentive Compensation Plan.*
10.8 Form of Too, Inc. 1999 Stock Option and Performance Incentive Plan.*
10.9 Form of Too, Inc. 1999 Non-Associate Director Stock Plan.*
10.10 Form of Employment Agreement by and between Too, Inc. and Michael W.
Rayden.*
11.1 Statement regarding computation of per share earnings.*
21.1 Subsidiaries of Too, Inc.*
- -------------------
* To be filed by amendment.
<PAGE>
TOO, INC.
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
TOO, INC.
By: /s/ Kent A. Kleeberger
--------------------------------------------------
Name: Kent A. Kleeberger
Title: Vice President and Chief Financial Officer
Date: May 4, 1999
