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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 JULY 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 1-14987
------------------------------
TOO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1333930
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
8323 WALTON PARKWAY, NEW ALBANY, OH 43054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(614) 775-3500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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.
Yes[X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes[X] No[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK OUTSTANDING AT SEPTEMBER 3, 2004
------------ --------------------------------
$.01 Par Value 34,521,317 Shares
TOO, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations
Thirteen and Twenty-Six Weeks Ended July 31, 2004 and August 2, 2003 ........ 3
Consolidated Balance Sheets
July 31, 2004 and January 31, 2004 .......................................... 4
Consolidated Statements of Cash Flows
Twenty-Six Weeks Ended July 31, 2004 and August 2, 2003 ..................... 5
Notes to Consolidated Financial Statements .................................... 6
Report of Independent Registered Public Accounting Firm ....................... 13
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ....................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................ 23
Item 4. Controls and Procedures ................................................... 23
PART II Other Information
Item 1. Legal Proceedings ........................................................ 23
Item 4. Submission of Matters to a Vote of Security Holders ...................... 23
Item 6. Exhibits and Reports on Form 8-K ......................................... 24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
--------------------- ---------------------
JULY 31, AUGUST 2, JULY 31, AUGUST 2,
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales $ 139,841 $ 131,704 $ 293,972 $ 269,675
Costs of goods sold, buying and
occupancy costs 95,941 91,896 199,033 187,240
--------- --------- --------- ---------
Gross income 43,900 39,808 94,939 82,435
General, administrative and store
operating expenses 42,067 38,835 84,976 74,390
--------- --------- --------- ---------
Operating income 1,833 973 9,963 8,045
Interest income, net 201 65 414 189
--------- --------- --------- ---------
Income from continuing operations
before income taxes 2,034 1,038 10,377 8,234
Provision for income taxes 642 400 3,742 3,000
--------- --------- --------- ---------
Income from continuing operations 1,392 638 6,635 5,234
Loss on discontinued operations of
mishmash, net of tax - (4,468) - (4,905)
--------- --------- --------- ---------
Net income (loss) $ 1,392 $ (3,830) $ 6,635 $ 329
========= ========= ========= =========
Income (loss) per share - basic:
Continuing operations $ 0.04 $ 0.02 $ 0.19 $ 0.15
Discontinued operations - (0.13) - (0.14)
--------- --------- --------- ---------
Net income (loss) per basic share $ 0.04 $ (0.11) $ 0.19 $ 0.01
========= ========= ========= =========
Income (loss) per share - diluted:
Continuing operations $ 0.04 $ 0.02 $ 0.19 $ 0.15
Discontinued operations - (0.13) - (0.14)
--------- --------- --------- ---------
Net income (loss) per diluted share $ 0.04 $ (0.11) $ 0.19 $ 0.01
========= ========= ========= =========
Weighted average common shares:
Basic 34,446 34,271 34,425 34,185
========= ========= ========= =========
Diluted 34,786 34,737 34,850 34,649
========= ========= ========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
3
TOO, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JULY 31, JANUARY 31,
2004 2004
--------- ----------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 102,463 $ 114,990
Restricted cash 26,780 20,846
Receivables 7,116 6,802
Income taxes receivable 597 5,542
Inventories 75,702 58,299
Store supplies 13,400 13,285
Other 2,387 2,542
--------- ---------
Total current assets 228,445 222,306
Property and equipment, net 143,880 147,038
Deferred income taxes 6,780 6,780
Other assets 14,484 14,434
--------- ---------
Total assets 393,589 390,558
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 40,778 35,660
Accrued expenses 40,244 41,725
Income taxes payable 8,304 17,464
--------- ---------
Total current liabilities 89,326 94,849
Other long-term liabilities 14,388 13,956
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 50 million shares
authorized Common stock, $.01 par value, 100 million shares
authorized, 34.5 million and 34.4 million issued and outstanding
at July 31, 2004 and January 31, 2004, respectively 345 344
Treasury stock, at cost, 29,709 shares (998) (998)
Paid in capital 121,446 119,960
Retained earnings 169,082 162,447
--------- ---------
Total shareholders' equity 289,875 281,753
--------- ---------
Total liabilities and shareholders' equity $ 393,589 $ 390,558
========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4
TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
TWENTY-SIX WEEKS ENDED
----------------------
JULY 31, AUGUST 2,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,635 $ 329
IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS:
Depreciation and amortization 10,659 9,502
Loss on impairment of assets - 5,560
CHANGES IN ASSETS AND LIABILITIES:
Inventories (17,403) (8,846)
Accounts payable and accrued expenses 3,932 (2,663)
Income taxes (4,213) (8,371)
Other assets 775 (3,604)
Other liabilities 432 1,608
--------- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 817 (6,485)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (11,002) (9,833)
Funding of nonqualified benefit plans (431) -
Restricted cash (5,934) (23,699)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (17,367) (33,532)
--------- ---------
FINANCING ACTIVITIES:
Stock options and other equity changes 964 295
Change in cash overdraft 3,059 591
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,023 886
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (12,527) (39,131)
Cash and equivalents, beginning of period 114,990 105,700
--------- ---------
Cash and equivalents, end of period $ 102,463 $ 66,569
========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
5
TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
Too, Inc. (referred to herein as "Too" or "the Company") is the operator of two
specialty retailing concepts, Limited Too and Justice. Limited Too sells
apparel, underwear, sleepwear, swimwear, footwear, lifestyle and personal care
products for fashion-aware, trend-setting young girls ages seven to fourteen
years. Justice, launched by the Company in late January 2004, sells value-priced
sportswear and accessories for girls ages seven to fourteen years.
On May 28, 2003, the Company announced the discontinuation of its mishmash
retail concept in favor of redirecting its resources to the Justice concept. See
Note 5 for further information regarding the Company's discontinued operations.
Also on that date, the Company announced it was ending its involvement in the
Goldmark joint venture. See Note 8 for further information.
The accompanying unaudited interim Consolidated Financial Statements as of July
31, 2004 and for the thirteen and twenty-six weeks ended July 31, 2004 and
August 2, 2003, 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 2003 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.
The Consolidated Financial Statements as of July 31, 2004, and for the thirteen
and twenty-six weeks ended July 31, 2004 and August 2, 2003 included herein have
been reviewed by the independent registered public accounting firm of
PricewaterhouseCoopers LLP and the report of such firm follows the notes to the
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.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
2. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the recognition and
measurement principles of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, no compensation expense for stock options has been recognized as
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant. The Company does recognize
compensation expense related to restricted stock awards.
6
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," to stock-based employee compensation
(in millions, except per share amounts):
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
-------------------- ---------------------
JULY 31, AUGUST 2, JULY 31, AUGUST 2,
2004 2003 2004 2003
-------- -------- -------- ---------
Net income (loss), as reported $ 1.4 $ (3.8) $ 6.6 $ 0.3
Stock-based compensation expense recorded
under APB Opinion No. 25, net of tax 0.2 0.1 0.5 0.3
Stock-based compensation expense
determined under fair value based
method, net of tax (1.1) (0.9) (2.3) (1.9)
-------- -------- -------- --------
Pro forma net income (loss) $ 0.5 $ (4.6) $ 4.8 $ (1.3)
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 0.04 $ (0.11) $ 0.19 $ 0.01
======== ======== ======== ========
Basic - pro forma $ 0.01 $ (0.13) $ 0.14 $ (0.04)
======== ======== ======== ========
Diluted - as reported $ 0.04 $ (0.11) $ 0.19 $ 0.01
======== ======== ======== ========
Diluted - pro forma $ 0.01 $ (0.13) $ 0.14 $ (0.04)
======== ======== ======== ========
The weighted average fair value per share of options granted is estimated using
the Black-Scholes option-pricing model and the following weighted average
assumptions:
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
------------------- -------------------
JULY 31, AUGUST 2, JULY 31, AUGUST 2,
2004 2003 2004 2003
------- --------- -------- ---------
Expected life 5.0 5.0 5.0 5.0
Forfeiture rate 20% 20% 20% 20%
Dividend rate - - - -
Price volatility 49% 51% 50% 52%
Risk-free interest rate 3.6% 2.3% 3.5% 2.6%
The weighted average fair value of options granted during the thirteen and
twenty-six weeks ended July 31, 2004 was $7.18 and $7.88, respectively. The
weighted average fair value of options granted during the thirteen and
twenty-six weeks ended August 2, 2003 was $7.76 and $7.53, respectively.
3. 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
7
if stock options or restricted stock were converted to common stock using the
treasury stock method, except when the effect would be anti-dilutive. The
Company has reclassified the loss from operations of mishmash to discontinued
operations for the thirteen and twenty-six weeks ended August 2, 2003.
Accordingly,the weighted average common shares - diluted for the thirteen weeks
ended August 2, 2003 have been adjusted for the effect of stock options and
restricted stock for purposes of calculating the income or loss per share from
continuing and discontinued operations. The adjustment had no effect on
earnings per share as previously reported. The following table shows the
amounts used in the computation of basic and diluted earnings per share (in
thousands):
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
--------------------- ---------------------
JULY 31, AUGUST 2, JULY 31, AUGUST 2,
2004 2003 2004 2003
--------- --------- --------- ---------
Net income (loss) $ 1,392 $ (3,830) $ 6,635 $ 329
========= ========= ========= =========
Weighted average common shares - basic 34,446 34,271 34,425 34,185
Dilutive effect of stock options
and restricted stock 340 466 425 464
--------- --------- --------- ---------
Weighted average common shares - diluted 34,786 34,737 34,850 34,649
========= ========= ========= =========
Due to the options' strike price exceeding the average market price of the
common shares for the reporting periods, certain options were excluded from the
calculation of net income per diluted share. In fiscal 2004, options to purchase
1,109,000 and 1,032,000 common shares were not included in the computation for
the thirteen and twenty-six weeks ended July 31, 2004, respectively. In fiscal
2003, options to purchase 1,009,000 and 1,147,000 common shares were not
included in the computation of net income per diluted share for both the
thirteen and twenty-six weeks ended August 2, 2003, respectively.
4. DEPARTURE OF EXECUTIVE OFFICERS
On May 24, 2004, The Company's Executive Vice President and Chief Financial
Officer and President and General Manager of Limited Too resigned effective June
23, 2004. The pre-tax costs related to separation under the employment
agreements with both of the executives recognized in the thirteen-week period
ended July 31, 2004 were $1.3 million, or $0.2 per diluted share. The Company
does not anticipate any future costs associated with this separation.
8
5. DISCONTINUED OPERATIONS
On May 28, 2003, the Company announced the discontinuation of its mishmash
retail concept in favor of redirecting its resources to the development of a new
concept focused on value-priced sportswear and accessories for `tween girls ages
7 to 14 years. All 18 of the mishmash stores open at the time of the
announcement were closed by the end of November 2003. Four of the former
mishmash locations have been converted to the Justice format and have since
reopened. The remaining fourteen locations were returned to the landlord and a
reserve for lease termination costs of $1.7 million has been established. In
accordance with the provisions of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," the Company has reclassified its Consolidated
Statements of Operations to segregate, as discontinued operations, the revenues
and expenses of its mishmash operations. The operating loss of mishmash of $4.5
million, net of an income tax benefit of $2.9 million, for the thirteen weeks
ended August 2, 2003 is shown on the Loss on Discontinued Operations line of the
Consolidated Statements of Operations. This loss is comprised of an after tax
loss from operations of mishmash of $0.4 million and an after tax loss on
mishmash store closings and impairment charges of $4.1 million. The operating
loss of mishmash of $4.9 million, net of an income tax benefit of $3.1 million,
for the twenty-six weeks ended August 2, 2003 is also shown on the Loss on
Discontinued Operations line of the Consolidated Statements of Operations. This
loss is comprised of an after tax loss from operations of mishmash of $0.8
million and an after tax loss on mishmash store closings and impairment charges
of $4.1 million. The net operating loss of mishmash includes net sales of $3.1
million and $5.3 million for the thirteen and twenty-six weeks, respectively,
ended August 2, 2003.
In fiscal 2003, the Company incurred store closing costs, which were recorded in
accordance with the provisions of SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." In the second quarter of 2003, the Company
incurred $1.8 million related to mishmash store closing activities. The Company
does not expect to incur any additional material expenses in association with
these store closing activities. All store closing liabilities are expected to be
settled in fiscal 2004.
The following table provides a reconciliation of the store closing liability
balance during the season, which is included in the Accrued Expenses line of the
Consolidated Balance Sheets (in thousands):
BEGINNING ENDING
ACCRUAL ACCRUAL
BALANCE CURRENT COSTS BALANCE
FEBRUARY 1, PERIOD PAID OR JULY 31,
2004 EXPENSE SETTLED 2004
----------- ------- ------- --------
Contract termination costs $ 1,192 $ - $ (563) $ 629
--------- --------- --------- ---------
Store closing liability $ 1,192 $ - $ (563) $ 629
========= ========= ========= =========
6. 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
9
first and third quarters reflects adjustments for inventory markdowns and
shrinkage estimates for the total selling season.
7. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed on a straight-line basis, using service lives for store assets ranging
principally from 5 to 10 years for leasehold improvements and 3 to 10 years for
other property and equipment. Depreciation and amortization for fixed assets at
the home office and distribution center are calculated using service lives of 40
years for buildings, 7 to 10 years for furniture and fixtures and 5 to 7 years
for computers and other office 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. Interest costs
associated with the construction of certain long-term projects are capitalized.
Maintenance and repairs are charged to expense as incurred. Major renewals and
betterments that extend service lives are capitalized. Property and equipment at
July 31, 2004 and January 31, 2004 consisted of (in thousands):
JULY 31, JANUARY 31,
2004 2004
---------- ----------
Land $ 8,103 $ 8,103
Buildings 42,049 42,045
Furniture, fixtures and equipment 169,458 163,748
Leasehold improvements 33,553 33,192
Construction-in-progress 2,569 4,378
---------- ----------
Total 255,732 251,466
Less: accumulated depreciation and
amortization (111,852) (104,428)
---------- ----------
Property and equipment, net $ 143,880 $ 147,038
========== ==========
8. RELATED PARTY TRANSACTIONS
During fiscal year 2002, the Company formed a 50% owned joint venture, Goldmark,
which was accounted for under the equity method of accounting. On May 28, 2003,
the Company announced it was ending its involvement in the joint venture. The
Company continues to provide certain services on behalf of the joint venture,
for which the Company is reimbursed.
9. CREDIT FACILITY
In August 1999, the Company entered into a five-year, $100 million
collateralized credit facility ("Old Credit Facility"). The Old Credit Facility
consisted of a $50 million five-year term loan and a $50 million, five-year
annual revolving credit commitment. The Old Credit Facility's interest rates,
which reflected matrix pricing, were based on the London Interbank Offered Rate
or Prime plus a spread as
10
defined in the agreement. The term loan was interest only until the end of the
third year at which time the amortization of the outstanding principal balance
would have begun. The Old Credit Facility contained customary representations
and warranties as well as certain affirmative, negative and financial covenants.
In November 2001, the Company amended the Old Credit Facility. The amendment
allowed for the investment of cash in short-term, AAA-rated municipal bonds, as
well as less stringent limitations on 2001 capital expenditures and on
indebtedness incurred in relation to lease agreements.
On May 24, 2002, the Company sold 2.4 million shares of its common stock,
resulting in net proceeds of $73.4 million. Concurrently, the Company paid off
the entire $50 million term loan due under the Old Credit Facility, and the
remaining proceeds from the sale of common stock were used for general corporate
purposes. The $50 million revolving loan commitment under the Old Credit
Facility remained in effect and was available to the Company for future business
purposes.
On April 29, 2003, the Company terminated the aforementioned Old Credit Facility
and entered into a new unsecured three-year credit facility ("New Credit
Facility") with a syndicate of banks. The New Credit Facility consists of a $100
million unsecured revolving loan commitment. Interest expense on borrowings
under the New Credit Facility is based on, at the borrower's option, either (1)
the higher of the Prime rate or the federal funds effective rate plus 1/2 of 1%
or (2) matrix pricing applied to the London Interbank Offered Rate. Under the
terms of the New Credit Facility, the Company is required to comply with certain
covenants, including financial ratios such as leverage, coverage and tangible
net worth. The New Credit Facility limits the Company from incurring certain
additional indebtedness, restricts substantial asset sales and provides for a
springing lien against certain assets in the event of default. On September 16,
2003, the New Credit Facility was amended, and the amendment became
retroactively effective as of July 31, 2003. In exchange for the modification of
certain financial covenants the Company agreed to maintain a pledged investment
account equal to 110% of any outstanding letters of credit or any revolving
commitment usage. The Company had outstanding letters of credit under the New
Credit Facility amounting to $23.6 million and $18.2 million as of July 31, 2004
and January 31, 2004, respectively. On July 22, 2004, the Company was notified
that the syndicate of banks had approved the New Investment Policy approved by
the Company's Board of Directors earlier this year. The New Investment Policy
provides the Company with expanded options for investment instruments and
maturity date. As of July 31, 2004, the Company is in compliance with all
applicable terms of the amended New Credit Facility.
Interest income, net, consisted of the following (in thousands):
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
JULY 31, AUGUST 2, JULY 31, AUGUST 2,
2004 2003 2004 2003
--------- --------- -------- ---------
Interest expense 228 146 498 266
Interest income (429) (211) (912) (455)
------- ------- ------- -------
Interest income, net (201) (65) (414) (189)
======= ======= ======= =======
11
10. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Financial Accounting
Standards Board Interpretation ("FIN") No. 46, "Consolidation of Variable
Interest Entities," in January 2003. FIN No. 46 establishes accounting and
disclosure requirements for ownership interests in entities that have certain
financial or ownership characteristics (sometimes known as special purpose
entities). Subsequent to issuing FIN No. 46, the FASB continued to propose
modifications and issue FASB Staff Positions ("FSPs") that changed and clarified
FIN No. 46. These modifications and FSPs were subsequently incorporated into FIN
No. 46 (revised) ("FIN No. 46R"), which was issued in November 2003 and replaces
FIN No. 46. Among other things, FIN No. 46R a) essentially excludes operating
businesses from its provisions subject to certain conditions, b) states the
provisions of FIN No. 46R are not required to be applied if a company is unable
to obtain the necessary information, c) includes new definitions and examples of
what variable interests are, d) clarifies and changes the definition of a
variable interest entity and e) clarifies and changes the definition and
treatment of de facto agents. FIN No. 46R is effective for public companies that
have interests in variable interest entities or potential variable interest
entities created prior to February 1, 2003 for the first interim or annual
period ending after December 15, 2003. Application of FIN No. 46R for all other
types of entities created prior to February 1, 2003 is required for the first
interim or annual period ending after March 15, 2004. The adoption of FIN No.
46R did not have a significant impact on the results of operations, cash flows
or the financial position of the Company.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 July 31, 2004 and the related
consolidated statements of operations for each of the thirteen and twenty-six
week periods ended July 31, 2004 and August 2, 2003 and the consolidated
statement of cash flows for the twenty-six week periods ended July 31, 2004 and
August 2, 2003. These interim financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, 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 the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
January 31, 2004, and the related consolidated statements of income, changes in
shareholders' equity, and of cash flows for the year then ended (not presented
herein), and in our report dated February 24, 2004 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 31, 2004, is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
August 16, 2004
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
On May 28, 2003, the Company announced the discontinuation of its mishmash
retail concept, and all mishmash stores were closed by November 25, 2003.
Accordingly, mishmash's operating results have been reflected as discontinued
operations in this Form 10-Q. Unless otherwise indicated, the following
discussion relates only to Too, Inc.'s continuing operations.
Net sales for the thirteen weeks ended July 31, 2004 were $139.8 million, an
increase of 6% from $131.7 million for the comparable period of 2003. Gross
income increased 10% to $43.9 million in 2004 from $39.8 million in 2003 and
operating income increased 80% to $1.8 million in 2004 from $1.0 million in
2003. Net income for the quarter was $1.4 million in 2004 versus a net loss of
$3.8 million in 2003. The 2003 loss includes a $4.5 million loss on mishmash
operations. Total Company diluted earnings per share were $0.04 versus a loss
per share of $0.11 in 2003. Earnings per share from continuing operations were
$0.04 for the second quarter of 2004 versus $0.02 for the second quarter of
2003.
Net sales for the twenty-six weeks ended July 31, 2004 were $294.0 million, an
increase of 9% from $269.7 million for the comparable period of 2003. Gross
income increased 15% to $94.9 million in 2004 from $82.4 million in 2003 and
operating income increased 25% to $10.0 million in 2004 from $8.0 million in
2003. Net income for the period was $6.6 million in 2004 up from $0.3 million in
2003, which included a loss on discontinued operations of $4.9 million, in 2003.
Total Company diluted earnings per share increased to $0.19 versus $0.01 in
2003. Earnings per share from continuing operations were $0.19 for the first and
second quarters of 2004 versus $0.15 for the first and second quarters of 2003.
The following table represents, for the periods indicated, the amounts shown in
the Company's Consolidated Statements of Operations, expressed as a percentage
of net sales:
THIRTEEN TWENTY-SIX WEEKS
WEEKS ENDED ENDED
------------------ ------------------
JULY 31, AUGUST 2, JULY 31, AUGUST 2,
2004 2003 2004 2003
-------- --------- -------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, buying and
occupancy costs 68.6 69.8 67.7 69.4
------- ------- ------- -------
Gross income 31.4 30.2 32.3 30.6
General, administrative and store
operating expenses 30.1 29.5 28.9 27.6
------- ------- ------- -------
Operating income 1.3 0.7 3.4 3.0
Interest income, net 0.1 0.0 0.1 0.1
------- ------- ------- -------
Income from continuing operations
before income taxes 1.5 0.8 3.5 3.1
Provision for income taxes 0.5 0.3 1.3 1.1
------- ------- ------- -------
Income from continuing operations 1.0 0.5 2.3 1.9
Loss on discontinued operations of
mishmash, net of tax 0.0 (3.4) 0.0 (1.8)
------- ------- ------- -------
Net income (loss) 1.0% (2.9)% 2.3% 0.1%
======= ======= ======= =======
14
FINANCIAL SUMMARY
Summarized financial data for the thirteen and twenty-six weeks ended July 31,
2004 and August 2, 2003 is presented below:
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------------- -----------------------------
July 31, August 2, Percent July 31, August 2, Percent
2004 2003 Change 2004 2003 Change
-------- --------- ------- -------- --------- -------
Net sales (millions) $ 139.8 $ 131.7 6% $ 294.0 $ 269.7 9%
Limited Too:
Comparable store sales (1) -3% -13% -1% -16%
Sales per average square foot (2) $ 58 $ 60 -3% $ 123 $ 125 -2%
Sales per average store (thousands) (3) $ 239 $ 248 -4% $ 506 $ 514 -2%
Average store size at quarter end (square feet) 4,126 4,121 0% 4,126 4,121 0%
Total square feet at quarter end (thousands) 2,311 2,213 4% 2,311 2,213 4%
Number of stores:
Beginning of period 554 515 553 510
Opened 6 22 9 29
Closed 0 0 (2) (2)
------- ------- ------- -------
End of period 560 537 560 537
======= ======= ======= =======
Stores remodeled 1 1 6 3
Number of mishmash stores - 18 - 18
Number of Justice stores 30 - 30 -
----------
(1) A store is included in our comparable store sales calculation once it has
completed 52 weeks of operation. Further, stores that have changed more
than 20% in square feet are treated as new stores for purposes of this
calculation.
(2) Sales per average square foot is the result of dividing net sales for the
fiscal quarter by average gross square feet, which reflects the impact of
opening and closing stores throughout the quarter.
(3) Sales per average store is the result of dividing net sales for the fiscal
quarter by average store count, which reflects the impact of opening and
closing stores throughout the quarter.
NET SALES
Net sales for the second quarter of 2004 increased 6% to $139.8 from $131.7
million in 2003. The increase was primarily a result of the net addition of 23
Limited Too stores and 30 Justice stores. Offsetting the increase in store count
was a 3% decrease in comparable store sales ("comps"). The negative comparable
store sales for the second quarter were driven primarily by an earlier Easter
holiday in 2004 that shifted the redemption of the Company's Too Bucks promotion
almost entirely into the first quarter of 2004 rather than the second quarter,
as in 2003. This earlier redemption resulted in a reduction of approximately two
percentage points in comps for the second quarter of fiscal 2004.
15
Year-to-date net sales were $294.0 million, a 9% increase from $269.7 million in
2003, driven primarily by the increase in store count. Limited Too sales
benefited from the increase in store count, but were offset by a 1% decrease in
comparable store sales for the 2004 spring season. This 1% comp decrease
represents a significant improvement over the 2003 spring season when comparable
store sales decreased 16%.
For Limited Too, transactions per average store increased 3% in the second
quarter of fiscal 2004 compared to the comparable period in 2003. However,
Limited Too's average dollar sale was down 7%, which was comprised of a 3%
decrease in units per transaction and a 4% decrease in average unit retail. Year
to date, Limited Too's average dollar sale decreased in excess of 7%, which was
comprised of a decrease in excess of 3% in units per transaction and a decrease
in excess of 4% in average unit retail.
From a merchandising standpoint, the non-apparel portion of the business
continued to post strong sales increases on an average store basis during the
first and second quarters of 2004. The introduction of the "Fun Zone" area in
the Fall of fiscal 2003, located in the front corner of our stores, was a major
factor in the improvement of the non-apparel sales performance. For both the
second fiscal quarter, as well as the spring season, the best performing apparel
categories included girls' skirts and skorts, dresses and jackets.
Underperforming apparel categories included active tops and bottoms and casual
tops.
GROSS INCOME
Gross income, expressed as a percentage of net sales, was 31.4% for the second
quarter of fiscal 2004, an increase of 120 basis points from a gross income rate
of 30.2% for the comparable period of 2003. This rate increase was due to lower
markdowns and lower buying and occupancy costs as a percent of net sales. Year
to date 2004 gross income was 32.3% of net sales, a 170 basis point improvement
over the comparable period in 2003. This increase was due to improved inventory
controls, which lead to significantly lower markdown expenses in 2004 compared
to 2003, and lower buying and occupancy costs as a percent of net sales.
Markdowns, as a rate to net sales, decreased 290 basis points in the second
quarter of fiscal 2004 versus the comparable period in 2003, and decreased 260
basis points for the year to date 2004 versus the comparable period in 2003. The
improvement in markdown expense on both a period to date and year to date basis
was due to improved management of inventory levels, as well as a decision by the
Company to reduce the level of promotional activity during the quarter and
season.
Buying and occupancy costs declined 30 basis points as a percent of net sales in
the second quarter of fiscal 2004 compared to the second quarter of 2003,
primarily due to reduced catalog production costs, net of partner revenue. The
decrease in catalog costs was caused by the reduction of catalog circulation
during the second quarter versus last year. Year to date 2004 buying and
occupancy costs declined 90 basis points as a percent of net sales. This
decrease was driven by the reduction of catalog expenses, net of partner
revenue, offset partially by an increase in the buying payroll due to an
incentive compensation expense in 2004 not incurred in 2003.
The Limited Too initial mark up ("IMU") rate for second quarter 2004 decreased
slightly from the comparable period of 2003 due to the change in the mix of
business to more non-apparel and accessory items, which tend to have lower IMU.
However, this decrease was more than offset by the increase in
16
total sales. Year to date 2004 IMU for Limited Too also decreased from the
comparable period of 2003 due to the same factors that drove the second quarter
decrease.
The Company's gross income may not be comparable to that of other retailers
since all significant costs related to the Company's distribution network,
excluding freight costs, are included in general, administrative and store
operating expenses (see "General, Administrative and Store Operating Expenses"
section below).
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 30.1% for the second quarter of fiscal 2004, an increase of
60 basis points from a rate of 29.5% for the comparable period of 2003. The
increase in rate was attributable to higher home office expense, slightly higher
store expenses and the severance costs associated with the departure of two
executive officers. Year to date general, administrative and store operating
expenses, expressed as a percentage of net sales, were 28.9% for the second
quarter of fiscal 2004, an increase of 130 basis points from a rate of 27.6% for
the comparable period of 2003. Increased home office and store expenses,
severance costs associated with the departure of two executive officers, and the
favorable settlement of a brand protection litigation lawsuit in 2003, which
decreased 2003 operating expenses, drove this increase over 2003.
During the second fiscal quarter of 2004 two of the Company's executive officers
resigned. There was a one-time before-tax charge of $1.3 million associated with
this departure, which increased the administrative expenses of the Company from
the comparable period in 2003. The Company does not anticipate any future costs
associated with this departure.
Store expenses increased 40 basis points as a rate to net sales in the second
quarter of fiscal 2004 versus the second quarter of 2003. The change was due to
increased store payroll and other store costs associated with the net addition
of 23 Limited Too stores and 30 Justice stores. On a year to date basis, store
expenses increased 20 basis points as a percent of net sales over the first half
of 2003.
Home office expenses increased 30 and 70 basis points as a rate to net sales in
the thirteen and twenty-six weeks ended July 31, 2004, respectively, over the
comparable periods in 2003. The change was due primarily to an accrual for
incentive compensation made during the first and second quarters of fiscal 2004,
while no such accrual was made during the first half of fiscal 2003 because of
the Company's disappointing results, as well as increased recruiting and
relocation expenses compared to 2003.
Costs related to the distribution center, excluding freight costs, included in
general, administrative and store operating expenses were $1.9 million and $2.0
million for the second quarters of fiscal 2004 and 2003, respectively and $3.7
million and $4.1 million for the spring seasons of 2004 and 2003, respectively.
17
OPERATING INCOME
Operating income, expressed as a percentage of net sales, was 1.3% in the second
quarter of fiscal 2004, an increase of 60 basis points from 0.7% in the second
quarter of 2003. The rate increase was a result of a 120 basis point increase in
gross income, which was partially offset by a 60 basis point increase in
general, administrative and store operating expenses. Year to date, 2004
operating income as a percent of sales was 3.4%, an increase of 40 basis points
over the comparable period in 2003. This was a result of a 170 basis point
increase in gross income offset partially by a 130 basis point increase in
general, administrative and store operating expenses.
INTEREST INCOME, NET
Interest income, net, amounted to $0.2 million for the second quarter of fiscal
2004 versus $0.1 million in the second quarter of 2003. Interest income is
earned on investments in money market securities and short-term, AAA-rated and
insured municipal bonds. Interest income amounted to $0.4 million and $0.2
million for the second quarters of fiscal 2004 and 2003, respectively. Interest
expense represents credit facility and letters of credit fees, as well as net
interest expense related to the Company's nonqualified benefit plans. Interest
expense amounted to $0.2 million and $0.1 million for the second quarters of
fiscal 2004 and 2003, respectively.
For the twenty-six weeks ended July 31, 2004, interest income, net, amounted to
$0.4 million versus $0.2 million for the twenty-six weeks ended August 2, 2003.
Interest income amounted to $0.9 million and $0.5 million, and interest expense
amounted to $0.5 million and $0.3 million for the first two quarters of fiscal
2004, and 2003, respectively.
PROVISION FOR INCOME TAXES
The provision for income taxes from continuing operations increased to $0.6
million in the second quarter of fiscal 2004 from $0.4 million for the second
quarter of 2003. The income tax provision rate decreased 690 basis points to
31.6% in the second quarter of fiscal 2004 from 38.5% in the second quarter of
2003. The rate decrease is attributable to the tax benefit derived from higher
municipal interest income as a percentage of pre-tax income in the second
quarter of 2004 versus 2003.
The provision for income taxes from continuing operations increased to $3.7
million for the year-to-date period ended July 31, 2004 from $3.0 million in the
comparable period of 2003. The income tax provision rate decreased 30 basis
points to 36.1% in the year-to-date period ended July 31, 2004 from 36.4% in the
comparable period ended August 2, 2003.
DISCONTINUED OPERATIONS
On May 28, 2003, the Company announced that it was ending the rollout of its
mishmash retail concept in favor of redirecting its resources to the development
of a new concept, Justice, focused on value-
18
priced sportswear and accessories for `tween girls, ages 7 to 14 years. All 18
of the mishmash stores open at the time of the announcement were closed by the
end of November 2003.
No expense for discontinued operations was recognized in the first or second
quarters of fiscal 2004. For the second quarter of fiscal 2003, the loss on
discontinued operations of mishmash amounted to $4.5 million, net of tax. Year
to date for the second quarter of 2003 the loss on discontinued operations of
mishmash amounted to $4.9 million, net of tax.
FINANCIAL CONDITION
Our balance sheet remains strong due to positive cash flows from operations. We
were able to finance all capital expenditures with working capital generated
from operations and ended the quarter with $129.3 million in cash and
equivalents, of which $26.8 million was restricted by our Credit Facility and
insurance trust deposits. A more detailed discussion of liquidity, capital
resources and capital requirements follows.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities is the primary resource to support
operations, including projected growth, seasonal working capital requirements
and capital expenditures. A summary of our working capital position and
capitalization follows (in thousands):
JULY 31, JANUARY 31,
2004 2004
-------- -----------
Working capital, excluding restricted cash of
$26.8 and $20.8 million at July 31, 2004 and
January 31, 2004, respectively $112,339 $106,611
======== ========
Capitalization:
Shareholders' equity $289,875 $281,753
======== ========
Additional amounts available under the revolving
portion of the Credit Facility $ 76,427 $ 81,822
Net cash provided by operating activities amounted to $0.8 million for the first
and second quarters of fiscal 2004, while cash used for operating activities
totaled $6.5 million for the comparable period of 2003. The increase over the
second quarter of last year was due to the change in accounts payable and
accrued expenses, income taxes, and other assets, which was offset by the change
in inventories.
The change in accounts payable and accrued expenses was driven primarily by the
timing of inventory received during the second quarter in preparation of the
back-to-school season at the stores, as well as the increase in the incentive
compensation accrual in fiscal 2004, which was not accrued for in 2003 due to
the Company's financial performance during that period.
19
The amount of cash used for income taxes decreased in the first and second
quarters of 2004 versus the comparable period in 2003. The reduction is due to
the collection of an income tax receivable related to the Company's fiscal 2002
income tax filings.
The cash used to purchase inventories increased in the first and second quarters
of 2004 versus the comparable period in 2003, caused by higher inventory levels
on hand at the end of Q2 2004 compared to Q2 2003, as well as lower beginning
inventory levels at the beginning of 2004 compared to the beginning of 2003.
The change in other assets in the first and second quarter of 2004 is primarily
due to store supply purchases made in 2003.
Net cash used for investing activities amounted to $17.4 million and $33.5
million for the first and second quarters of 2004 and 2003, respectively. The
change is due to slightly higher capital expenditures in 2004 compared to 2003,
as well as the Company's restricted cash requirement as outlined in the credit
facility.
Net cash provided by financing activities amounted to $4.0 million and $0.9
million for the first and second quarters of 2004 and 2003, respectively.
Financing activities represent proceeds from employee stock option exercises, as
well as the increase in cash overdraft.
In August 1999, we entered into a five-year, $100 million collateralized credit
facility ("Old Credit Facility"). The Old Credit Facility consisted of a $50
million five-year term loan and a $50 million, five-year annual revolving credit
commitment. The Old Credit Facility's interest rates, which reflected matrix
pricing, were based on the London Interbank Offered Rate or Prime plus a spread
as defined in the agreement. The term loan was interest only until the end of
the third year at which time the amortization of the outstanding principal
balance would have begun. The Old Credit Facility contained customary
representations and warranties as well as certain affirmative, negative and
financial covenants. In November 2001, the Company amended the Old Credit
Facility. The amendment allowed for the investment of cash in short-term,
AAA-rated municipal bonds, as well as less stringent limitations on 2001 capital
expenditures and on indebtedness incurred in relation to lease agreements.
On May 24, 2002, the Company sold 2.4 million shares of its common stock,
resulting in net proceeds of $73.4 million. Concurrently, the Company paid off
the entire $50 million term loan due under the Old Credit Facility, and the
remaining proceeds from the sale of common stock were used for general corporate
purposes. The $50 million revolving loan commitment under the Old Credit
Facility remained in effect and was available to the Company for future business
purposes.
On April 29, 2003, the Company terminated the aforementioned Old Credit Facility
and entered into a new unsecured three-year credit facility ("New Credit
Facility" or "Credit Facility") with a syndicate of banks. The New Credit
Facility consists of a $100 million unsecured revolving loan commitment.
Interest expense on borrowings under the New Credit Facility is based on, at the
borrower's option, either (1) the higher of the Prime rate or the federal funds
effective rate plus 1/2 of 1% or (2) matrix pricing applied to the London
Interbank Offered Rate. Under the terms of the New Credit Facility, the Company
is required to comply with certain covenants, including financial ratios such as
leverage, coverage and tangible net worth. The New Credit Facility limits the
Company from incurring certain additional indebtedness, restricts substantial
asset sales and provides for a springing lien against certain
20
assets in the event of default. On September 16, 2003, the New Credit Facility
was amended, and the amendment became retroactively effective as of July 31,
2003. In exchange for the modification of certain financial covenants the
Company agreed to maintain a pledged investment account equal to 110% of any
outstanding letters of credit or any revolving commitment usage. The Company had
outstanding letters of credit under the New Credit Facility amounting to $23.6
million and $18.2 million as of July 31, 2004 and January 31, 2004,
respectively. On July 22, 2004, the Company was notified that the syndicate of
banks had approved the New Investment Policy approved by the Company's Board of
Directors earlier this year. The New Investment Policy provides the Company with
expanded options for investment instruments and maturity date. As of July 31,
2004, the Company is in compliance with all applicable terms of the amended New
Credit Facility.
CAPITAL EXPENDITURES
Capital expenditures, primarily for new and remodeled stores, totaled $11.0
million for the twenty-six weeks ended July 31, 2004 compared to $9.8 million
for the comparable period in 2003. We anticipate spending between $20 million
and $22 million in fiscal 2004, primarily for new Limited Too and Justice
stores, remodeling or expansion of existing Limited Too stores and related
fixtures and equipment. We intend to add 210,000 to 220,000 square feet in 2004,
which will represent a 9% to 10% increase over year-end 2003. We anticipate that
the increase will result from opening approximately 20 to 25 new Limited Too
stores and expanding about half of the approximately 20 stores identified for
remodeling. Additionally, we plan to open approximately 30 to 35 Justice stores
during fiscal 2004. We expect that cash from operations will fund substantially
all capital expenditures in fiscal 2004.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Information regarding the Company's contractual obligations and commercial
commitments can be found in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of Too, Inc.'s Form 10-K
for the fiscal year ended January 31, 2004.
CRITICAL ACCOUNTING POLICES AND ESTIMATES
The Company's critical accounting policies and estimates can be found in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of Too, Inc.'s Form 10-K for the fiscal year ended January
31, 2004.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Financial Accounting
Standards Board Interpretation ("FIN") No. 46, "Consolidation of Variable
Interest Entities," in January 2003. FIN No. 46 establishes accounting and
disclosure requirements for ownership interests in entities that have certain
financial or ownership characteristics (sometimes known as special purpose
entities). Subsequent to issuing FIN No. 46, the FASB continued to propose
modifications and issue FASB Staff Positions ("FSPs") that changed and clarified
FIN No. 46. These modifications and FSPs were subsequently
21
incorporated into FIN No. 46 (revised) ("FIN No. 46R"), which was issued in
November 2003 and replaces FIN No. 46. Among other things, FIN No. 46R a)
essentially excludes operating businesses from its provisions subject to certain
conditions, b) states the provisions of FIN No. 46R are not required to be
applied if a company is unable to obtain the necessary information, c) includes
new definitions and examples of what variable interests are, d) clarifies and
changes the definition of a variable interest entity and e) clarifies and
changes the definition and treatment of de facto agents. FIN No. 46R is
effective for companies that have interests in variable interest entities or
potential variable interest entities for periods ending after December 15, 2003.
Application of FIN No. 46R for all other types of entities is required for
periods ending after March 15, 2004. The adoption of FIN No. 46R did not have a
significant impact on the results of operations, cash flows or the financial
position of the Company.
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, but may not be limited to, statements in this Form
10-Q relating to anticipated capital expenditures in 2004 for new stores and the
remodeling or expansion of existing stores and the related funding thereof. 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 Safe Harbor
Statement and Business Risks section of the Company's Form 10-K, filed April 29,
2002, 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. Therefore, there can be no assurance
that the forward-looking statements included herein will prove to be accurate.
In light of the significant uncertainties in the forward-looking statements
included herein, the inclusion of such information should not be regarded a
representation by the Company, or any other person, that the objectives of the
Company will be achieved. The forward-looking statements made herein are based
on information presently available to the management of the Company. 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.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent we borrow under our Credit Facility, we will be exposed to market
risk related to changes in interest rates. At July 31, 2004, no borrowings were
outstanding under the Credit Facility. Additionally, we are exposed to market
risk related to interest rate risk on the investment of cash in securities with
original maturities of three months or less. These investments are considered
cash equivalents and are shown as such on the Consolidated Balance Sheets. If
there are changes in interest rates, those changes would affect the interest
income we earn on those investments.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation carried out, as of the end of the period covered by this
report, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Operating Officer
(in his capacity as the Company's Principal Financial Officer), the Chief
Executive Officer and Chief Operating Officer, have concluded that the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) were effective as of the end of the
period covered by this report. There were no changes in the Company's internal
control over financial reporting that occurred during the Company's most recent
fiscal quarter that have materially affected, or are reasonably likely to
affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims, lawsuits and other legal actions pending for and
against 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 adverse effect on Too's results of operations cash flows or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 13, 2004, the Company held its Annual Meeting of Stockholders.
(b) See paragraph (c) below.
23
(c) At the Annual Meeting, the Company's stockholders elected two Class B
Directors to the Board of Directors by the following vote:
DIRECTOR NOMINEES SHARES VOTED FOR SHARES WITHHELD
----------------- ---------------- ---------------
David A. Krinsky 30,087,429 303,754
Kenneth J. Strottman 29,086,326 1,304,857
The term of office of the Company's Directors, Michael W. Rayden, Elizabeth M.
Eveillard, Nancy J. Kramer, Phillip E. Mallott, and Fredric M. Roberts,
continued after the Annual Meeting.
At the Annual Meeting, the Company's stockholders also were asked to re-approve
the material terms of the Incentive Compensation Performance Plan. Of the
30,391,183 shares present in person of represented by proxy at the meeting,
27,361,862 shares were voted for the plan, 2,804,201 shares were voted against
the plan, and 225,120 shares abstained from voting with respect to the plan.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.21 Employment Agreement, dated as of September 15, 2003,
between the Company and Sally A. Boyer (filed to make
a correction to Exhibit 10.21 to the Annual Report on
Form 10-K filed on April 7, 2004).
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Incorporation
of Report of Independent Registered Public Accounting
Firm.
31.1 Certification of Periodic Report by the Chief
Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Periodic Report by the Chief
Operating Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Periodic Report by the Chief
Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Periodic Report by the Chief
Operating Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On May 12, 2004, Too, Inc. filed a Current Report on Form 8-K dated
May 12, 2004, reporting pursuant to "Item 12. Results of Operations
and Financial Condition," that Too, Inc. had issued a press release
announcing its financial results for the first quarter ended May 1,
2004, and certain expectations for the second quarter ended July 31,
2004.
24
On May 14, 2004, Too Inc. filed an Amendment to the Current Report
on Form 8-K, dated May 12, 2004. This 8-K/A amended the Current
Report on Form 8-K originally dated May 12, 2004, to include Item
12. Results of Operations and Financial Condition, which was
inadvertently omitted from the original EDGAR submission. No changes
were made to Exhibit 99 included therein.
On May 24, 2004, Too Inc. filed a Current Report on Form 8-K dated
May 24, 2004, reporting pursuant to "Item 5. Other Events and
Regulation FD Disclosure," that Too, Inc. issued a press release
announcing the resignations of two of the Company's executive
officers.
25
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/ William E. May
-------------------------------
William E. May
Executive Vice President and Chief
Operating Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: September 8, 2004
26