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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 28, 2000
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)
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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, OH 43219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (614) 479-3500
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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 24, 2000
------------ --------------------------------
$.01 Par Value 30,746,655 Shares
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TOO, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the Thirteen and Thirty-Nine Weeks Ended
October 28, 2000 and October 30, 1999.......................................................... 3
Consolidated Balance Sheets
October 28, 2000 and January 29, 2000.......................................................... 4
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended
October 28, 2000 and October 30, 1999.......................................................... 5
Notes to Consolidated Financial Statements.......................................................... 6
Report of Independent Accountants................................................................... 10
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........ 11
PART II. Other Information
Item 1. Legal Proceedings............................................................................. 17
Item 6. Exhibits and Reports on Form 8-K............................................................. 17
Signature ............................................................................................. 18
Index to Exhibits...................................................................................... 19
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2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------- -------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
--------------- -------------- --------------- --------------
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Net sales $ 134,040 $ 114,802 $ 361,238 $ 296,714
Costs of goods sold, buying and
occupancy costs 88,415 76,456 240,978 198,038
--------------- -------------- --------------- --------------
Gross income 45,625 38,346 120,260 98,676
General, administrative and store
operating expenses 34,486 29,305 99,909 85,309
--------------- -------------- --------------- --------------
Operating income 11,139 9,041 20,351 13,367
Interest expense, net 461 1,101 1,310 1,101
--------------- -------------- --------------- --------------
Income before income taxes 10,678 7,940 19,041 12,266
Provision for income taxes 4,300 3,200 7,600 4,900
--------------- -------------- --------------- --------------
Net income $ 6,378 $ 4,740 $ 11,441 $ 7,366
=============== ============== =============== ==============
Earnings per share:
Basic $ 0.21 $ 0.15 $ 0.37 $ 0.24
=============== ============== =============== ==============
Diluted $ 0.20 $ 0.15 $ 0.36 $ 0.24
=============== ============== =============== ==============
Weighted average common shares:
Basic 30,741 30,674 30,736 30,674
=============== ============== =============== ==============
Diluted 31,797 31,243 31,774 30,864
=============== ============== =============== ==============
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The accompanying notes are an integral part of these consolidated financial
statements.
3
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TOO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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OCTOBER 28, JANUARY 29,
2000 2000
-------------- ---------------
(UNAUDITED)
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ASSETS
CURRENT ASSETS:
Cash and equivalents $ 32,540 $ 59,984
Receivables 6,615 2,863
Inventories 54,037 34,656
Store supplies 7,217 6,171
Deferred income taxes 3,285 2,904
Other 2,176 504
-------------- ---------------
Total current assets 105,870 107,082
Property and equipment, net 75,144 61,874
Deferred income taxes 10,170 7,838
Other assets 1,417 1,799
-------------- ---------------
Total assets $ 192,601 $ 178,593
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 26,017 $ 20,754
Accrued expenses 41,371 46,689
Income taxes payable 14,020 13,541
-------------- ---------------
Total current liabilities 81,408 80,984
Long-term debt 50,000 50,000
Other long-term liabilities 3,197 2,142
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 50 million shares authorized - -
Common stock, $.01 par value, 100 million shares authorized,
30.7 million issued and outstanding 307 307
Paid in capital 25,498 24,410
Retained earnings since effective date, August 23, 1999 32,191 20,750
-------------- ---------------
Total shareholders' equity 57,996 45,467
-------------- ---------------
Total liabilities and shareholders' equity $ 192,601 $ 178,593
============== ===============
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The accompanying notes are an integral part of these consolidated financial
statements.
4
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TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
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THIRTY-NINE WEEKS ENDED
-------------------------------
OCTOBER 28, OCTOBER 30,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,441 $ 7,366
IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS:
Depreciation and amortization 12,759 9,977
CHANGES IN ASSETS AND LIABILITIES:
Inventories (19,381) (16,566)
Accounts payable and accrued expenses (1,901) 35,562
Income taxes (2,133) (7,115)
Other assets (1,778) (3,567)
Other liabilities 1,055 480
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 62 26,137
-------------- --------------
INVESTING ACTIVITIES:
Capital expenditures (28,493) (23,055)
-------------- --------------
NET CASH USED FOR INVESTING ACTIVITIES (28,493) (23,055)
-------------- --------------
FINANCING ACTIVITIES:
Stock options, restricted stock and other equity changes 987 -
Proceeds from borrowings under the credit facility - 64,235
Repayment of borrowing under the credit facility - (14,235)
Payment of dividend to The Limited - (50,000)
Net increase in net investment by The Limited - 20,874
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 987 20,874
-------------- --------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (27,444) 23,956
Cash and equivalents, beginning of period 59,984 987
-------------- --------------
Cash and equivalents, end of period $ 32,540 $ 24,943
============== ==============
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The accompanying notes are an integral part of these consolidated financial
statements.
5
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TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
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 ages seven to fourteen years. 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.
The accompanying unaudited interim consolidated financial statements
as of October 28, 2000 and for the thirteen and thirty-nine week
periods ended October 28, 2000 and October 30, 1999, 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 Annual
Report on Form 10-K. 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, 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.
Prior to August 23, 1999, the Company operated as a wholly owned
subsidiary of The Limited, Inc. Effective August 23, 1999, The Limited
distributed to its shareholders of record as of August 11, 1999, all
of its interest in Too, Inc. on the basis of one share of Too, Inc.
common stock for each seven shares of The Limited, Inc. common stock
(the "Spin-off"). The Spin-off resulted in 30.7 million shares of Too,
Inc. common stock outstanding as of August 23, 1999. As a result of
the Spin-off, the Company became an independent, separately traded,
public company listed on the New York Stock Exchange.
The consolidated financial statements as of October 28, 2000, and for
the thirteen and thirty-nine weeks ended October 28, 2000, and October
30, 1999 included herein have been reviewed by the independent public
accounting firm of PricewaterhouseCoopers LLP and the report of such
firm follows the notes to consolidated financial statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions
of Section 11 of the Securities Act of 1933 for its report on the
consolidated financial statements because that report is not a
"report" within the meaning of Sections 7 and 11 of that Act.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if stock options or restricted stock were converted to common
stock using the treasury stock method.
Earnings per share, as presented in the Consolidated Statements of
Income, for periods prior to and including the Spin-off was calculated
by dividing net income by the 30.7 million common shares issued in
connection with the Spin-off as if these shares were outstanding for
such periods.
6
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The following table shows the amounts used in the computation of basic
and diluted earnings per share (in thousands):
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THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
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OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
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Net income $ 6,378 $ 4,740 $ 11,441 $ 7,366
============= ============= ============= =============
Weighted average common shares - basic 30,741 30,674 30,736 30,674
Dilutive effect of stock options
and restricted stock 1,056 569 1,038 190
------------- ------------- ------------- -------------
Weighted average common shares - diluted 31,797 31,243 31,774 30,864
============= ============= ============= =============
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Options to purchase 126,000 and 117,500 common shares were not
included in the computation of net income per diluted share for the
thirteen and thirty-nine week periods ended October 28, 2000,
respectively, as the options' exercise price was greater than the
average market price of the common shares. No options to purchase
common shares were excluded from the computation of net income per
share for the thirteen and thirty-nine week periods ended October
30,1999.
3. INVENTORIES
The fiscal year of the Company is comprised of two principal selling
seasons: Spring (the first and second quarters) and Fall (the third
and fourth quarters). Inventories are principally valued at the lower
of average cost or market, on a first-in, first-out basis utilizing
the retail method. Inventory valuation at the end of the first and
third quarters reflects adjustments for inventory markdowns and
shrinkage estimates for the total selling season.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (thousands):
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OCTOBER 28, JANUARY 29,
2000 2000
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Property and equipment, at cost $ 144,404 $ 121,268
Less accumulated depreciation and amortization (69,260) (59,394)
-------------- ---------------
Property and equipment, net $ 75,144 $ 61,874
============== ===============
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7
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5. RELATIONSHIP WITH THE LIMITED
In connection with the Spin-off, the Company entered into a service
agreement with Limited Distribution Services, a wholly owned
subsidiary of The Limited, to provide distribution services to us
covering flow of merchandise from factory to our stores for up to
three years after the date of Spin-off. Most of the merchandise and
related materials for the Company's stores are shipped to a
distribution center owned by The Limited in Columbus, Ohio, where the
merchandise is received, inspected, allocated and packed for shipment
to stores. Under the service agreement, The Limited distributes
merchandise and related materials using common and contract carriers
to the Company's stores. Inbound freight is charged to Too based upon
actual receipts and related charges, while outbound freight is charged
based on a percentage of cartons shipped.
Our main offices are owned by Distribution Land Corp., a wholly owned
subsidiary of the Limited, and leased to us with a lease term expiring
in August 2002.
Our largest apparel supplier has been Mast Industries, Inc., a wholly
owned subsidiary of The Limited. Mast Industries supplied
approximately 33% of the apparel that we purchased in 1999. 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 continue to source products through Mast
Industries.
Amounts payable to The Limited, including merchandise payables to Mast
Industries, amounted to approximately $11 million at October 28, 2000.
6. CREDIT FACILITY
During August 1999, the Company entered into a five-year $100 million
credit agreement (the "Credit Facility") with a syndicate of banks.
The Credit Facility is collateralized by virtually all assets of the
Company and is comprised of a $50 million five-year term loan and a
$50 million revolving loan commitment. The entire amount of the term
portion was drawn in order to fund a $50 million dividend to The
Limited and $14 million was drawn under the revolving loan commitment
principally to repay a portion of working capital advances made by the
Limited prior to the Spin-off.
The $50 million revolving loan commitment is available to fund working
capital requirements and for general corporate purposes. Interest on
borrowings under the Credit Facility is based on matrix pricing
applied to either the London Interbank Offered Rate or Prime, as
defined in the agreement. Payments of principal under the term loan
are due at various dates from July 2002 to August 2004. A commitment
fee based on matrix pricing is charged on the unused portion of the
revolving loan commitment. The commitment fee is up to 1/2 of 1% of
the unused revolving credit commitment per annum. Under the terms of
the Credit Facility, the Company is required to comply with certain
covenants including financial ratios. The Credit Facility limits the
Company from incurring certain additional indebtedness and restricts
substantial asset sales, capital expenditures above approved limits
and cash dividends. The Company is in compliance with all applicable
terms of the Credit Facility. As of October 28, 2000, there were no
amounts outstanding under the revolving portion of the Credit
Facility.
Interest expense, including the amortization of financing fees,
amounted to $1.2 million and $3.7 million for the quarter and
year-to-date periods ending October 28, 2000, respectively. Interest
expense was partially offset by interest income of $779,000 and $2.4
million for the quarter and year-to-date periods ending October
28,2000, respectively. Interest expense and interest income amounted
to $1.5 million and $367,000 for the quarter and year-to-date periods
ending October 30, 1999, respectively.
8
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7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS
133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (February 4, 2001 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that the adoption of SFAS 133 will not have a
material effect on the Company's results of operations or its financial
position.
The Emerging Issues Task Force ("EITF") has issued EITF Issue No.
00-10, "Accounting for Shipping and Handling Revenues and Costs," which
will be effective in the fourth quarter of 2000, and EITF Issue No.
00-14, "Accounting for Certain Sales Incentives," which will be
effective in the second quarter of 2001. EITF No. 00-10 addresses the
classification of shipping and handling revenues and costs in the
consolidated statements of income and EITF No. 00-14 addresses the
accounting for, and classification of, various sales incentives. The
Company has determined that adopting the provisions of these EITF
issues will not have a material effect on the Company's results of
operations or its financial position.
The Securities and Exchange Commission ("SEC") has issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which will be effective beginning in the fourth quarter of
2000. SAB No. 101 provides the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues.
The Company has determined that adopting the provisions of this SAB
will not have a material effect on the Company's results of operations
or its financial position.
9
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Too, Inc.:
We have reviewed the accompanying consolidated balance sheet of Too, Inc. and
its subsidiaries (the "Company") as of October 28, 2000, and the related
consolidated statements of income for each of the thirteen and thirty-nine week
periods ended October 28, 2000 and October 30, 1999 and the consolidated
statements of cash flows for the thirty-nine week periods ended October 28, 2000
and October 30, 1999. 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 consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of January
29, 2000, and the related consolidated statements of income and shareholders'
equity, and of cash flows for the year then ended (not presented herein), and in
our report dated February 17, 2000 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of January 29, 2000,
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 13, 2000
10
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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 28, 2000 were $134.0 million, an
increase of 17% from $114.8 million for the comparable period of 1999. Gross
income increased 19% to $45.6 million from $38.3 million in 1999 and operating
income rose 23% to $11.1 million from $9.0 million in 1999. Net income increased
35% to $6.4 million from $4.7 million in 1999. Diluted earnings per share
increased to $.20, a 33% increase, versus diluted earnings per share of $.15 in
1999.
Net sales for the thirty-nine weeks ended October 28, 2000, increased 22% to
$361.2 million from $296.7 million for the comparable period in 1999. Gross
income increased 22% to $120.3 million from $98.7 million in 1999 and operating
income increased 52% to $20.4 million from $13.4 million in 1999. Net income
increased to $11.4 million, an increase of 86% versus 1999 adjusted net income
of $6.2 million and a 55% increase versus 1999 historical net income of $7.4
million. The adjusted results for 1999 reflect interest expense, net of the
related tax benefit, on the Company's borrowings under the credit facility as if
it were in place as of the beginning of the year. Year-to-date diluted earnings
per share increased 50% to $.36 versus 1999 historical diluted earnings per
share of $.24.
Management believes the presentation below provides a reasonable basis on which
to present the adjusted net income information. Although the adjusted net income
information should not be construed as an alternative to the reported results
determined in accordance with generally accepted accounting principles, it is
provided to assist in investors' understanding of the Company's results of
operations and the impact of certain transactions entered into by the Company in
connection with the August 1999 Spin-off from the former parent.
ADJUSTED NET INCOME INFORMATION (IN THOUSANDS)
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THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
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OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
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Net income $ 6,378 $ 4,740 $ 11,441 $ 7,366
Adjusted interest expense (1) - - - (2,108)
Adjusted tax benefit (2) - - - 900
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Adjusted net income $ 6,378 $ 4,740 $ 11,441 $ 6,158
============= ============= ============= =============
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1) Adjusted net income includes interest expense and financing fees on
approximately $52 million of average indebtedness representing debt
incurred under the credit facility which was used to pay a $50 million
dividend to The Limited in connection with the Spin-off.
2) The tax benefit is related to adjusted interest expense arising from
the credit facility at an estimated effective tax rate of
approximately 40%.
11
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FINANCIAL SUMMARY
The following summarized financial and statistical data compares the thirteen
and thirty-nine week periods ended October 28, 2000, to the comparable 1999
period:
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THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------------ ------------------------------------------
OCTOBER 28, OCTOBER 30, PERCENT OCTOBER 28, OCTOBER 30, PERCENT
2000 1999 CHANGE 2000 1999 CHANGE
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Net sales (millions) $ 134.0 $ 114.8 17 % $ 361.2 $ 296.7 22%
Comparable store sales increases (1) 1% 7% 6% 8%
Retail sales per average square foot (2) $ 85 $ 83 2 % $ 238 $ 222 7%
Retail gross square feet at end of
quarter (thousands) 1,605 1,397 15 %
Stores with "Girl Power" format 138 72
Percentage of stores in "Girl Power"
format 35% 21%
NUMBER OF STORES:
Beginning of period 373 332 352 319
Opened 18 10 41 30
Closed - - (2) (7)
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End of period 391 342 391 342
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</TABLE>
(1) A store is included in our comparable store sales calculation once it
has completed 52 weeks of operation. Further, stores that are expanded
more than 20% in square feet are treated as new stores for purposes of
this calculation.
(2) Retail sales per average square foot is the result of dividing net
sales for the fiscal quarter by average gross square feet, which
reflects the impact of opening and closing stores throughout the
quarter.
NET SALES
Net sales for the third quarter of 2000 increased 17% to $134.0 million from
$114.8 million in 1999. The net sales increase was attributable to a 1% increase
in comparable store sales, with the balance due to the net addition of 49 new
stores since the end of the third quarter 1999, remodeled stores and
approximately $1.5 million of incremental sales from the catalog and e-commerce
sales channels.
Year-to-date net sales were $361.2 million, a 22% increase over 1999
year-to-date sales of $296.7. The increase was due to a 6% increase in
comparable store sales, the net addition of 49 new stores, remodeled stores and
approximately $5.2 million in sales from the catalog and e-commerce sales
channels.
Within merchandise categories for both the quarter and year-to-date periods,
active pants, shorts, jackets and graphic tees all showed significant sales
increases as did cut and sewn casual tops, other jeanswear and most of the
add-on category (principally underwear/bras and swimwear).
12
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GROSS INCOME
Gross income, expressed as a percentage of sales, was 34.0% for the third
quarter of 2000, an increase of 60 basis points from a gross income rate of
33.4% for the third quarter of 1999. This increase was a result of higher
merchandise margins which were partially offset by higher catalog costs.
Merchandise margins increased as a result of higher initial mark-ups that were
partially offset by higher markdowns.
For the year-to-date period, the gross income rate was unchanged at 33.3% as the
impact of catalog costs, which were not incurred until the third quarter of
1999, was offset by higher merchandise margins.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
General, administrative and store operating expense, expressed as a percentage
of net sales, increased 20 basis points to 25.7% in the third quarter of 2000
from 25.5% for the same period in 1999. The increase during the quarter was due
to higher catalog and home office costs. The increase in home office expenses
was principally due to costs associated with replacing certain services and
administrative functions previously performed and allocated by the former
parent. On a year-to-date basis, general, administrative and store operating
expense decreased by 110 basis points to 27.7% in 2000 from 28.8% in 1999. The
decrease during the year-to-date periods was due to the leveraging of store
expenses arising from higher per store productivity as well as lower cost
allocations from The Limited which were partially offset by higher home office
costs.
OPERATING INCOME
Operating income, expressed as a percentage of net sales, increased to 8.3% in
the third quarter of 2000 compared to 7.9% in 1999. Year-to-date operating
income increased to 5.6% in 2000 compared to 4.5% in 1999. The increase in
operating income for the quarter was driven by a higher gross margin rate while
the increase for the year-to-date period was primarily due to the decrease, as
expressed as a percentage of net sales, in general, administrative and store
operating expenses.
NET INTEREST EXPENSE
Net interest expense amounted to $461,000 and $1.3 million for the quarter and
year-to-date periods ending October 28, 2000, respectively. Net interest expense
for the quarter and year-to-date periods in 1999 amounted to $1.1 million.
Interest expense, including the amortization of financing fees, amounted to $1.2
million and $3.7 million for the quarter and year-to-date periods ending October
28, 2000, respectively. Interest expense was partially offset by interest income
of $779,000 and $2.4 million for the quarter and year-to-date periods,
respectively. Interest expense and interest income amounted to $1.5 million and
$367,000 for the quarter and year-to-date periods ending October 30, 1999,
respectively. Interest income was earned on short-term investments in commercial
paper and money market instruments.
INCOME TAXES
Income tax expense amounted to $4.3 million and $7.6 million for the quarter and
year-to-date periods ending October 28, 2000, respectively, compared to $3.2
million and $4.9 million for the comparable periods in 1999. We anticipate that
the annual effective tax rate will remain unchanged at 40% in fiscal 2000.
13
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FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities and the revolving portion of our $100
million credit facility provide the resources to support operations, including
projected growth, seasonal working capital requirements and capital
expenditures.
Net cash provided by operating activities amounted to $62 thousand for the
thirty-nine weeks ended October 28, 2000 versus net cash provided by operating
activities of $26.1 million for the same period in 1999. The decrease in net
cash provided by operating activities versus the comparable period in 1999 was
principally due to an increase in accounts payable and accrued expenses at
October 30, 1999.
Investing activities represented capital expenditures, which were primarily for
new and remodeled stores.
Financing activities principally represented proceeds from employee stock option
exercises and the issuance of restricted stock.
A summary of our working capital position and capitalization follows
(thousands).
<TABLE>
<CAPTION>
OCTOBER 28, JANUARY 29,
2000 2000
------------- -------------
<S> <C> <C>
Working capital $ 24,462 $ 26,098
============= =============
Capitalization:
Long-term debt 50,000 50,000
Shareholders' equity 57,996 45,467
------------- -------------
Total capitalization $ 107,996 $ 95,467
============= =============
Amounts authorized under revolving portion
of credit facility $ 50,000 $ 50,000
============= =============
</TABLE>
In August 1999, we entered into a five-year, $100 million collateralized Credit
Facility. The Credit Facility consists of a $50 million five-year term loan and
a $50 million, five-year annual revolving credit commitment. The Credit
Facility's interest rates are based on the London Interbank Offered Rate or
Prime plus a spread as defined in the agreement which reflect matrix pricing.
The term loan is interest only until the end of the third year at which time the
amortization of the outstanding principle balance will begin. The Credit
Facility contains customary representations and warranties as well as certain
affirmative, negative and financial covenants.
No amounts were borrowed against the $50 million revolving credit commitment
during the quarter ended October 28, 2000.
14
<PAGE> 15
CAPITAL EXPENDITURES
Capital expenditures, primarily for new and remodeled stores, totaled $28.5
million for the thirty-nine weeks ended October 28, 2000 compared to $23.1
million for the comparable period of 1999. We anticipate spending approximately
$40 to $50 million in 2000 for capital expenditures principally for the
construction of approximately 58 new stores and the remodel of 10 existing
stores along with $12 to $15 million for our new Home Office and Distribution
Center facilities. Our store expansion and remodel program should add
approximately 230,000 to 235,000 gross square feet during 2000, representing a
15% to 16% increase over year-end 1999. The Company expects that capital
expenditures will be funded principally by net cash provided by operating
activities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (February 4, 2001 for
the Company). SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management of the Company
anticipates that the adoption of SFAS 133 will not have a material effect on the
Company's results of operations or its financial position.
The Emerging Issues Task Force ("EITF") has issued EITF Issue No. 00-10,
"Accounting for Shipping and Handling Revenues and Costs," which will be
effective in the fourth quarter of 2000, and EITF Issue No. 00-14, "Accounting
for Certain Sales Incentives," which will be effective in the second quarter of
2001. EITF No. 00-10 addresses the classification of shipping and handling
revenues and costs in the consolidated statements of income and EITF No. 00-14
addresses the accounting for, and classification of, various sales incentives.
The Company has determined that adopting the provisions of these EITF issues
will not have a material effect on the Company's results of operations or its
financial position.
The Securities and Exchange Commission ("SEC") has issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
will be effective beginning in the fourth quarter of 2000. SAB No. 101 provides
the SEC staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. The Company has determined that adopting
the provisions of this SAB will not have a material effect on the Company's
results of operations or its financial position.
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. 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 2000 for new stores and the
remodeling or expansion of existing stores, and the related funding. 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 future performance and financial results 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; currency and exchange risks; changes
in existing or potential trade restrictions, duties, tariffs or quotas; changes
in political or financial stability; changes in postal rates and charges and
paper and printing costs; availability of suitable store locations at
appropriate terms; ability to develop new merchandise; ability to hire and train
associates; and/or other risk factors that may be described in the Risk Factors
section of the Company's Form 10, filed August 18, 1999, as well as other
filings with the Securities and Exchange Commission. Future economic and
industry trends that could potentially impact revenue and profitability are
difficult to predict. The Company assumes no obligation to publicly update or
revise its forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied therein will not be
realized.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 6. EXHIBITS
(a) Exhibits
10.1 Employment Agreement, dated as of September 15, 2000, between
the Company and Michael W. Rayden
10.2 Executive Agreement, dated as of September 15, 2000, between
the Company and Michael W. Rayden
10.3 Employment Agreement, dated as of September 15, 2000, between
the Company and Kent A. Kleeberger
10.4 Executive Agreement, dated as of September 15, 2000, between
the Company and Kent A. Kleeberger
10.5 Employment Agreement, dated as of September 15, 2000, between
the Company and James C. Petty
10.6 Executive Agreement, dated as of September 15, 2000, between
the Company and James C. Petty
10.7 Employment Agreement, dated as of September 15, 2000, between
the Company and Sally A. Boyer
10.8 Executive Agreement, dated as of September 15, 2000, between
the Company and Sally A. Boyer
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
16
<PAGE> 17
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,
Senior Vice President - Chief Financial Officer,
Secretary and Treasurer
(duly authorized officer and Principal
Financial and Accounting Officer)
Date: December 12, 2000
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NO. DOCUMENT
--- --------
10.1 Employment Agreement, dated as of September 15, 2000, between
the Company and Michael W. Rayden
10.2 Executive Agreement, dated as of September 15, 2000, between
the Company and Michael W. Rayden
10.3 Employment Agreement, dated as of September 15, 2000, between
the Company and Kent A. Kleeberger
10.4 Executive Agreement, dated as of September 15, 2000, between
the Company and Kent A. Kleeberger
10.5 Employment Agreement, dated as of September 15, 2000, between
the Company and James C. Petty
10.6 Executive Agreement, dated as of September 15, 2000, between
the Company and James C. Petty
10.7 Employment Agreement, dated as of September 15, 2000, between
the Company and Sally A. Boyer
10.8 Executive Agreement, dated as of September 15, 2000, between
the Company and Sally A. Boyer
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Incorporation of Report
of Independent Accountants.
27. Financial Data Schedule.
18
