<PAGE> 1
- --------------------------------------------------------------------------------
DRAFT 4/5/00
-------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
February 17, 2000
Date of Report (Date of earliest event reported)
TOO, INC.
(Exact name of registrant as specified in its charter)
-------------
<TABLE>
<S> <C> <C>
Delaware 1-14987 31-1333930
-------- ------- ----------
(State or other jurisdiction of (Commission File no.) (IRS Employer Identification No.)
incorporation)
</TABLE>
3885 Morse Road
Columbus, OH 43219
(Address of principal executive offices)
(614) 479-3500
(Registrant's telephone number
including area code)
-------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
Item 5. Other Events.
Change in Accounting for Gift Certificates
- ------------------------------------------
The Company sells gift certificates in exchange for cash. These gift
certificates do not expire and can be redeemed toward the purchase of
merchandise in the future. The Company has historically recognized net receipts
/ (redemptions) from gift certificates as a reduction / (increase) to general,
administrative and store operating expenses. On February 17, 2000, Too, Inc.
(the "Company") issued a press release which, in addition to announcing fourth
quarter and annual financial results, announced a change in accounting relating
to gift certificates. The Company now defers the recognition of income on these
transactions until the customer takes possession of the merchandise. This change
in accounting impacts the timing of recognizing income from gift certificates
transactions but does not impact the Company's reported cash flows, net sales or
comparable store sales.
As discussed in Note 11 to the Consolidated Financial Statements, the Company
has given retroactive effect to this change in accounting by restating its
previously issued financial statements as of January 30, 1999 and January 31,
1998, and for each of the three fiscal years in the period ended January 30,
1999 as filed on August 18, 1999 on Form 10.
Item 7. Financial Statements and Exhibits.
<TABLE>
<CAPTION>
( c ) Exhibits
<S> <C> <C>
Exhibit Number Description
-------------- -----------
* 23 Consent of Independent Accountants
* 99-1 Press Release of Too, Inc., February 17, 2000
* 99-2 Selected Consolidated Financial and Operating Data
* 99-3 Management's Discussion and Analysis of Financial Condition and Results of Operation's
* 99-4 Consolidated Financial Statements of Limited Too, Inc.
</TABLE>
- ----------------------
* Filed with this Form 8-K
SIGNATURES
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.
By: /s/ Kent A. Kleeberger
-----------------------------------------
Dated: April 6, 2000 Kent A. Kleeberger
Vice President - Chief Financial Officer,
Secretary and Treasurer
2
<PAGE> 3
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
* 23 Consent of Independent Accountants
* 99-1 Press Release of Too, Inc., February 17, 2000
* 99-2 Selected Consolidated Financial and Operating Data
* 99-3 Management's Discussion and Analysis of Financial Condition and Results of Operation's
* 99-4 Consolidated Financial Statements of Limited Too, Inc.
</TABLE>
- ----------------------
* Filed with this Form 8-K
3
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-89529, 333-89533, 333-93717 and 333-93715) of
our report dated April 22, 1999, except for the information in Notes 11 and 12
as to which the date is February 17, 2000 relating to the financial statements,
which appears in this Current Report on Form 8-K for the year ended January 30,
1999.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
April 6, 2000
4
<PAGE> 1
EXHIBIT 99.1
TOO, INC. FOURTH QUARTER NET INCOME UP 52%
1999 QUARTER E.P.S. $.55 VS. $.36 FOR 1998 PERIOD
COLUMBUS, Ohio; Feb. 17, 2000 - Too, Inc. (NYSE: TOO) today reported net income
increased 52% to $17.2 million, or $.55 per diluted share, for the fourth
quarter ended January 29, 2000 over adjusted net income of $11.3 million, or
$.36 per diluted share, for the quarter ended January 30, 1999.
The adjusted results for 1998 and 1999 reflect interest expense on the Company's
ongoing capital structure and are also restated to give effect to the change in
accounting for gift certificates. Excluding the impact of interest expense,
fourth quarter 1998 diluted earnings per share, after restatement, amounted to
$.37.
Net sales for the fourth quarter 1999 were $155.6 million compared to $123.2
million for the 1998 period.
Comparable store sales increased 10% for the fourth quarter 1999 on top of a 10%
increase in comparable store sales for the same period in fiscal 1998.
"The fourth quarter capped off a great year for the Company," said Too, Inc.
Chairman and CEO Michael W. Rayden. "Our increased sales and profitability are
clear indicators of our success in building the Limited Too brand. We are close
to achieving our goal of being a 360-degree brand with the launch of our
`catazine' in October and the introduction of the Company's expanded Web site
earlier this month. Our plans include enabling customers to purchase Limited Too
merchandise through the Web site by mid-year."
Net income for fiscal year 1999 was $24.6 million, representing diluted earning
per share of $.79. Adjusted net income for fiscal year 1999 increased 60% to
$23.4 million, or $.75 per diluted share, compared to adjusted net income of
$14.6 million, or $.47 per diluted share, for fiscal 1998. Net sales for 1999
increased 20% over the prior year in reaching a record $452.4 million.
Comparable store sales increased 9% for the 1999 fiscal year as compared to a
15% increase in comparable store sales for 1998.
During the fourth quarter of fiscal 1999, the Company changed its accounting for
gift certificates. In making the change, the Company looked to guidance provided
by Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements which was issued in December 1999 by the Securities and Exchange
Commission. The Company effected this accounting change by restating its
previously published financial statements for fiscal periods 1997 through 1999.
The change reduced diluted earnings per share for fiscal years 1997, 1998 and
1999 by $.01, $.02 and $.03 per share, respectively. The change does not affect
the Company's reported cash flows, net sales or comparable store sales.
As of January 29, 2000, Too, Inc. operated 352 Limited Too stores. During 1999,
the Company opened 42 new stores and remodeled 18 existing stores. All of the
stores opened last year were done in the highly successful "Girl Power" design
format.
Too, Inc. is a specialty retailer targeted to active, fashion-aware girls
between 7 and 14 years of age and operates 352 stores in 44 states and
distributes a catazine under the "Limited Too" brand name. Visit the Company's
Web site at www.limitedtoo.com.
Interested investors may listen to a recording of Too, Inc.'s quarterly earnings
conference call by pressing 1-800-625-5288 and requesting replay #656342. The
replay will be available through February 27, 2000.
SAFE HARBOR STATEMENT UNDER THE PRVATE SECURITIES LITIGATION REFORM ACT OF 1995:
All forward-looking statements in this press release, including the statements
regarding the Company's plan to enable customer e-commerce purchases by
mid-2000, involve material risks and uncertainties and are subject to change
based on various important factors which may be beyond the Company's control.
Such factors include, but are not limited to, the Company's ability to implement
systems for e-commerce purchases in the expected time frame and the acceptance
thereof by customers, and other risk factors
5
<PAGE> 2
described in the Company's filings with the Securities and Exchange Commission.
Accordingly, the Company's future performance and financial results may differ
materially from those expressed or implied in any forward-looking statements.
The Company does not undertake 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.
/CONTACT: Robert Atkinson, Too, Inc., 614-479-3739, or [email protected].
6
<PAGE> 1
EXHIBIT 99.2
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents summary historical and operating data of Too, Inc.
for the last five fiscal years and for the thirteen weeks ended May 1, 1999 and
May 2, 1998. The information for the fiscal years ended February 3, 1996 and
January 28, 1995 is derived from our unaudited consolidated financial
statements. The information for the thirteen weeks ended May 1, 1999 and May 2,
1998 is derived from the unaudited consolidated financial statements which, in
the opinion of management, reflect all adjustments, which are of a recurring
nature, necessary to present fairly the financial position and results of
operations and cash flows for the interim periods. Results for the thirteen
weeks ended May 1, 1999 are not necessarily indicative of the results of
operations to be expected for the full fiscal year.
Before the August 23, 1999 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 consolidated
financial statements and the notes to those financial statements. You should
read these sections for a further explanation of the data summarized here.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN WEEKS ENDED
----------------------------------------------------------------- ------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, MAY 1, MAY 2,
1999 1998 1997 1996 (1) 1995 1999 1998
------------ ------------ ----------- ----------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND SALES PER AVERAGE SQUARE FOOT)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 376,943 $ 322,150 $ 258,818 $ 214,302 $ 173,787 $ 95,048 $ 82,257
Gross income (2) 125,214 95,247 60,844 38,237 47,928 31,724 24,888
General, administrative and store
operating expenses (3) 97,333 83,381 69,802 57,631 45,078 29,102 23,652
Operating income (loss) 27,881 11,866 (8,958) (19,394) 2,850 2,622 1,236
Net income (loss) 16,681 7,166 (5,458) (11,594) 1,750 1,622 736
Earnings (loss) per share (4) $ 0.54 $ 0.23 $ (0.18) $ (0.38) $ 0.06 $ 0.05 $ 0.02
BALANCE SHEET DATA:
Inventories 27,565 18,661 20,437 16,046 15,156 23,584 17,167
Total assets 90,769 73,574 75,193 73,372 58,128 90,238 71,243
SELECTED OPERATING DATA:
Comparable store sales increase
(decrease) (5) 15 % 20 % 8 % (4)% 13 % 10 % 23 %
Total net sales growth 17.0 % 24.5 % 20.8 % 23.3 % 18.4 % 15.6 % 25.3 %
Gross income rate (6) 33.2 % 29.6 % 23.5 % 17.8 % 27.6 % 33.4 % 30.3 %
Operating income (loss) rate (6) 7.4 % 3.7 % (3.5)% (9.0)% 1.6 % 2.8 % 1.5 %
Total number of stores open at
period end 319 312 308 288 212 321 313
Total square feet at period end
(thousands) 1,281 1,244 1,224 1,143 838 1,296 1,248
Annual sales per average square
foot (7) $ 300 $ 259 $ 214 $ 207 226 NM NM
</TABLE>
7
<PAGE> 2
NM = not meaningful
(1) Represents the 53-week fiscal year ended February 3, 1996.
(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) Earnings (loss) per share was calculated by dividing net income (loss)
by the 30.7 million common shares issued in connection with the
spin-off as if theses shares were outstanding for all periods
presented. The dilutive effect of our options and restricted stock that
were granted in connection with or subsequent to the spin-off have not
been considered in the computation of net income (loss) per share for
periods prior to the spin-off.
(5) 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.
(6) Calculated as a percentage of net sales.
(7) Annual sales per average square foot is the result of dividing net
sales for the fiscal year by average gross square feet, which reflects
the impact of opening and closing stores throughout the year.
8
<PAGE> 1
EXHIBIT 99-3
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 Current Report on Form 8-K. " 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 $(19.4) 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:
- increased net sales to $376.9 million from $258.8 million
- improved our pretax operating income to $27.9 million from a loss of
$(9.0) million
- improved our operating income rate as a percentage of sales to 7.4%
from a loss of (3.5)% by increasing sales volume, improving gross
income and slowing the growth in general, administrative and store
operating expenses
- 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.
RESULT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN WEEKS ENDED
----------------------------------------------- ------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1, MAY 1, MAY 2,
1999 1998 1997 1999 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs of goods sold, buying and
occupancy costs 66.8 70.4 76.5 66.6 69.7
------------- ------------- ------------- ------------- -------------
Gross income 33.2 29.6 23.5 33.4 30.3
General, adminstrative and store
operating expenses 25.8 25.9 27.0 30.6 28.8
------------- ------------- ------------- ------------- -------------
Operating income (loss) 7.4 3.7 (3.5) 2.8 1.5
Provision for (benefit from)
income taxes 3.0 1.5 (1.4) 1.1 0.6
------------- ------------- ------------- ------------- -------------
Net income (loss) 4.4 % 2.2 % (2.1)% 1.7 % 0.9 %
============= ============= ============= ============= =============
</TABLE>
9
<PAGE> 2
FINANCIAL SUMMARY
Below, you will find summarized annual 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) $ 377 $ 322 $ 259 17 % 24 %
Comparable store sales increase (1) 15 % 20 % 8 %
Annual 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 year end (square feet) 4,015 3,987 3,974
Total square feet at 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 year 319 312 308
========= ========= ============
</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 or
downsized more than 20% in square feet are treated as new stores for
purposes of this calculation.
(2) Annual sales per average square foot is the result of dividing net sales
for the fiscal year by average gross square feet which reflects the impact
of opening and closing stores throughout the year.
THIRTEEN WEEKS ENDED MAY 1, 1999 COMPARED TO THIRTEEN WEEKS ENDED MAY 2, 1998
NET SALES. Net sales for the thirteen weeks ended May 1, 1999 increased 16% to
$95.0 million from $82.3 million for the thirteen weeks ended May 2, 1998. The
increase was primarily a result of a 10% increase in comparable store sales,
with the balance attributable to new stores. Within the merchandise categories,
knit tops increased significantly, led by cut-and-sewn tops, graphic T-shirts
and active T-shirts. The add-on (principally underwear, sleepwear and swimwear)
and accessories categories also increased significantly.
GROSS INCOME. The gross income rate for the first quarter of 1999, expressed as
a percentage of net sales, increased to 33.4% from 30.3% for the first quarter
of 1998. The increase in rate was primarily attributable to higher initial
mark-ups 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.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General, administrative
and store operating expenses for the first quarter of 1999, expressed as a
percentage of net sales, increased to 30.6% from 28.8% for the first quarter
1998. This increase was attributable to increased allocations for services
provided by The Limited, including distribution and information technology,
which included costs associated with becoming year 2000 ready. In addition,
these expenses included web site development and catalog start-up costs, as well
as costs for a direct mail campaign during the first quarter of 1999. Finally,
the balance of the increase was attributable to store and home office payroll
costs, principally relating to management and incentive compensation programs.
OPERATING INCOME. Operating income, expressed as a percentage of net sales,
increased to 2.8% for the first quarter of 1999 from 1.5% for the same period in
1998. Operating income increased to $2.6 million for the first quarter of 1999
from $1.2 million for the same period in 1998. The increase was attributable to
higher merchandise margins and the favorable leveraging of buying and occupancy
costs, partially offset by higher general, administrative and store operating
expenses.
10
<PAGE> 3
FISCAL YEAR ENDED JANUARY 30, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1998
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, lifestyles, personal care products
under our "GirlCare" product line and tops experienced significant increases.
Net sales productivity increased 16% to $300 per average square foot.
GROSS INCOME. The gross income rate, expressed as a percentage of net sales,
increased to 33.2% 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 as a result of underperformance in the
ready-to-wear category and overassortment in the bottoms category.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General, administrative
and store operating expenses, expressed as a percentage of net sales, improved
slightly to 25.8% in 1998 from 25.9% 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. The increase in the allocated
expenses included information technology costs, including Year 2000 costs and
central distribution center costs, driven by unit growth of lower price
accessories and "GirlCare" products, which also have higher handling costs.
OPERATING INCOME. Operating income, expressed as a percentage of net sales, was
7.4% and 3.7% in fiscal 1998 and 1997, respectively. The improvement in 1998
over 1997 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.
FISCAL YEAR ENDED JANUARY 31, 1998 COMPARED TO FISCAL YEAR ENDED FEBRUARY 1,
1997
NET SALES. 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. 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
to 25.9% in 1997 from 27.0% 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 3.7% and (3.5%) in fiscal 1997 and 1996,
respectively. As with the improvement in 1998 over 1997, the improvement in 1997
over 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.
11
<PAGE> 4
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 -- Our Net Sales, Net Income and Inventory
Levels Fluctuate on a Seasonal Basis," in the Information Statement dated August
18, 1999 and included in our Amended Registration Statement filed with the
Securities and Exchange Commission on August 18, 1999 (Registration No.
1-14987), hereafter referred to as the "Information Statement."
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- -----------
<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 $ 24,888 $ 24,016 $ 29,870 $ 46,440
% of full year 19.9 % 19.2 % 23.8 % 37.1 %
Net income $ 736 $ 240 $ 4,248 $ 11,457
% of full year 4.4 % 1.4 % 25.5 % 68.7 %
1997 QUARTERS
Net sales $ 65,646 $ 61,263 $ 86,430 $ 108,811
% of full year 20.4 % 19.0 % 26.8 % 33.8 %
Gross income $ 15,590 $ 15,170 $ 23,988 $ 40,499
% of full year 16.4 % 15.9 % 25.2 % 42.5 %
Net income (loss) $ (1,230) $ (1,619) $ 2,018 $ 7,997
% of full year (17.2)% (22.6)% 28.2 % 111.6 %
</TABLE>
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" in the Information
Statement. 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" in the Information
Statement.
12
<PAGE> 5
Below, you will find a summary of our working capital position and
capitalization.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED
------------------------------------------- ---------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1, MAY 1, MAY 2,
1999 1998 1997 1999 1998
------------ ------------ ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ 17,361 $ 30,294 $ 13,764 $ (486) $ (1,724)
Working capital (deficit) 311 (8,945) 4,541 5,436 (2,378)
Capitalization:
Net investment by The Limited 50,017 37,065 53,923 58,963 41,720
Cash flow to capital investment
(net cash provided by operating
activities divided by capital
expenditures) $ 1.21 $ 6.34 $ 1.62 NM NM
</TABLE>
- --------------
NM = not meaningful
Net cash used for operating activities approximated $500,000 for the first
quarter of 1999, down from $1.7 million used by such activities for the same
period in 1998. The $1.2 million improvement for the first quarter of 1999
principally resulted from the increase in net income after the impact of
depreciation and amortization and a larger decline in inventory levels from the
end of the previous fiscal year.
Net cash provided by operating activities totaled $17.4 million, $30.3 million
and $13.8 million for 1998, 1997 and 1996, respectively. Net income before
depreciation and amortization increased $9.5 million from 1997. However, the
increase in inventories in 1998 coupled with an increase in income tax payments
more than offset the $9.5 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 Current report on Form 8-K.
CAPITAL EXPENDITURES
Capital expenditures, primarily for new and remodeled stores, approximated $7.3
million for the first quarter of 1999, a $6.3 million increase from the same
period in 1998. 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 $32 to $37 million in 1999 for capital
expenditures, of which $25 to $29 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 stores to be opened in 1999 will be less than $400,000 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 $15,000. In
addition, inventory purchases are expected to average approximately $75,000 per
store.
We expect that substantially all future capital expenditures will be funded by
net cash provided by operating activities.
13
<PAGE> 6
IMPACT OF TRANSITIONAL SERVICES AND SEPARATION AGREEMENTS
Excluding the store leases agreement and the distribution services agreement,
amounts to be charged under the new transitional services and separation
agreements are not expected to be materially different than amounts charged by
The Limited prior to the date of the spin-off. Since amounts to be charged under
the store leases agreement will be contingently payable based upon positive
comparable store sales performance, it is anticipated that any amounts due will
not have a material adverse impact on liquidity, financial condition or results
of operation.
For a further discussion of the transitional services and separation agreements,
see "Relationship Between Too, Inc. and The Limited - Transitional Services and
Separation Agreements" in the Information Statement.
DESCRIPTION OF CREDIT FACILITIES
We have a collateralized credit facility for $100 million against which $64
million was drawn to pay a $50 million dividend to The Limited, to repay a
portion of the working capital advances made by The Limited to us in 1999 before
the spin-off and to pay fees and expenses in connection with the closing of the
credit facility. The remainder of the credit facility is available to fund
working capital requirements and for general corporate purposes. The credit
facility:
- consists of a $50 million amortizing term loan which will begin
amortizing at the end of the third year and a $50 million five-year
revolving credit facility
- contains customary representations and warranties and affirmative,
negative and financial covenants
- has interest rates that are based on the London Interbank Offered Rate
plus a spread or the administrative agent bank's base rate plus a
spread
- is guaranteed by our present and future domestic subsidiaries
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. We use a variety of proprietary and third-party
computer technologies -- both hardware and software -- directly in our business.
We also rely on numerous third parties and their systems' ability to address the
Year 2000 issue. Our 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.
READINESS
We are participating in The Limited's Year 2000 readiness efforts. We have been
part of the package migration group of The Limited, which involves the migration
of software to be Year 2000 ready. We have installed those systems. Recently, we
have decided to explore redeploying our inventory planning legacy system which
is not part of the overall Year 2000 readiness efforts undertaken by The
Limited. The Limited has not committed resources to assist us in our remediation
efforts on the inventory planning legacy system.
14
<PAGE> 7
We have assumed full responsibility to make our legacy system Year 2000 ready
and to identify and respond to any Year 2000 issues associated with the
interaction between our legacy system, our other systems and new systems
installed as part of The Limited's overall efforts. We believe we will incur an
additional $100,000 of programming costs in order to make the legacy system Year
2000 ready and integrate this system with the other newly installed systems. If
we are unsuccessful in our efforts to remediate the inventory planning legacy
system, we will continue with the planning system The Limited has already
provided us as part of The Limited's Year 2000 readiness efforts.
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:
- awareness, which includes identifying risks and conducting an
education program regarding Year 2000 issues
- assessment, which primarily includes establishing project resources,
developing a Year 2000 renovation strategy, completing a company-wide
inventory of information technology and determining the necessary
training and testing facility requirements
- renovation/development, which includes the analysis of existing
information systems, the design of remediation activities and the
coding of necessary remedies
- validation, which primarily includes system testing
- implementation, which includes the placement of renovated systems "in
production" and training end users
There are two areas of focus:
- ASSESSMENT OF YEAR 2000 READINESS OF KEY VENDORS AND SUPPLIERS. A
vast network of vendors, suppliers and service providers located
both within and outside the United States provides us with
merchandise for resale, supplies for operational purposes and
services. We have identified key vendors, suppliers and service
providers, and The Limited is making efforts to determine their
Year 2000 status. As a result, The Limited obtained completed
Year 2000 surveys from approximately 40 of our most critical
third-party vendors, representing over half of our total 1998
purchases, to determine an estimated compliance date. Of the 40
critical third-party vendors surveyed, approximately half have
indicated that they are Year 2000 compliant. The remaining
vendors have indicated estimated compliance dates through the
third quarter of 1999. Based upon the results of the surveys, we
selected three of our more significant vendors (American Electric
Power Company, Inc., BB Dakota and National Processing Company)
for on-site visits to further assess the vendors' progress and
estimated compliance dates. The Limited will continue to monitor
the status of the vendors' estimated compliance dates in order to
identify potential delays.
- EVALUATING FACILITIES AND DISTRIBUTION EQUIPMENT WITH EMBEDDED
COMPUTER TECHNOLOGY. We 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
complete, and all stages of its efforts are expected to be
complete in the second quarter of 1999.
In addition, The Limited also focused on:
- RENOVATION OF LEGACY SYSTEMS. The Limited's twelve operating
businesses have completed all five stages of Year 2000
implementation for renovation of legacy systems.
- INSTALLATION OF NEW SOFTWARE PACKAGES TO REPLACE SELECTED LEGACY
SYSTEMS AT FIVE OF THE LIMITED'S TWELVE OPERATING BUSINESSES.
Replacement of their significant legacy systems with new software
packages is complete.
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
$8.1 million, of which approximately $6.0 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.
15
<PAGE> 8
Additional expenditures are expected to range from $3.5 million to $3.8 million
through July 1999, of which approximately $2.4 million of new software purchases
will be capitalized. Total incremental expenses, primarily depreciation and
amortization of new package systems, are not expected to have a material impact
on our financial condition during 1999 and 2000. Included in the above costs are
expenditures associated with the development of an internal testing center,
which has enabled us 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 this section of the information statement. Efforts by approximately
500 employees of The Limited's information technology division represent
approximately three-fourths of the total information technology budgeted hours
for the Year 2000 project. The Limited engaged external consultants, primarily
from PricewaterhouseCoopers LLP and Compuware, to assist us with program
management and new software package implementation, which represent the
remaining hours. We have allocated approximately 35% of our information
technology budget for the period from fall 1997 through fall 1999 toward Year
2000 remediation efforts.
REASONABLY LIKELY WORST CASE SCENARIO AND CONTINGENCY PLANS
We believe 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 in the second
half of 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. Additionally, we have not postponed any
significant information technology projects due to the Year 2000 project. Thus,
we do not believe that the delay of any projects has had a material impact on
our financial condition and results of operations. However, despite The
Limited's significant efforts to make our systems, facilities and equipment Year
2000 ready, and our efforts to make our inventory planning legacy system Year
2000 ready, the readiness of third-party service providers and vendors
(including, for instance, governmental entities and utility companies) is beyond
our control. Thus, we cannot assure you that the failure of systems of other
companies on which The Limited's or our 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 us.
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. See
"Relationship Between Too, Inc. and The Limited -- Transitional Services and
Separation Agreements -- Services Agreement" in the Information Statement.
CHANGE IN ACCOUNTING
The Company has changed its accounting for gift certificates. The Company had
historically recognized net receipts/(redemptions) from gift certificates as a
reduction/(increase) to general, administrative and store operating expenses.
The Company now defers the recognition of income on these transactions until the
customer takes possession of the merchandise.
The Company has given retroactive effect to this change in accounting by
restating its previously issued financial statements for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997 and the related
quarterly financial statements for the years ended January 30, 1999 and January
31, 1998. See Note 11 in the Consolidated Financial Statements in this Current
Report on Form 8-K for additional information.
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 became effective in the first quarter of 1999 and did not have a material
adverse effect on our results of operations.
16
<PAGE> 9
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 became
effective in the first quarter of 1999 and did not 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 Current report on Form 8-K or
made by our management involve risks and uncertainties and may change based on
various important factors, many of which may be beyond our control. Thus, our
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. See, for example, "Summary," "Risk Factors,"
"Relationship Between Too, Inc. and The Limited," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
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:
- 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
- the availability of suitable store locations at appropriate terms
- the ability to develop new merchandise
- 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.
17
<PAGE> 1
EXHIBIT 99.4
Consolidated Financial Statements of Limited Too, Inc.
Report of Independent Accountants
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
18
<PAGE> 2
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
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.
The consolidated financial statements for each of the three years in the period
ended January 30, 1999 have been restated as described in Note 11.
PRICEWATERHOUSECOOPERS LLP
Columbus, Ohio
April 22, 1999, except for the information in Notes 11 and 12 as to which the
date is February 17, 2000
19
<PAGE> 3
LIMITED TOO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN WEEKS ENDED
-------------------------------------------- -----------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1, MAY 1, MAY 2,
1999 1998 1997 1999 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales $ 376,943 $ 322,150 $ 258,818 $ 95,048 $ 82,257
Costs of goods sold, buying and
occupancy costs 251,729 226,903 197,974 63,324 57,369
------------- ------------- ------------- ------------- -------------
Gross income 125,214 95,247 60,844 31,724 24,888
General, administrative and store
operating expenses 97,333 83,381 69,802 29,102 23,652
------------- ------------- ------------- ------------- -------------
Operating income (loss) 27,881 11,866 (8,958) 2,622 1,236
Provision for (benefit from) income
taxes 11,200 4,700 (3,500) 1,000 500
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 16,681 $ 7,166 $ (5,458) $ 1,622 $ 736
============= ============= ============= ============= =============
Net income (loss) per share:
Basic and Diluted $ 0.54 $ 0.23 $ (0.18) $ 0.05 $ 0.02
============= ============= ============= ============= =============
Weighted average common shares:
Basic and Diluted 30,674 30,674 30,674 30,674 30,674
============= ============= ============= ============= =============
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
20
<PAGE> 4
LIMITED TOO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31, MAY 1,
1999 1998 1999
-------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 987 $ 1,649 $ 558
Receivables 1,440 1,090 1,750
Inventories 27,565 18,661 23,584
Store supplies 5,237 3,701 5,433
Deferred income taxes 3,751 1,276 3,251
Other 582 183 404
-------------- -------------- ---------------
Total current assets 39,562 26,560 34,980
Property and equipment, net 44,894 42,871 48,945
Deferred income taxes 6,313 4,143 6,313
-------------- -------------- ---------------
Total assets $ 90,769 $ 73,574 $ 90,238
============== ============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,108 $ 2,454 $ 4,382
Accrued expenses 24,260 22,699 24,779
Income taxes payable 11,883 10,352 383
-------------- -------------- ---------------
Total current liabilities 39,251 35,505 29,544
Other long-term liabilities 1,501 1,004 1,731
Commitments and contingencies
Net investment by The Limited 50,017 37,065 58,963
-------------- -------------- ---------------
Total liabilities and shareholder's equity $ 90,769 $ 73,574 $ 90,238
============== ============== ===============
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
21
<PAGE> 5
LIMITED TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN WEEKS ENDED
-------------------------------------------- --------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1, MAY 1, MAY 2,
1999 1998 1997 1999 1998
------------- ------------- ------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 16,681 $ 7,166 $ (5,458) $ 1,622 $ 736
IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS:
Depreciation and amortization 10,563 10,626 9,959 3,216 2,589
CHANGES IN ASSETS AND LIABILITIES:
Inventories (8,904) 1,776 (4,391) 3,981 1,494
Accounts payable and accrued expenses 2,215 666 8,545 1,793 3,178
Income taxes (3,114) 9,248 4,468 (11,000) (9,994)
Other assets and liabilities (80) 812 641 (98) 273
------------- ------------- ------------- ----------- -------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 17,361 30,294 13,764 (486) (1,724)
------------- ------------- ------------- ----------- -------------
INVESTING ACTIVITIES:
Capital expenditures (14,294) (4,780) (8,504) (7,267) (1,005)
------------- ------------- ------------- ----------- -------------
CASH USED FOR INVESTING ACTIVITIES (14,294) (4,780) (8,504) (7,267) (1,005)
------------- ------------- ------------- ----------- -------------
FINANCING ACTIVITIES:
Net increase (decrease) in net investment by
The Limited (3,729) (24,024) (5,213) 7,324 3,919
------------- ------------- ------------- ----------- -------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (3,729) (24,024) (5,213) 7,324 3,919
------------- ------------- ------------- ----------- -------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (662) 1,490 47 (429) 1,190
Cash and equivalents, beginning of period 1,649 159 112 987 1,649
------------- ------------- ------------- ----------- -------------
Cash and equivalents, end of period $ 987 $ 1,649 $ 159 $ 558 $ 2,839
============= ============= ============= =========== =============
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
22
<PAGE> 6
LIMITED TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENT 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.
The accompanying interim consolidated financial statements as of and for the
thirteen week periods ended May 1, 1999 and May 2, 1998 are unaudited and are
presented to comply with the rules and regulations of the Securities and
Exchange Commission. 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 period, but are not necessarily
indicative of the results of operations for a full fiscal year.
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 over 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
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 the first quarter of 1999
and 1998 represent the thirteen week periods ended May 1, 1999 and May 2, 1998.
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. In lieu of amortizing the initial
balance, subsequent shipments are expensed, except for new merchandise
presentation programs, which are capitalized. Store supplies are periodically
inventoried and adjusted as appropriate for changes in supply levels or costs.
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 $227,000 and $199,000 in
the first quarters of 1999 and 1998, and $567,000, $755,000 and $615,000 for the
fiscal years 1998, 1997 and 1996.
23
<PAGE> 7
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. The store assets are reviewed by district, in
accordance with the method by which management reviews store performance.
Factors used in the valuation include, but are not limited to, management's
plans for future operations, recent operating results and projected cash flows.
No impairment charges have been taken based on management's review.
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 when the customer takes possession of merchandise -- that is,
the point of sale. Markdowns associated with the Frequent Buyer and "Too Bucks"
Programs are recognized upon redemption in conjunction with a qualifying
purchase.
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
Earnings per share, as presented in the Consolidated Statements of Operations,
for periods prior to 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.
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.
24
<PAGE> 8
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 was effective in the first quarter of 1999 and
its adoption did not 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 was effective in the first
quarter of 1999 and its adoption did not 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):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31, MAY 1,
1999 1998 1999
---------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 69,523 $ 62,581 $ 74,058
Leaseholds and improvements 28,950 28,186 31,929
---------------- --------------- ---------------
Total 98,473 90,767 105,987
Less: accumulated depreciation and
amortization (53,579) (47,896) (57,042)
---------------- --------------- ---------------
Property and equipment, net $ 44,894 $ 42,871 $ 48,945
================ =============== ===============
</TABLE>
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.
A summary of rent expense for the thirteen weeks ended May 1, 1999 and May 2,
1998 and the years 1998, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN WEEKS ENDED
---------------------------------------------- -----------------------------------
1998 1997 1996 MAY 1, 1999 MAY 2, 1998
------------- ------------- ------------- ---------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fixed minimum $ 28,916 $ 28,198 $ 27,400 $ 7,509 $ 7,149
Contingent 375 296 435 51 86
------------- ------------- ------------- ---------------- ---------------
Total store rent 29,291 28,494 27,835 7,560 7,235
Equipment and other 880 879 925 293 203
------------- ------------- ------------- ---------------- ---------------
Total rent expense $ 30,171 $ 29,373 $ 28,760 $ 7,853 $ 7,438
============= ============= ============= ================ ===============
</TABLE>
Rent expense includes charges from The Limited and its subsidiaries for store,
office and warehouse space. Limited Too is committed to noncancellable leases
with remaining terms of one to fourteen years.
25
<PAGE> 9
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 noncancellable leases as of January
30, 1999 follows (in thousands):
2000 $ 29,247
2001 28,909
2002 28,457
2003 27,479
2004 26,578
Thereafter 69,585
5. ACCRUED EXPENSES
Accrued expenses consisted of (in thousands):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31, MAY 1,
1999 1998 1999
-------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Compensation, payroll taxes and benefits $ 5,907 $ 6,133 $ 6,373
Rent 7,187 5,922 7,469
Taxes, other than income 2,252 1,310 2,346
Other 8,914 9,334 8,591
-------------- --------------- --------------
Total $ 24,260 $ 22,699 $ 24,779
============== =============== ==============
</TABLE>
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.
This provision for (benefit from) income taxes consisted of (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN WEEKS ENDED
-------------------------------------------- --------------------------------
1998 1997 1996 MAY 1, 1999 MAY 2, 1998
------------- ------------- ------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CURRENT:
Federal $ 12,326 $ 7,804 $ (3,045) $ 441 $ 87
State 2,832 1,790 (762) 59 13
------------- ------------- ------------- --------------- ---------------
15,158 9,594 (3,807) 500 100
DEFERRED:
Federal (3,068) (3,975) 230 500 400
State (890) (919) 77 - -
------------- ------------- ------------- --------------- ---------------
(3,958) (4,894) 307 500 400
------------- ------------- ------------- --------------- ---------------
Provision for (benefit from)
Income Taxes $ 11,200 $ 4,700 $ (3,500) $ 1,000 $ 500
============= ============= ============= =============== ===============
</TABLE>
26
<PAGE> 10
A reconciliation between the statutory federal income tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN WEEKS ENDED
--------------------------------------------- --------------------------------
1998 1997 1996 MAY 1, 1999 MAY 2, 1998
------------- ------------- ------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income tax rate 35.0 % 35.0 % 35.0 % 35.0 % 35.0 %
State income taxes, net of federal benefit 4.5 4.5 4.5 4.5 3.5
Other items, net 0.7 0.1 (0.4) (1.4) 2.0
------------- ------------- ------------- -------------- --------------
40.2 % 39.6 % 39.1 % 38.1 % 40.5 %
============= ============= ============= ============== ==============
</TABLE>
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 approximately $12,000
and $10,500 for the thirteen weeks ended May 1, 1999 and May 2, 1998 and
$14,300, $(4,500) and $(8,000) for the years 1998, 1997 and 1996.
The effect of temporary differences which give rise to deferred income tax
balances was as follows (in thousands):
JANUARY 30, JANUARY 31,
1999 1998
------------- -------------
Book depreciation in excess of tax $ 3,204 $ 1,865
Rent 2,476 1,737
Inventory 881 160
Other, net 3,503 1,657
------------- -------------
Total deferred income taxes $ 10,064 $ 5,419
============= =============
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.
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.
27
<PAGE> 11
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
construction allowances, if any. 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 relations
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.
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>
FISCAL YEARS ENDED THIRTEEN
---------------------------------------------- WEEKS ENDED
1998 1997 1996 MAY 1, 1999
------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Merchandise purchases $ 58,456 $ 42,255 $ 39,171 $ 3,737
Capital expenditures 11,818 2,359 7,964 5,890
Inbound and outbound shipping 6,023 5,702 4,290 1,110
Store leasing, construction and management 50,044 23,044 21,856 13,985
Distribution center, MIS and home office expenses 9,140 6,675 5,948 2,656
Corporate services and centrally managed functions 13,920 9,153 8,792 4,904
------------- -------------- ------------- ----------------
$ 149,401 $ 89,188 $ 88,021 $ 32,282
============= ============== ============= ================
</TABLE>
28
<PAGE> 12
The following is a summary of the activity in the net investment by The Limited
account (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN
---------------------------------------------- WEEKS ENDED
1998 1997 1996 MAY 1, 1999
------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Beginning balance $ 37,065 $ 53,923 $ 64,594 $ 50,017
Transactions with related parties 149,401 89,188 88,021 32,282
Centralized cash management, dividends and transfers (167,444) (108,664) (85,266) (36,958)
Settlement of income taxes 14,314 (4,548) (7,968) 12,000
Net income 16,681 7,166 (5,458) 1,622
------------- -------------- ------------- ----------------
Ending balance $ 50,017 $ 37,065 $ 53,923 $ 58,963
============= ============== ============= ================
</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 years 1998, 1997 and 1996.
9. EMPLOYEE BENEFITS
Officers and key employees were granted options to participate in The Limited
stock option and restricted stock plans. The market value of The Limited's
restricted stock granted to the Company's employees is being amortized ratably
as compensation expense over the vesting period. Compensation expense for The
Limited's restricted stock granted to the Company's employees 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 $375,000 in 1998, $225,000 in 1997 and $45,000 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.
29
<PAGE> 13
Information about The Limited stock options held by the Company's employees and
related activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ---------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- -------------- ------------------ --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$15 - $19 435,000 7.5 $19 88,000 $18
$20 - $24 37,000 6.0 21 24,000 21
$25 - $29 191,000 8.3 27 10,000 27
$30 - $34 12,000 8.9 33 - -
-------------- ------------------ --------------- ---------------- ----------------
$15 - $34 675,000 7.7 $21 122,000 $19
============== ================== =============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION OPTION OPTION
NUMBER OF PRICE PER NUMBER OF PRICE PER NUMBER OF PRICE PER
STOCK OPTION ACTIVITY SHARES SHARE SHARES SHARE SHARES SHARE
- ----------------------------------- --------------- --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 534,000 $19 180,000 $19 176,000 $19
Granted 191,000 27 378,000 19 49,000 16
Exercised (47,000) 19 (23,000) 19 (7,000) 17
Canceled (3,000) 17 (1,000) 17 (38,000) 19
--------------- --------------- --------------- --------------- --------------- --------------
Outstanding at end of year 675,000 $21 534,000 $19 180,000 $19
=============== =============== =============== =============== =============== ==============
Options exercisable at end of year 122,000 $19 97,000 $20 84,000 $20
=============== =============== =============== =============== =============== ==============
</TABLE>
The pro forma amounts above are not necessarily representative of the effects of
stock-based awards on future pro forma net earnings, because (1) future grants
of employee stock options by the Company may not be comparable to awards made to
employees while the Company was a part of The Limited and (2) the assumptions
used to compute the fair value of any future stock option awards will be
specific to the Company and therefore may not be comparable to the assumptions
used.
In connection with the spin-off, unvested grants of The Limited stock options
and restricted stock held by Company employees were replaced with awards of the
Company's stock options and restricted stock (collectively, the "awards"). The
awards have the same ratio of the exercise price per option to the market value
per share and the same vesting provisions, option periods and other terms as The
Limited's awards that they replace. The aggregate difference between market
value and the exercise price of the awards did not exceed the aggregate
difference between market value and the exercise price of The Limited's awards.
The Limited stock options that have vested and are held by Company employees
expired 90 days after the date of the spin-off. Additional options on the
Company's common stock granted on the date of the spin-off to employees and
independent directors had an exercise price equal to the market value of the
Company's common stock on the date of the spin-off. In addition, some Company
restricted stock awards granted in connection with the spin-off contained
performance requirements.
30
<PAGE> 14
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. CHANGE IN ACCOUNTING
The Company sells gift certificates in exchange for cash. These gift
certificates do not expire and can be redeemed toward the purchase of
merchandise in the future.
The Company has changed its accounting for gift certificates. The Company had
historically recognized net receipts/(redemptions) from gift certificate
transactions as a reduction/(increase) to general, administrative and store
operating expenses. The Company now defers the recognition of income on these
transactions until the customer takes possession of the merchandise.
The Company has given retroactive effect to this change in accounting by
restating its previously issued financial statements beginning with fiscal 1996.
The impact for the fiscal years ended January 30, 1999, January 31, 1998 and
February 1, 1997 and the fiscal quarters ended May 1, 1999 and May 2, 1998 is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 30, 1999 YEAR ENDED JANUARY 31, 1998 YEAR ENDED FEBRUARY 1, 1997
------------------------------------------------------------------------------------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------------- --------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
General, administrative and
store operating expenses $ 96,758 $ 97,333 $ 82,950 $ 83,381 $ 69,698 $ 69,802
Income (loss) before income
taxes 28,456 27,881 12,297 11,866 (8,854) (8,958)
Provision (benefit) for 11,400 11,200 4,900 4,700 (3,500) (3,500)
income taxes
Net income (loss) 17,056 16,681 7,397 7,166 (5,354) (5,458)
Basic and diluted earnings
(loss) per share (1) $ 0.56 $ 0.54 $ 0.24 $ 0.23 $ (0.17) $ (0.18)
</TABLE>
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED MAY 1, 1999 ENDED MAY 2, 1998
-------------------------------------------------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------------- --------------- ---------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
General, administrative and
store operating expenses $ 30,412 $ 29,102 $ 24,599 $ 23,652
Income before income taxes 1,312 2,622 289 1,236
Provision for income taxes 500 1,000 100 500
Net income 812 1,622 189 736
Basic and diluted earnings
per share (1) $ 0.03 $ 0.05 $ 0.01 $ 0.02
</TABLE>
31
<PAGE> 15
(1) Earnings (loss) per share as presented for periods prior to 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.
The change in accounting also results in a shift in the pattern of quarterly
earnings (see Note 13). In addition, the restatement resulted in changes to the
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998 and to
Notes 5, 6, 7 and 13. Although the restatement had no impact on the cash flows
of the Company, certain reclassifications were made in the Consolidated
Statements of Cash Flows for the fiscal years ended January 30, 1999, January
31, 1998 and February 1, 1997 to reflect the restatement.
12. SUBSEQUENT EVENTS
Effective August 23, 1999, The Limited distributed to its shareholders of record
as of August 11, 1999, all of its interest in Too (formerly Limited Too) on the
basis of one share of Too common stock for each seven shares of The Limited
common stock (the "Spin-off"). The Spin-off resulted in 30.7 million shares of
Too common stock outstanding as of August 23, 1999. As a result of the Spin-off,
the Company became an independent, separately traded, public company. The
Company's largest shareholder is also the largest shareholder of The Limited.
CREDIT FACILITY
The Company has a collateralized $100 million credit facility against which $64
million was drawn to pay a $50 million dividend to The Limited, to repay a
portion of the working capital advances made by The Limited to us in 1999 before
the spin-off and to pay fees and expenses in connection with the closing of the
credit facility.
The credit facility:
- consists of a $50 million amortizing term loan which will begin
amortizing at the end of the third year and a $50 million five-year
revolving credit facility
- contains customary representations and warranties and affirmative,
negative and financial covenants
- has interest rates that are based on the London Interbank Offered Rate
plus a spread or the administrative agent bank's base rate plus a
spread
- is guaranteed by the Company's present and future domestic
subsidiaries
Before the spin-off, the Company's board of directors adopted, and The Limited,
as the sole shareholder of the Company, approved, effective on the completion of
the spin-off:
- the Too, Inc. 1999 Incentive Compensation Performance Plan (the
"Incentive Compensation Performance Plan")
- the Too, Inc. 1999 Stock Option and Performance Incentive Plan (the
"Stock Option and Performance Incentive Plan")
- the Too, Inc. 1999 Stock Plan for Non-Associate Directors (the
"Non-Associate Director Stock Plan")
The Incentive Compensation Performance Plan is intended to satisfy the
applicable provisions of Section 162(m) of the Internal Revenue Code. Awards are
based on the satisfaction of performance goals, and annual incentive
compensation targets established for eligible executives range from 10% to 150%
of base salary.
Under the Stock Option and Performance Incentive Plan and the Non-Associate
Director Stock Plan, eligible directors and executive and key management
associates are granted stock options and other incentive awards to purchase
shares of the Company's common stock. Each option vests over four to six years
and has a maximum term of ten years from the grant date.
32
<PAGE> 16
DISTRIBUTION AGREEMENT AND OTHER AGREEMENTS
In connection with the spin-off, the Company, The Limited and/or their
respective subsidiaries entered into a distribution agreement and various
transitional services and separation agreements, including a store leases
agreement, trademark and service mark licensing agreement, a services agreement,
a tax separation agreement and an amendment to an existing building lease
agreement.
Excluding the store leases agreement, amounts charged under the new transitional
services and separation agreements were not materially different than amounts
charged by The Limited prior to the date of the spin-off. Since amounts charged
under the stores leases agreement are contingently payable based upon positive
comparable store sales performance, it is anticipated that any amounts due will
not have a material adverse impact on liquidity, financial condition or results
of operations.
13. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 - AS RESTATED (1) FIRST SECOND THIRD FOURTH
- ---------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 82,257 $ 74,746 $ 96,720 $123,220
Gross income 24,888 24,016 29,870 46,440
Net income 736 240 4,248 11,457
Earnings per share - basic and diluted $ 0.02 $ 0.01 $ 0.14 $ 0.37
1998 - AS PREVIOUSLY REPORTED
- ----------------------------------------------
Net income $ 189 $ 240 $ 4,248 $ 12,379
Earnings per share - basic and diluted $ 0.01 $ 0.01 $ 0.14 $ 0.40
1997 - AS RESTATED (1)
- ----------------------------------------------
Net sales $ 65,646 $ 61,263 $ 86,430 $108,811
Gross income 15,590 15,170 23,988 40,499
Net income (loss) (1,230) (1,619) 2,018 7,997
Earnings (loss) per share - basic and diluted (0.04) (0.05) 0.07 0.26
1997 - AS PREVIOUSLY REPORTED
- ----------------------------------------------
Net income (loss) $ (1,686) $ (1,619) $ 2,018 $ 8,684
Earnings (loss) per share - basic and diluted $ (0.05) $ (0.05) $ 0.07 $ 0.28
</TABLE>
(1) During the fourth quarter of 1999, the Company changed its accounting for
gift certificates. The Company has given retroactive effect to this change
by restating its previously issued financial statements. See Note 11.
33
