<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 1999
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________________
Commission file number 1-14987
-------
TOO, INC.
--------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1333930
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3885 Morse Road, Columbus, OH 43219
-----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 479-3500
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days (or such shorter time as the Company became
effective).
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding at November 29, 1999
------------ --------------------------------
$.01 Par Value 30,674,120 Shares
<PAGE> 2
TOO, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Thirteen and Thirty-nine Weeks Ended
October 30, 1999 and October 31, 1998..................... 3
Consolidated Balance Sheets
October 30, 1999 and January 30, 1999 .................... 4
Consolidated Statements of Cash Flows
Thirty-nine Weeks Ended
October 30, 1999 and October 31, 1998..................... 5
Notes to Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............ 11
Part II. Other Information
Item 1. Legal Proceedings............................................ 19
Item 6. Exhibits and Reports on Form 8-K............................. 20
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TOO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------ -----------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $114,802 $ 96,720 $296,714 $253,723
Costs of goods sold, buying and occupancy costs 76,456 66,850 198,038 174,949
-------- -------- -------- --------
Gross income 38,346 29,870 98,676 78,774
General, administrative and store operating
expenses 29,305 22,822 86,619 71,097
-------- -------- -------- --------
Operating income 9,041 7,048 12,057 7,677
Interest expense, net 1,101 - 1,101 -
-------- -------- -------- --------
Income before taxes 7,940 7,048 10,956 7,677
Provision for income taxes 3,200 2,800 4,400 3,000
-------- -------- -------- --------
Net income $ 4,740 $ 4,248 $ 6,556 $ 4,677
======== ======== ======== ========
Net income per share:
Basic $ .15 $ .14 $ .21 $ .15
======== ======== ======== ========
Diluted $ .15 $ .14 $ .21 $ .15
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
TOO, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands)
October 30, January 30,
1999 1999
-------- --------
(Unaudited)
ASSETS
------
Current assets:
Cash and equivalents $ 24,943 $ 987
Receivables 1,476 1,440
Inventories 44,131 27,565
Store supplies 6,112 5,237
Deferred income taxes 2,951 2,951
Other 2,044 582
-------- --------
Total current assets 81,657 38,762
Property and equipment, net 57,372 44,894
Deferred income taxes 6,313 6,313
Other assets 1,794 -
-------- --------
Total assets $147,136 $ 89,969
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 18,076 $ 3,108
Accrued expenses 44,281 22,377
Income taxes payable 4,268 11,883
-------- --------
Total current liabilities 66,625 37,368
Long-term debt 50,000 -
Other long-term liabilities 1,981 1,501
Shareholders' equity:
Net investment by The Limited - 51,100
Retained earnings since effective date, 8/23/99 3,540 -
Common stock 307 -
Paid in capital 24,683 -
-------- --------
Total shareholders' equity 28,530 51,100
-------- --------
Total liabilities and shareholders' equity $147,136 $ 89,969
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
--------------------------
October 30, October 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,556 $ 4,677
Impact of other operating activities on cash flows:
Depreciation and amortization 9,977 7,827
Change in assets and liabilities:
Inventories (16,566) (22,137)
Accounts payable and accrued expenses 36,872 6,752
Income taxes (7,615) (7,494)
Other assets and liabilities (3,086) 951
-------- --------
Net cash provided by (used for) operating activities 26,138 (9,424)
-------- --------
Investing activities:
Capital expenditures (23,055) (5,328)
-------- --------
Net cash (used for) investing activities (23,055) (5,328)
-------- --------
Financing activities:
Net increase in net investment by The Limited 20,873 14,232
Proceeds from borrowings under credit facility 64,235 -
Payment of dividend to The Limited (50,000) -
Repayment of short-term debt (14,235) -
-------- --------
Net cash provided by financing activities 20,873 14,232
-------- --------
Net increase (decrease) in cash 23,956 (520)
Cash and equivalents, beginning of year 987 1,649
-------- --------
Cash and equivalents, end of period $ 24,943 $ 1,129
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
Too, Inc. (formerly Limited Too, Inc. referred to herein as the
Company) is a specialty retailer that sells apparel, underwear,
sleepwear, swimwear, lifestyle and personal care products for
fashion-aware, trend-setting young girls. Prior to August 23, 1999, the
Company operated as a wholly owned subsidiary of The Limited, Inc. The
consolidated financial statements include the accounts of Too, Inc. and
its wholly owned subsidiaries and reflect the Company's assets,
liabilities, results of operations and cash flows on a historical cost
basis.
On August 23, 1999, The Limited, Inc. (The Limited) effected a tax free
spin-off of 100% of the common stock of Too, Inc. by distributing a
dividend of approximately 30.7 million shares of Too, Inc. stock to The
Limited shareholders of record as of August 11, 1999. The Limited's
shareholders received one share of Too, Inc. common stock for every
seven shares of The Limited's common stock held as of the record date.
The accompanying interim consolidated financial statements as of
October 30, 1999, and for the thirteen and thirty-nine week periods
ended October 30, 1999, and October 31, 1998, are unaudited and are
presented to comply with the rules and regulations of the Securities
and Exchange Commission. Accordingly, these consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's 1999
Form 10 filing dated August 18, 1999. In the opinion of management, the
accompanying interim consolidated financial statements reflect all
adjustments (which are of a normal, recurring nature) necessary to
present fairly the financial position and results of operations and
cash flows for the interim periods, but are not necessarily indicative
of the results of operations for a full fiscal year.
The consolidated financial statements as of October 30, 1999, and for
the thirteen and thirty-nine week periods ended October 30, 1999, and
October 31, 1998, included herein have been reviewed by the independent
public accounting firm of PricewaterhouseCoopers LLP and the report of
such firm follows the Notes to Consolidated Financial Statements.
2. Cash and Equivalents
Cash and equivalents include amounts on deposit with financial
institutions and investments in commercial paper and money market
investments with original maturities less than 90 days.
6
<PAGE> 7
3. Earnings per Share
Earnings per diluted share is based on 31.2 million shares,
representing 30.7 million basic outstanding shares of the Company's
common stock as of October 30, 1999, plus approximately 569,000 shares
of common stock equivalents representing the dilutive effect of stock
options and restricted shares.
In connection with the spin-off, associates of the Company who were
participants in The Limited Inc. Stock Option and Restricted Stock
plans, were able to convert their unvested awards into Too, Inc. stock
options and restricted stock based on a formula designed to preserve
the intrinsic value of the options and restricted stock. In addition,
certain members of executive management and associates of the Company
received additional awards in conjunction with the spin-off. As the
stock options and restricted stock grants in Too, Inc. stock were not
outstanding during the thirteen and thirty-nine week periods ended
October 31, 1998, no dilutive effect is reflected in earnings per share
amounts presented.
Weighted average common shares outstanding (thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------- --------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic shares 30,674 30,674 30,674 30,674
Dilutive effect of stock options and
restricted shares 569 - 190 -
-------------- -------------- -------------- --------------
Diluted shares 31,243 30,674 30,864 30,674
============== ============== ============== ==============
</TABLE>
4. Inventories
The fiscal year of the Company is comprised of two principal selling
seasons: Spring (the first and second quarters) and Fall (the third and
fourth quarters). Inventories are principally valued at the lower of
average cost or market, on a first-in, first-out basis utilizing the
retail method. Inventory valuation at the end of the first and third
quarters reflects adjustments for inventory markdowns and shrinkage
estimates for the total selling season.
5. Property and Equipment, Net
Property and equipment, net, consisted of (thousands):
<TABLE>
<CAPTION>
October 30, January 30,
1999 1999
------------ -----------
<S> <C> <C>
Property and equipment, at cost $117,089 $98,473
Less accumulated depreciation and amortization 59,717 53,579
------------ -----------
Property and equipment, net $57,372 $44,894
============ ===========
</TABLE>
7
<PAGE> 8
6. Income Taxes
The Company is included in The Limited's consolidated federal and
certain state income tax groups for income tax reporting purposes
through August 23, 1999. However, the Company is responsible for its
proportionate share of income taxes calculated upon its federal taxable
income at an estimate of the Company's annual effective tax rate. Up to
the date of the spin off, income tax obligations were treated as having
been settled through the net investment by The Limited account as if
the Company was filing its income tax returns on a separate company
basis. Subsequent to the spin off, income tax obligations are settled
through the income taxes payable account. Income tax payments were $12
million and $10.5 million for the thirty-nine weeks ended October 30,
1999, and October 31, 1998, respectively.
7. Shareholders' Equity and Relationship with The Limited
In connection with the spin-off, the balance of the net investment by
The Limited was converted to common stock and paid in capital based on
the 30.7 million shares issued with a par value of $.01 per share.
Up to the date of the spin-off, The Limited provided various services
to the Company including, but not limited to, store design and
construction supervision, real estate management, travel and flight
support, merchandise sourcing, compensation and benefit plan
administration, management information and telecommunication services,
merchandise distribution services, engineering, customs and freight,
tax return preparation, and treasury. In connection with the spin-off,
the Company entered into various agreements with a duration of one to
three years with The Limited to continue some of these services. The
Limited will bill the Company actual costs incurred plus 5% based on
internal costs such as payroll, rent, and depreciation while third
party costs are charged without any markup. Amounts payable under these
agreements to The Limited at October 30, 1999, are approximately $14
million.
The Company participates in The Limited's centralized cash management
system. Under this system cash received from the Company's operations
is transferred to The Limited's centralized cash accounts and cash
disbursements are funded from the centralized cash accounts on a daily
basis. Prior to August 1, 1999, no interest was charged or earned on
the cash management account. Subsequent to August 1, 1999, interest is
earned by the Company on net cash balances due from The Limited.
Interest is calculated based on the Federal Reserve AA Composite 30-day
rate, one month in arrears.
8. Long-Term Debt
Effective August 13, 1999, the Company entered into a five year $100
million credit agreement with a syndicate of banks. The credit
agreement is collateralized by virtually all assets of the Company and
its subsidiaries and is comprised of a $50 million, five-year term loan
and a $50 million revolving credit facility. On August 13, 1999, the
entire portion of the term loan was drawn to pay a $50 million dividend
to The Limited. Additionally, approximately $14 million was drawn on
the revolving credit facility to pay working capital advances of $12
million made by The Limited in 1999 through July 31, 1999, as well as
financing fees and associated expenses of $2.0 million. The working
capital advances made by The Limited net of the $12 million repayment
were included in
8
<PAGE> 9
the net investment by The Limited at the spin-off date of August 23,
1999. The borrowings against the revolving credit facility were fully
paid as of October 30, 1999.
The unused portion of the credit facility is available to fund working
capital requirements and for general corporate purposes. Interest on
borrowings under the credit agreement is based on matrix pricing
applied to either the London Interbank Offered Rate plus a spread or
base rate, as defined. Payments under the term loan are due at various
dates starting in July 2002 through August 2004. A commitment fee based
on matrix pricing is charged on the unused portion of the revolving
credit facility. During the quarter ended October 30, 1999, the
commitment fee was 1/2 of 1% per annum. Under the terms of the credit
agreement, the Company is required to comply with certain financial
ratios. In addition, the credit agreement also limits the Company from
incurring certain additional indebtedness and restricts substantial
asset sales, capital expenditures above approved limits and cash
dividends.
9
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Too, Inc.
We have reviewed the condensed consolidated balance sheet of Too, Inc. (the
"Company") at October 30, 1999, and the related condensed consolidated
statements of income for each of the thirteen and thirty-nine week periods ended
October 30, 1999 and October 31, 1998 and the condensed consolidated statements
of cash flows for the thirty-nine week periods ended October 30, 1999 and
October 31, 1998. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 30, 1999, and the
related consolidated statements of operations and cash flows for the year then
ended (not presented herein); and in our report dated April 22, 1999, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of January 30, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
November 12, 1999
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the thirteen weeks ended October 30, 1999, were $114.8 million, an
increase of 19%, from $96.7 million for the comparable period of 1998. This
increase was driven by a 7% increase in comparable store sales, with the balance
attributable to new stores. Gross income increased 28% to $38.3 million from
$29.9 million in 1998 and operating income increased 29% to $9.0 million from
$7.0 million in 1998. Net income was $4.7 million, an increase of 34%, from $3.5
million on an adjusted basis for the comparable period ended October 31, 1998.
The adjusted results for 1998 reflect interest expense on the Company's
borrowings under the credit facility as if it were in place as of the beginning
of the year. Earnings per diluted share grew to $.15 per share, compared to $.14
per share in 1998 while earnings per diluted share on an adjusted basis, which
includes the impact of interest expense on the Company's borrowings under the
credit facility, increased 36% to $.15 per share in 1999 from $.11 adjusted
earnings per diluted share for 1998.
Net sales for the thirty-nine weeks ended October 30, 1999, were $296.7 million,
an increase of 17%, from $253.7 million in 1998, driven by an increase in
comparable store sales of 8%, with the balance attributable to new stores. Gross
income increased 25% to $98.7 million from $78.8 million in 1998 and operating
income increased 57% to $12.1 million from $7.7 million in 1998. Earnings per
diluted share grew 40% to $.21 per share, compared to $.15 per share in 1998
while earnings per diluted share on an adjusted basis increased 89% to $.17 per
share in 1999 from $.09 adjusted earnings per diluted share in 1998.
Adjusted Earnings Per Diluted Share
(Thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-nine Thirty-nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings Per Diluted Share $ .15 $ .14 $ .21 $ .15
======== ======== ======== ========
Adjusted Earnings Per Diluted Share:
Net Income $ 4,740 $ 4,248 $ 6,556 $ 4,677
Adjusted Interest Expense(1) - (1,101) (2,108) (3,209)
Adjusted Tax Benefit(2) - 400 900 1,300
-------- -------- -------- --------
Adjusted Net Income $ 4,740 $ 3,547 $ 5,348 $ 2,768
Adjusted Earnings Per Diluted Share $ .15 $ .11 $ .17 $ .09
-------- -------- -------- --------
Weighted Average Diluted Shares
Outstanding(3) 31,243 31,243 30,864 30,864
======== ======== ======== ========
</TABLE>
1) Adjusted net income and adjusted earnings per diluted share include
interest expense and financing fees, net of the related tax benefit, on
approximately $54 million of average indebtedness representing debt
incurred under the credit facility which was used to pay a $50 million
dividend to The Limited, to pay related financing fees and to repay working
capital advances by The Limited.
11
<PAGE> 12
2) The tax benefit is related to adjusted interest expense arising from the
credit facility at an estimated effective tax rate of approximately 40%.
3) Earnings per diluted share is based on the number of shares outstanding as
a result of the spin-off occurring August 23, 1999, and includes the
dilutive effect of stock options and restricted shares issued after that
date. As the stock options and restricted stock grants in Too, Inc. stock
were not present during the thirteen and thirty-nine week periods ended
October 31, 1998, diluted shares have been adjusted as if they were present
prior to the spin-off. The Limited distributed approximately 30.7 million
shares representing 100% of its ownership in the Company to shareholders of
record as of August 11, 1999. The distribution ratio was one share of Too,
Inc. common stock for every seven shares of The Limited's common stock
outstanding on the date of the spin-off.
Financial Summary
- ------------------
The following summarized financial and statistical data compares the thirteen
week and thirty-nine week periods ended October 30, 1999, to the comparable 1998
periods:
<TABLE>
<CAPTION>
Third Quarter Year - to - Date
----------------------------------- -------------------------------------
1999 1998 Change 1999 1998 Change
--------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET SALES (MILLIONS): $115 $97 19% $297 $254 17%
COMPARABLE STORE SALES INCREASE: 7% 11% 8% 17%
========= ========= ========= =========
STORE DATA:
Retail sales increase
attributable to net new and
remodeled stores 12% 1% 9% 2%
Retail sales per average gross square foot $83 $78 6% $222 $204 9%
Retail sales per average store
(thousands) $341 $312 9% $908 $817 11%
Retail gross square feet at end of quarter
(thousands) 1,397 1,246 12%
Average store size at end of
quarter (gross square feet) 4,085 4,006 2%
</TABLE>
<TABLE>
<CAPTION>
Third Quarter Year - to - Date
---------------------- ----------------------
1999 1998 1999 1998
--------- ------- --------- --------
<S> <C> <C> <C> <C>
NUMBER OF STORES:
Beginning of period 332 311 319 312
Opened 10 1 30 2
Closed - (1) (7) (3)
--------- ------- --------- --------
End of period 342 311 342 311
========= ======= ========= ========
</TABLE>
12
<PAGE> 13
Net Sales
- ---------
Net sales for the third quarter of 1999 increased 19% to $115 million from $97
million in 1998. The net sales increase was attributable to a 7% increase in
comparable store sales, with the balance due to the net addition of 31 new
stores since the end of the third quarter 1998.
The Company's third quarter performance was primarily driven by increases of 10%
in the Knit Tops categories bolstered by Graphic and Active Tees and increases
in the Add-On categories which includes sleepwear, robes, bras and underwear.
Year-to-date net sales increased 17% to $297 million from $254 million in 1998.
The net sales increase was attributable to an 8% increase in comparable store
sales, with the balance due to the net addition of 31 new stores and the
favorable impact of our store remodel program.
Gross Income
- ------------
The third quarter of 1999 gross income, expressed as a percentage of sales,
increased to 33.4% from 30.9% for the same period in 1998. The improvement was
driven by an increase in the merchandise margin (which represents gross income
before deduction of buying and occupancy costs). The increase in the merchandise
margin was due to higher initial markups and lower markdowns.
The 1999 year-to-date gross income, expressed as a percentage of sales,
increased to 33.3% from 31.0% in 1998. The increase was primarily attributable
to higher initial markups and lower markdowns which was partially offset by
slightly higher buying and occupancy costs.
General, Administrative and Store Operating Expenses
- ----------------------------------------------------
General, administrative and store operating expense, expressed as a percentage
of net sales, increased to 25.5% in the third quarter of 1999 from 23.6% for the
same period in 1998. The increase was due primarily to catalog expenses and
increased Distribution Center costs charged by The Limited, Inc. Additionally,
store payroll costs associated with new store openings and additional store
management also contributed to the rate increase.
The 1999 year-to-date, general, administrative and store operating expense,
expressed as a percentage of sales, increased to 29.2% from 28.0% in 1998. The
increase was driven by catalog expenses, expenses associated with the spin-off
transaction and increased distribution center costs charged by The Limited, Inc.
Operating Income
- ----------------
Third quarter and year-to-date operating income, expressed as a percentage of
net sales, were 7.9% and 4.1% in 1999 compared to 7.3% and 3.0% in 1998,
respectively. The increase in the gross income rate more than offset the
increase in the general, administrative and store operating expense rate
year-to-date.
13
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Net Interest Expense
- --------------------
Third quarter and year-to-date 1999 interest expense and financing fees were
$1.5 million arising from borrowing on the Company's credit agreement, offset by
$0.4 million of interest income on excess cash invested by The Limited, Inc.
under a treasury management agreement.
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Cash provided from operating activities and the revolving portion of the credit
facility provide the resources to support operations, including projected
growth, seasonal working capital requirements and capital expenditures.
Net cash provided by operating activities totaled $26.1 million for the
thirty-nine weeks ended October 30, 1999, versus net cash used for operating
activities of $9.4 million for the same period in 1998. The change in net cash
provided by operating activities was primarily driven by an increase in net
income before the deduction of depreciation and amortization and an increase in
accounts payable and accrued expenses during the 1999 period over the comparable
period in 1998.
Investing activities represented capital expenditures, which were primarily for
new and remodeled stores.
Financing activities included an increase of $20.9 million in the net investment
by The Limited representing $32.9 million of working capital advances through
the date of the spin off, of which $12 million was repaid on August 13, 1999,
with proceeds from the $100 million credit agreement. Additionally, the Company
paid a $50 million cash dividend to The Limited with proceeds from the credit
agreement on August 13, 1999. In connection with the spin-off, the balance of
the net investment by The Limited was converted to common stock and paid in
capital based on the 30.7 million shares issued in connection with the spin-off
with a par value of $.01 per share. The Company also paid off the revolving
portion of the $100 million credit facility during the third quarter.
A summary of the Company's working capital position and capitalization follows
(thousands).
October 30, January 30,
1999 1999
------- -------
Working capital $15,032 $ 1,394
======= =======
Capitalization:
Long-term debt 50,000
Shareholders' Equity 28,530
Net investment by The Limited - 51,100
------- -------
Total capitalization $78,530 $51,100
======= =======
14
<PAGE> 15
Capital Expenditures
- --------------------
Capital expenditures, primarily for new and remodeled stores, totaled $23.1
million for the thirty-nine weeks ended October 30, 1999, compared to $5.3
million for the comparable period of 1998. The Company anticipates spending
approximately $35.0 million in 1999 for capital expenditures, which will be
primarily for new stores, the remodel or relocation and expansion of 18 existing
stores and related improvements for the retail business.
The Company intends to add approximately 58,000 gross square feet during the
fourth quarter of 1999. At year end 1999, gross square feet will have increased
14% over end of year 1998. It is anticipated the increase will result from the
addition of approximately 13 net new stores and the expansion of two stores. The
Company expects that capital expenditures will be funded principally by net cash
provided by operating activities.
INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE
The Year 2000 issue arises primarily from computer programs, commercial systems
and embedded chips that will be unable to properly interpret dates beyond the
year 1999. The Company utilizes a variety of proprietary and third party
computer technologies - both hardware and software - directly in its businesses.
The Company also relies on numerous third parties and their systems' ability to
address the Year 2000 issue. The Company's critical information technology (IT)
functions include point-of-sale equipment, merchandise distribution, merchandise
and non-merchandise procurement, credit card and banking services,
transportation, and business and accounting management systems. The Company is
using both internal and external resources to complete its Year 2000
initiatives.
Readiness
- ---------
The Company's information systems are primarily operated by The Limited using
Limited hardware in their facilities pursuant to a service agreement. In order
to address the Year 2000 issue, the Company participated with its former parent,
The Limited, which established a program management office to oversee, monitor
and coordinate the company-wide Year 2000 effort. This office has developed and
is implementing a Year 2000 plan. The implementation includes five stages:
- - awareness, which includes identifying risks and conducting an education
program regarding Year 2000 issues
- - assessment, which primarily includes establishing project resources,
developing a Year 2000 renovation strategy, completing a company-wide
inventory of information technology and determining the necessary
training and testing facility requirements
- - renovation/development, which includes the analysis of existing
information systems, the design of remediation activities and the
coding of necessary remedies
- - validation, which primarily includes system testing
- - implementation, which includes the placement of renovated systems "in
production" and training end users
15
<PAGE> 16
There are four areas of focus:
- - RENOVATION OF LEGACY SYSTEMS. The Company has completed all five stages
of Year 2000 implementation for renovation of legacy systems.
- - INSTALLATION OF NEW SOFTWARE PACKAGES TO REPLACE SELECTED LEGACY
SYSTEMS. Replacement of significant legacy systems with new software
packages is complete.
- - ASSESSMENT OF YEAR 2000 READINESS AT KEY VENDORS AND SUPPLIERS. A vast
network of vendors, suppliers and service providers located both within
and outside the United States provide the Company with merchandise for
resale, supplies for operational purposes and services. The Company has
identified key vendors, suppliers and service providers, and The
Limited sent Year 2000 surveys to 71 of these vendors to determine
their Year 2000 status. A total of 69 vendors responded and indicated
that they will be Year 2000 ready. Based upon the results of the
surveys, the Company selected three vendors for on-site visits to
further assess the vendors' progress and estimated compliance dates.
The Limited and the Company have considered the results of the vendor
surveys and on-site visits during the development of their contingency
plan.
- - EVALUATING FACILITIES AND DISTRIBUTION EQUIPMENT WITH EMBEDDED COMPUTER
TECHNOLOGY. The Company uses various facilities and distribution
equipment with embedded computer technology, such as conveyors,
elevators, and security systems, fire protection systems and energy
management systems. All of our remediation efforts are complete.
Cost to Address the Year 2000 Issue
- -----------------------------------
Total expenditures incurred from 1997 through October 30, 1999 related to
remediation, testing, conversion, replacement and upgrading system applications
were approximately $6.4 million, of which approximately $2.3 million represents
capital assets which will be amortized principally over a period of five years
beginning in May 1999. Total costs included expenditures associated with the
development of an internal testing center, which has enabled The Limited to
perform comprehensive testing of newly renovated systems by processing
transactions as if they had occurred in the Year 2000. This internal testing
process was used to develop the risk and cost estimates described in the
"Information Systems and `Year 2000' Compliance" section of the Form 10-Q.
In addition to the previously described costs, significant internal payroll
costs (not separately identified) were incurred relating to the Company's and
The Limited's Year 2000 initiatives. These payroll costs include the efforts by
approximately 500 employees of The Limited's information and technology
division, representing approximately three-fourths of their total information
technology budgeted hours for the Year 2000 project. In addition, The Limited
engaged external consultants to assist it with program management and new
software package implementation, which represent the remaining hours. The
Limited has allocated approximately 15% of its information technology budget for
the period from Fall 1997 through Fall 1999 toward Year 2000 remediation
efforts.
Total remaining expenditures are expected to be up to $300,000 during 1999 and
2000. Total incremental expenses, including depreciation and amortization of new
package systems, remediation to bring current systems into compliance, and
writing off legacy systems are not expected to have a material impact on the
Company's financial condition during 1999 and 2000.
16
<PAGE> 17
Reasonably Likely Worst Case Scenario and Contingency Plans
- -----------------------------------------------------------
The Company believes that the reasonably likely worst case scenario would
involve short-term disruption of systems affecting its supply and distribution
channels. The Company and The Limited have substantially completed the
development of contingency plans that identify actions to be taken if any
critical systems or services are interrupted. The Company and The Limited have
considered various contingency plans, such as alternative sourcing and
accelerated delivery of merchandise from foreign suppliers, and operational
alternatives, including manual processes. In addition, the Company plans to have
key managerial, operational and technical support personnel available to
identify and remedy any disruption that may occur during the transition to the
new millennium.
At the present time, the Company and The Limited are not aware of any Year 2000
issues that are expected to affect materially its products, services,
competitive position or financial performance. Additionally, the Company has not
postponed any significant information technology projects due to the Year 2000
project. Thus, the Company does not believe that the delay of any projects has
had a material impact on its financial condition and results of operations.
However, despite The Company's and The Limited's significant efforts to make its
systems, facilities and equipment Year 2000 ready, the compliance of third party
service providers and vendors (including, for instance, governmental entities
and utility companies) is beyond the Company's control. Accordingly, the Company
can give no assurances that the failure of technology infrastructure of the
United States (or other systems, such as utilities, of general importance),
foreign nations or other companies on which the Company's systems rely, or the
failure of key suppliers or other third parties to comply with Year 2000
requirements, will not have a material adverse effect on the Company.
In connection with the spin-off, we will indemnify The Limited against any
liabilities caused by or arising from The Limited's year 2000 readiness
assistance. We have also agreed not to make any claims against The Limited
caused by or arising from The Limited's Year 2000 readiness assistance and in
connection with the failure of any of our systems to be Year 2000 ready.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Form 10-Q or made by management of the Company involve risks and
uncertainties and are subject to change based on various important factors, many
of which may be beyond the Company's control. Accordingly, the Company's future
performance and financial results may differ materially from those expressed or
implied in any such forward-looking statements. Forward-looking statements are
indicated by words such as "anticipate," "estimate," "expect," "intend," "risk,"
"could," "may," "will," "pro forma," "likely," "possible," "potential," and
similar words and phrases and the negative forms and variations of these words
and phrases, and include statements in this Management's Discussion and Analysis
relating to anticipated capital expenditures in 1999 for new stores and the
remodeling or expansion of existing stores, and the funding therefor, and the
costs and dates relating to the Year 2000 effort, which statements are based on
the Company's current best estimates that may be proven incorrect as additional
information becomes available. The Company's Year 2000-related forward-looking
statements are also based on assumptions about many important factors, including
the technical skills of employees and independent contractors, the
representations and preparedness of third parties, the ability of vendors to
deliver merchandise or perform services required by the Company and the
collateral effects of the Year
17
<PAGE> 18
2000 issues on the Company's business partners and customers. While the Company
believes its assumptions are reasonable, it cautions that it is impossible to
predict factors that could cause actual costs or timetables to differ materially
from the expected results. In addition to Year 2000 issues, the following
factors, among others, in some cases have affected and in the future could
affect the Company's financial performance and actual results and could cause
actual results for 1999 and beyond to differ materially from those expressed or
implied in any forward-looking statements included in this Form 10-Q or
otherwise made by management: changes in consumer spending patterns, consumer
preferences and overall economic conditions, the impact of competition and
pricing, changes in weather patterns, political stability, currency and exchange
risks and changes in existing or potential duties, tariffs or quotas, postal
rate increases and charges, paper and printing costs, availability of suitable
store locations at appropriate terms, ability to develop new merchandise and
ability to hire and train associates.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On November 13, 1997, the United States District Court for the Southern
District of Ohio, Eastern Division, dismissed with prejudice an amended
complaint that had been filed against the Company, The Limited and
certain of The Limited's other subsidiaries by the American Textile
Manufacturers Institute ("ATMI"), a textile industry trade association.
The amended complaint alleged that the defendants violated the federal
False Claims Act by submitting false country of origin declarations to
the U.S. Customs Service. On November 26, 1997, ATMI served a motion to
alter or amend judgment and a motion to disqualify the presiding judge
and to vacate the order of dismissal. The motion to disqualify was
denied on December 22, 1997, but as a matter of his personal
discretion, the presiding judge elected to recuse himself from further
proceedings and this matter was transferred to a judge of the United
States District Court for the Southern District of Ohio, Western
Division. On May 21, 1998, this judge denied all pending motions
seeking to alter, amend or vacate the judgment that had been entered in
favor of the Company. On June 5, 1998, ATMI appealed to the United
States Court of Appeals for the Sixth Circuit (the "Sixth Circuit"). On
September 14, 1999, the Sixth Circuit affirmed the order of dismissal.
ATMI's petition for rehearing and suggestion for rehearing en banc were
denied on November 2, 1999.
The Company is a defendant in other litigation arising in the ordinary
course of business. Although it is not possible to predict with
certainty the eventual outcome of any litigation, in the opinion of
management, neither the ATMI proceeding discussed above nor any other
pending litigation are expected to have a material adverse effect on
the Company's financial position or results of operations.
19
<PAGE> 20
Item 6. EXHIBITS
(a) Exhibits
--------
15. Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Incorporation of Report
of Independent Accountants.
27. Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None
20
<PAGE> 21
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOO, INC.
(Registrant)
By /s/ Kent A. Kleeberger
------------------------
Kent A. Kleeberger,
Vice President and
Chief Financial Officer
Date: December 13, 1999
- ----- -----------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOO, INC.
(Registrant)
By /s/ Kent A. Kleeberger
---------------------------
Kent A. Kleeberger
Vice President and
Chief Financial Officer
Date: December 13, 1999
- -----------------------------
21
<PAGE> 1
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated November 12, 1999 on our review of the
interim consolidated financial information of Too, Inc. (the "Company") as of
and for the thirteen and thirty-nine week periods ended October 30, 1999 and
included in this quarterly report on Form 10-Q for the thirteen weeks then ended
is incorporated by reference in the Company's Registration Statements on Form
S-8, Registration Nos. 333-89529 and 333-89533. Pursuant to Rule 436(c) under
the Securities Act of 1933, this report should not be considered a report or a
part of the registration statement prepared or certified by us within the
meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
December 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements (unaudited) of Too, Inc. for the quarter ended
October 30, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-30-1999
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<SECURITIES> 0
<RECEIVABLES> 1,476
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<INVENTORY> 44,131
<CURRENT-ASSETS> 81,657
<PP&E> 117,089
<DEPRECIATION> 59,717
<TOTAL-ASSETS> 147,136
<CURRENT-LIABILITIES> 66,625
<BONDS> 0
0
0
<COMMON> 307
<OTHER-SE> 28,223
<TOTAL-LIABILITY-AND-EQUITY> 147,136
<SALES> 114,802
<TOTAL-REVENUES> 114,802
<CGS> 76,456
<TOTAL-COSTS> 76,456
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<INCOME-PRETAX> 7,940
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