UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 1999
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-10089
FACTORY 2-U STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0299573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Ruffin Road, San Diego, CA 92123-1866
(Address of principal executive office) (Zip Code)
(858) 627-1800
(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.
[X] YES [ ] NO
The number of shares outstanding of the registrant's of common stock, as of
October 30, 1999, was 12,377,136 shares.
<PAGE>
FACTORY 2-U STORES, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Factory 2-U Stores, Inc. Balance Sheets as of October 30, 1999
(Unaudited) and January 30, 1999 ............................................F-1
Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
13 weeks ended October 30, 1999 and October 31, 1998.........................F-3
Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
39 weeks ended October 30, 1999 and October 31, 1998 ........................F-4
Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
39 weeks ended October 30, 1999 and October 31, 1998 ........................F-5
Factory 2-U Stores, Inc. Notes to Consolidated Financial Statements
(Unaudited) ...........................................................F-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..............................................3
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities and Use of Proceeds...........................8
Item 3. Defaults Upon Senior Securities.....................................8
Item 4. Submission of Matters to a Vote of Security Holders.................8
Item 5. Other Information...................................................8
Item 6. Exhibits and Reports on Form 8-K .....................................8
Signatures ...............................................9
Exhibit Index ..............................................10
2
<PAGE>
PART I
Item 1. Financial Statements
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
October 30, January 30,
1999 1999
----------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash $ 4,341 $ 3,124
Merchandise inventory 54,233 31,353
Prepaid expenses and other assets 2,698 1,137
Deferred income taxes 1,747 1,690
------ -----
Total current assets 63,019 37,304
Leasehold improvements and equipment,
net of accumulated depreciation and amortization 25,314 18,187
Deferred income taxes 937 1,149
Other assets 1,772 2,419
Excess of cost over net assets acquired,
less accumulated amortization of $9,736
and $8,537 at October 30, 1999 and
January 30, 1999, respectively 29,906 31,108
------- ------
Total assets $ 120,948 $ 90,167
============ ===========
(continued)
F-1
<PAGE>
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
(continued)
October 30, January 30,
1999 1999
-------------- ---------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,275 $ 1,818
Accounts payable 35,373 21,258
Income taxes payable 1,885 2,656
Accrued expenses 17,804 20,151
Revolving credit notes 13,468 -
------- -------
Total current liabilities 69,805 45,883
Revolving credit notes - 1,843
Long-term debt, less current maturities 10,779 10,530
Capital leases and other long-term obligations 2,983 2,257
Deferred rent 2,404 1,889
------ -----
Total liabilities 85,971 62,402
Stockholders' equity:
Series A convertible preferred stock,
$0.01 par value; 0 and 4,500,000
shares authorized, 0 shares issued
and outstanding (aggregate liquidation
preference of $0) at October 30, 1999
and January 30, 1999 - -
Series B junior convertible, exchangeable
preferred stock, $0.01 par value;
40,000 shares authorized, 0 shares issued
and outstanding (aggregate liquidation
preference of $0) at October 30, 1999
and January 30, 1999, respectively - -
Common stock, $0.01 par value, 35,000,000
shares authorized and 12,377,136 shares
issued and outstanding at October 30, 1999,
and 80,000,000 shares authorized and
12,106,175 shares issued and outstanding
at January 30, 1999 124 121
Stock subscription notes receivable (3,885) (4,087)
Additional paid-in capital 107,003 103,248
Accumulated deficit (68,265) (71,517)
-------- --------
Total stockholders' equity 34,977 27,765
------- ------
Total liabilities and stockholders' equity $ 120,948 $ 90,167
============ ===========
The accompanying notes are an integral part to these financial statements.
F-2
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Operations
(in thousands, except per share data)
(Unaudited)
13 Weeks Ended
---------------------------------
October 30, October 31,
1999 1998
---------------- ---------------
Net sales $ 104,551 $ 84,978
Cost of sales 67,191 56,193
------- ------
Gross profit 37,360 28,785
Selling and administrative expenses 31,162 24,812
Amortization of intangibles 590 591
Stock option compensation expense 2,094 -
------ ------
Operating income (loss) 3,514 3,382
Interest expense 622 1,071
------- -------
Income (loss) before income taxes 2,892 2,311
Income taxes 1,186 60
-------- --------
Income (loss) before dividends 1,706 2,251
Preferred stock dividends - Series A - (865)
Preferred stock dividends - Series B - (779)
-------- ---------
Net Income (loss) available
to common stockholders $ 1,706 $ 607
=========== ==========
Earnings (loss) per share:
Basic $ 0.14 $ 0.40
Diluted $ 0.13 $ 0.23
Weighted average common shares outstanding
Basic 12,230 1,508
Diluted 13,022 9,962
The accompanying notes are an integral part to these financial statements.
F-3
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Operations
(in thousands, except per share data)
(Unaudited)
39 weeks Ended
-----------------------------------
October 30, October 31, 1998
1999
--------------- ------------------
Net sales $ 281,581 $ 224,929
Cost of sales
181,571 149,336
-------- -------
Gross profit 100,010 75,593
Selling and administrative expenses 88,812 70,336
Amortization of intangibles 1,769 1,770
Stock option compensation expense 2,094 -
Special charges - 1,500
-------- --------
Operating income (loss) 7,335 1,987
Interest expense 1,824 3,443
-------- --------
Income (loss) before income
taxes and extraordinary item 5,511 (1,456)
Income taxes
2,259 159
-------- --------
Income (loss) before extraordinary item 3,252 (1,615)
Extraordinary item - debt extinguishmen
(less applicable income taxes of $0) - (2,750)
------- --------
Income (loss) before dividends 3,252 (4,365)
Preferred stock dividends - Series A - (2,593)
Preferred stock dividends - Series B - (2,210)
------- --------
Net income (loss) available
to common stockholders $ 3,252 $ (9,168)
=========== ============
Earnings (loss) per share:
Basic:
Income (loss) before extraordinary item $ 0.27 $ (4.28)
Extraordinary item $ - $ (1.83)
Net income (loss) $ 0.27 $ (6.11)
Diluted:
Income (loss) before extraordinary item $ 0.25 $ (4.28)
Extraordinary item $ - $ (1.83)
Net income (loss) $ 0.25 $ (6.11)
Weighted average common shares outstanding
Basic 12,157 1,501
Diluted 12,804 1,501
The accompanying notes are an integral part to these financial statements.
F-4
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
(Unaudited)
39 weeks ended
------------------------------
October 30, October 31,
1999 1998
---------------- ---------------
Cash flows from operating activities:
Income (loss) before dividends $ 3,252 $ (4,365)
Adjustments to reconcile income (loss)
to net cash used in operating activities:
Depreciation and amortization 6,545 5,258
Debt discount amortization 848 1,161
Extraordinary loss on debt extinguishment - 2,750
Loss on disposal of equipment 464 159
Deferred rent expense 515 (355)
Stock option compensation expense 83 -
Option performance charge 2,094 -
Changes in operating assets and liabilities:
Merchandise inventory (22,880) (11,746)
Prepaid expenses and other assets (1,324) (2,101)
Accounts payable 14,115 11,086
Accrued expenses and other (2,200) (798)
-------------- --------------
Net cash used in operating activities 1,512 1,049
-------------- --------------
Cash flows from investing activities:
Purchase of leasehold improvements and equipment (12,368) (4,299)
Net cash used in investing activities (12,368) (4,299)
--------------- --------------
(continued)
F-5
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
(Continued)
39 weeks ended
-----------------------------------
October 30, October 31,
1999 1998
------------ -------------
Cash flows from financing activities:
Borrowings on revolving credit facility 316,293 253,509
Payments on revolving credit facility (304,668) (240,246)
Payments on notes payable and
capital lease obligations (1,335) (5,239)
Proceeds from issuance of common stock 3 -
Buyback of warrants (457) -
Proceeds from exercise of stock options 1,623 -
Proceeds from exercise of warrants 412 -
Payment of deferred debt issuance costs - (70)
Proceeds from stock subscription notes receivable 202 -
Payment of dividends on Series A preferred stock - (2,592)
------- -------
Net cash provided by financing activities 12,073 5,362
Net increase in cash 1,217 2,112
Cash at the beginning of the period 3,124 3,167
------- -------
Cash at the end of the period $ 4,341 $ 5,279
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 934 $ 2,112
Income taxes $ 3,021 $ 74
Supplemental disclosures of non-cash
Investing activities:
Capital lease purchases $ - $ 936
Supplemental disclosures of non-cash
Financing activities:
Series B preferred stock dividends $ - $ 2,210
The accompanying notes are an integral part to these financial statements.
F-6
<PAGE>
FACTORY 2-U STORES, INC.
Notes to Financial Statements
(Unaudited)
(1) Unaudited Interim Financial Statements
The accompanying unaudited financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statements and should be read in conjunction with the
financial statements for the fiscal year ended January 30, 1999 included in the
Factory 2-U Stores, Inc. (the "Company") Form 10-K as filed with the Securities
and Exchange Commission. The unaudited consolidated financial statements for the
13 and 39 weeks ending October 31, 1998 include the accounts of Family Bargain
Corporation and its subsidiaries. All significant intercompany transactions were
eliminated in consolidation. On November 23, 1998, the Company carried out a
Recapitalization in which all of the Company's stock was converted into a single
class of Common Stock. Under the Plan of Recapitalization, each share of
Pre-Recapitalization Common Stock was converted into .30133 shares of Common
Stock, each share of Series A Preferred Stock was converted into one share of
Common Stock and each share of Series B Preferred Stock was converted into
173.33 shares of Common Stock. In connection with the Recapitalization, General
Textiles, Inc. was merged into Family Bargain Corporation and the Company's name
was changed to Factory 2-U Stores, Inc. In the opinion of management, the
unaudited financial statements as of and for the 13 and 39 weeks ended October
30, 1999 and October 31, 1998 reflect all adjustments (which include normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for the periods presented. Due to the
seasonal nature of the Company's business, the results of operations for the
interim period may not necessarily be indicative of the results of operations
for a full year.
(2) Long-term Debt
As of October 30, 1999, the Company had outstanding long-term indebtedness,
less current maturities, of $10.8 million. At January 31, 1998, the Company had
outstanding $22.9 million face value of Trade Subordinated Notes, Subordinated
Reorganization Notes and Junior Subordinated Reorganization Notes. These notes
were non-interest bearing, except for certain contingent interest payments and
were subject to minimum principal payment requirements based on the annual
excess cash flows of General Textiles. Accordingly, they were discounted to
carrying values based on estimated future cash flows of General Textiles at
discount rates ranging from 6% to 25%.
F-7
<PAGE>
Effective April 30, 1998, the Company exchanged the Subordinated
Reorganization Notes and the Junior Subordinated Reorganization Notes (the "Old
Notes") for new notes (the "New Subordinated Notes" and the "New Junior
Subordinated Notes", collectively, the "New Notes"). The New Notes removed an
estimated excess cash flow calculation previously used to determine the timing
and amount of payments. Further, the New Notes provide a fixed schedule for debt
principal payments. In accordance with EITF 96-19, the Company recorded the
exchange of the Old Notes as an extinguishment of debt, and in connection
therewith, recorded an extraordinary loss, net of taxes, of $2.8 million. This
loss represents the amount by which the present value of the New Notes exceeded
the present value of the Old Notes for which they were exchanged and fees paid
to the lenders. The fees included the issuance of 22,600 shares of
pre-Recapitalization common stock and warrants to purchase 82,690 shares of
pre-Recapitalization common stock, both stated at fair market value when they
were issued. The New Subordinated Notes totaled $3.3 million and bore interest
at 9.2% per annum through March 31, 1999, after which the interest rate would
increase by one percent per annum each year up to a maximum of 13.2%. Principal
was due in annual payments ranging from $0.2 million to $0.4 million with a
balloon payment of $2.1 million due May 28, 2003. The entire balance of $3.3
million was paid on December 8, 1998. The New Junior Subordinated Notes have a
face value of $17.3 million, are non-interest bearing and are reflected on the
accompanying balance sheets at the present value using a discount rate of 10%.
The unamortized discount related to the New Junior Subordinated Notes was $5.5
million at October 30, 1999, resulting in a net carrying value of $11.8 million,
of which $1.0 million is a current maturity, as reflected in the October 30,
1999 balance sheet (see Financial Statements). The discount is amortized to
interest expense as a non-cash charge until the notes are paid in full. Further,
the New Junior Subordinated Notes require principal payments at December 31,
1999 and December 31, 2000 of $1.0 million, at December 31, 2001 and December
31, 2002 of $2.0 million, at December 31, 2003 and December 31, 2004 of $3.0
million and a final payment at May 28, 2005 of $5.3 million.
(3) Revolving Credit Notes
The Company maintains a $50.0 million revolving credit facility with a
financial institution secured by all the assets of the Company. Amounts which
may be borrowed under the working capital facility are based on a percentage of
eligible inventories, as defined, outstanding from time to time, as more fully
described below. On July 31, 1998, the Company's two operating subsidiaries,
General Textiles and Factory 2-U, Inc., merged to form a new Delaware
corporation named General Textiles, Inc. As a result, in July 1998, the lender
agreed to amend certain terms and conditions of the revolving credit facilities
with General Textiles and Factory 2-U. The covenants and financial ratios were
reset to reflect anticipated earnings, capital expenditures and cash flow of the
Company during fiscal 1998 and the facilities were combined into one revolving
credit facility (the "Facility").
F-8
<PAGE>
At October 30, 1999 the Company could borrow up to $50.0 million at the
prime rate plus 0.75%, subject to limitations based on inventory levels. At
October 30, 1999, the Company owed $13.5 million under the Facility and had
$46.6 million available to borrow under the Facility. The Facility expires in
March 2000 but is subject to one year automatic renewal periods, unless
terminated by either party. The balance owed under the Facility fluctuates as
the Company borrows to meet working capital requirements and due to the seasonal
nature of the Company's business. The Company pays fees of 0.25% on the unused
portion of the Facility. As of October 30, 1999, the Company was not in
compliance with the current ratio covenant in the Facility, but the lender has
waived the current ratio requirement through October 30, 1999.
(4) Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings per Share" (SFAS No. 128),
which the Company adopted as of January 31, 1998. This Statement sets forth the
basis for the computation of "basic" earnings per share and "diluted" earnings
per share from the previous method of computing both "primary" and "fully
diluted" earnings per share. At October 30, 1999, there were 1,430,684
potentially dilutive common stock options and warrants outstanding.
(5) Provision for Income Taxes
The Company recorded a $1.2 million provision for income taxes as reflected
in the accompanying statements of operations for the 13 weeks ended October 30,
1999. The provision for income taxes is based upon the estimated effective tax
rate for the entire fiscal year. The effective tax rate is subject to ongoing
review and evaluation.
(6) Stock Options and Warrants
On October 1, 1999, when the Company's common stock achieved a market price
of $19.91 or greater for 60 consecutive trading days, 92,960 stock options with
a market price hurdle of $19.91 became exercisable. As a result, the Company
recorded a non-cash stock option compensation expense in the amount of $2.1
million. As of October 30, 1999, the Company had outstanding options to purchase
1,347,994 shares of common stock. Of those options, 258,485 become exercisable
once specified market price hurdles for the Company's common stock have been
achieved and maintained for 60 consecutive trading days, subject to vesting
conditions (92,961 are exercisable at a market price hurdle of $24.89; 82,762
are exercisable at $33.19; and 82,762 are exercisable at $49.78). Assuming all
options with market price hurdles are fully vested, when the market price of the
Company's common stock reaches $24.89,
F-9
<PAGE>
$33.19 and $49.78 for the specified periods of time, the Company will be
required to record aggregate non-cash compensation expense in the minimum
amounts of $1.6 million, $2.1 million and $3.5 million, respectively. At October
30, 1999, the Company had outstanding warrants exercisable for 82,690 shares of
common stock with an exercise price of $19.91 per share.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
Management's discussion of the results of operations provides analysis of
the Company's operations during the 13 and 39 weeks ended October 30, 1999 and
October 31, 1998. Results of Operations The following discussion and analysis
should be read in conjunction with the Company's Financial Statements and notes
thereto included elsewhere in this Form 10-Q. As of October 30, 1999 there were
187 stores in operation versus 168 at October 31, 1998. 13 Weeks Ended October
30, 1999 Compared to the 13 Weeks Ended October 31, 1998 Net sales were $104.6
million for the 13 weeks ended October 30, 1999 compared to $85.0 million for
the 13 weeks ended October 31, 1998, an increase of approximately $19.6 million,
or 23.0%. Comparable store sales increased 7.7%. The Company opened 15 new
stores and closed 6 stores during the current period. Gross profit was $37.4
million for the 13 weeks ended October 30, 1999 compared to $28.8 million for
the 13 weeks ended October 31, 1998, an increase of approximately $8.6 million,
or 30.0%. As a percentage of sales, gross profit was 35.7% for the 13 weeks
ended October 30, 1999 compared to 33.9% for the 13 weeks ended October 31,
1998. The increase in the gross profit margin is primarily attributable to a
higher markup, lower inventory shrinkage and lower markdown volume. Selling and
administrative expenses were $31.2 million for the 13 weeks ended October 30,
1999 compared to $24.8 million for the 13 weeks ended October 31, 1998, an
increase of approximately $6.4 million, or 25.6%. Approximately $5.8 million of
the increase was sales volume related. As a percentage of sales, selling and
administrative expenses were 29.8% for the 13 weeks ended October 30, 1999 and
29.2% for the 13 weeks ended October 31, 1998. The increase was due to increased
employee corporate and field supervisor expenses, information systems expenses
and higher pre-opening expenses related to new store opening activity.
3
<PAGE>
The Company recorded a non-cash stock option compensation expense in the
amount of $2.1 million during the 13 weeks ended October 30, 1999. See Note 6 of
"Notes to Financial Statements." Interest expense was $0.6 million for the 13
weeks ended October 30, 1999 compared to $1.1 million for the 13 weeks ended
October 31, 1998, a decrease of approximately $0.4 million. Lower average
borrowings under the Company's revolving credit facility and the exchange of the
Old Notes for the New Notes which resulted in a lower debt discount amortization
reduced interest expense in the current year. See "Liquidity and Capital
Resources." Income taxes were $1.2 million for the 13 weeks ended October 30,
1999 and $0.1 million for the 13 weeks ended October 31, 1998. Income taxes
increased as a result of higher taxable income versus the same period a year
ago. The net income available to common stockholders was $1.7 million for the 13
weeks ended October 30, 1999 compared to $0.6 million for the 13 weeks ended
October 31, 1998. The increase in net income for the 13 weeks ended October 30,
1999 is a result of the operating factors cited above. 39 weeks Ended October
30, 1999 Compared to the 39 weeks Ended October 31, 1998 Net sales were $281.6
million for the 39 weeks ended October 30, 1999 compared to $224.9 million for
the 39 weeks ended October 31, 1998, an increase of $56.7 million, or 25.2%.
Comparable store sales increased 13.5%. The Company opened 34 new stores and
closed 15 stores during the current period. Gross profit was $100.0 million for
the 39 weeks ended October 30, 1999 compared to $75.6 million for the 39 weeks
ended October 31, 1998, an increase of $24.4 million, or 32.3%. As a percentage
of sales, gross profit was 35.5% for the 39 weeks ended October 30, 1999
compared to 33.6% for the 39 weeks ended October 31, 1998. The increase in the
gross profit margin is primarily attributable to a higher markup, lower
inventory shrinkage and lower markdown volume. Selling and administrative
expenses were $88.8 million for the 39 weeks ended October 30, 1999 compared to
$70.3 million for the 39 weeks ended October 31, 1998, an increase of
approximately $18.5 million, or 26.3%. Approximately $14.3 million of the
increase was sales volume related. As a percentage of sales, selling and
administrative expenses were 31.5% for the 39 weeks ended October 30, 1999
compared to 31.3% for the 39 weeks ended October 31, 1998. The increase was due
to increased employee corporate and field supervisor expenses, information
systems expenses and higher pre-opening expenses related to new store opening
activity. The Company recorded a non-cash stock option compensation expense in
the amount of $2.1 million during the 39 weeks ended October 30, 1999. See Note
6 of "Notes to Financial Statements."
4
<PAGE>
The special charge of $1.5 million in fiscal 1998 represents various
expenses incurred in connection with the hiring of the Company's President and
CEO last year. Interest expense was $1.8 million for the 39 weeks ended October
30, 1999 and compared to $3.4 million for the 39 weeks ended October 31, 1998, a
decrease of $1.6 million. Lower average borrowings this year under the Company's
revolving credit facility and the exchange of the Old Notes for the New Notes
which resulted in a lower debt discount amortization reduced interest expense in
the current year. See "Liquidity and Capital Resources." Income taxes increased
to $2.3 million for the 39 weeks ended October 30, 1999 compared to $0.2 million
for the 39 weeks ended October 31, 1998. Income taxes increased as a result of
increased taxable income. An extraordinary charge of $2.8 million was incurred
for the 39 weeks ended October 31, 1998 as a result of notes payable associated
with the General Textiles bankruptcy being extinguished early and new notes with
terms more favorable to the Company being issued. The net income available to
common stockholders was $3.3 million for the 39 weeks ended October 30, 1999
compared to a net loss available to common stockholders of $9.2 million for the
39 weeks ended October 31, 1998. The increase in net income for the 39 weeks
ended October 30, 1999 is a result of the operating factors cited above.
Liquidity and Capital Resources General As of October 30, 1999, the Company had
outstanding indebtedness in the principal amount of $25.2 million. The Company
finances its operations through trade credit, amounts borrowed under its $50.0
million revolving credit facility and internally generated cash flow. Credit
terms provided by vendors and other suppliers are usually net 30 days. Amounts
which may be borrowed under the working capital facility are based on a
percentage of eligible inventories, as defined, outstanding from time to time,
as more fully described elsewhere in this Form 10-Q. See Notes 2 and 3 of Notes
to Financial Statements. Management believes that the Company's sources of cash,
including the Facility (which expires in March 2000, but is subject to one year
automatic renewal periods unless terminated by either party), will be adequate
to finance its operations and meet obligations under its existing indebtedness
as they become due for at least the next twelve months. See Note 3 of Notes to
Financial Statements.
5
<PAGE>
Capital Expenditures The Company anticipates spending approximately $3.0
million on capital expenditures during the remainder of the current fiscal year
ending January 29, 2000 which includes costs to open approximately 4 new stores,
complete its new distribution center, upgrade store level fixtures and to
upgrade information systems. Management believes that future expenditures will
be financed from internal cash flow and the Facility. Inflation In general, the
Company believes that inflation has had no recent material impact on operations
and none is anticipated in the next fiscal year. Minimum Wage Increases The
Company employs, both in its stores and in its corporate headquarters, a
substantial number of employees who earn hourly wages near or at the minimum
wage. Actions by both the federal and certain state governments have increased
the hourly wages payable by the Company to such employees. To mitigate the
impact of such wage increases, the Company has instituted policies to manage its
ratio of wages to sales. Management believes that these measures will be
adequate to control the impact of hourly wage increases on the overall
profitability of its operations for the foreseeable future. Seasonality and
Quarterly Fluctuations The Company historically has realized, and expects to
continue to realize, its highest level of sales and income during the third and
fourth quarters of its fiscal year (the quarters ending in October and January)
as a result of the "Back to School" (August and September) and Christmas
(November and December) seasons. The seasonally lower sales in the Company's
first two quarters (February through July), can result in the Company's
incurring losses during those quarters even in years in which it will have full
year profits. Year 2000 Issue Many currently installed computer systems and
software products are coded to accept only 2 digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept 4
digit entries to distinguish 21st century dates from 20th century dates. Systems
that do not properly recognize such information could generate erroneous data or
fail. As a result, computer systems and/or software used by many companies may
need to be upgraded to comply with Year 2000 requirements.
6
<PAGE>
The Company is utilizing both internal and external resources as
applicable, to identify, correct or reprogram its internal systems for Year 2000
compliance. The effect on the Company's future results of operations is being
determined as part of the detailed conversion process. In February 1999, the
Company implemented a new integrated software package to support future growth
and to address the issues associated with the Year 2000. This system
implementation substantially completed the Company's internal program to address
the Company's Year 2000 issues. The new software installation cost $2.8 million.
The Company has sought to insure that the software and operating systems
included in its new integrated software package are Year 2000 compliant. The
Company has requested information and assurances from its major vendors, service
providers and customers about their state of Year 2000 compliance and readiness.
In the event that significant Year 2000 issues are identified with such parties,
and in contemplation of the possibility of such problems, the Company has
developed contingency plans such as the use of alternate vendors or manual
systems. Although, based on a review of its data processing, operational and
other computer-based systems, the Company does not currently believe that it
will experience any significant adverse effects or material unbudgeted costs
resulting therefrom, there can be no assurance in that regard. The failure to
correct a material Year 2000 problem could result in an interruption in or a
failure of certain normal activities or operations. Such interruptions or
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Because there is general
uncertainty about the Year 2000 problem, including uncertainty about the Year
2000 readiness of suppliers and customers, it is not possible to predict whether
Year 2000 problems will occur or what consequences such problems will have on
results of operations, liquidity or financial condition. However, the Company's
plans to address Year 2000 issues are intended to minimize, to the extent
feasible, the possibility of interruptions of normal operations. There can,
however, be no assurance that the Company will be successful in doing so.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995 Certain statements contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations or elsewhere in this Form 10-Q that are not related to historical
results are forward-looking statements. Actual results may differ materially
from those projected or implied in the forward-looking statements. Risks and
uncertainties which could effect the Company include, but are not limited to,
general and local economic and weather conditions that affect buying patterns of
the Company's customers, changes in consumer spending and the Company's ability
to anticipate buying patterns and implement appropriate inventory strategies,
continued availability of capital and financing, competitive factors, expansion
plans, risks and uncertainties associated with the failure of the Company or its
suppliers or customers to be Year 2000 compliant, and other factors affecting
the Company's business beyond the Company's control as well as other factors
described in the Company's other filings with the Securities and Exchange
Commission. Consequently, all of the forward-
7
<PAGE>
looking statements are qualified by these cautionary statements and there
can be no assurance that the results or developments anticipated by the Company
will be realized or that they will save the expected effects on the Company or
its business or operations. Actual results could differ materially from those
contemplated or expressed in any forward-looking statements. PART II - OTHER
INFORMATION Item 1. Legal Proceedings The Company is at all times subject to
pending and threatened legal actions, which arise out of the normal course of
business. In the opinion of management, based in part on the advice of legal
counsel, the ultimate disposition of these matters will not have a material
adverse effect on the financial position or results of operations of the
Company. Item 2. Changes in Securities and Use of Proceeds None. Item 3.
Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of
Security Holders None. Item 5. Other Information None. Item 6. Exhibits and
Reports on Form 8-K (a) Exhibits 11.1 Computation of per share loss (1 page) 27
Financial Data Schedule (1 page) (b) Reports on Form 8-K None.
8
<PAGE>
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.
FACTORY 2-U STORES, INC.
Date: December 13, 1999
By:/s/ Douglas C. Felderman
---------------------------------
Name: Douglas C. Felderman
Title: Executive Vice President and Chief Financial Officer
(duly authorized officer and principal financial officer)
9
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
11.1 Computation of per share income (loss) 11
27 Financial Data Schedule (for EDGAR filing only) 12
10
<PAGE>
<TABLE>
EXHIBIT 11.1
COMPUTATION OF PER SHARE INCOME (LOSS)
<CAPTION>
13 weeks ended 39 weeks ended
-------------- --------------
<S> <C> <C> <C> <C>
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
------------ ---------- ----------- ------------
The computation of net income (loss) available
and adjusted shares outstanding follows:
Income (loss) from continuing operations $ 1,706 $ 2,251 $ 3,252 $ (1,615)
Extraordinary item - - - (2,750)
Net income (loss) 1,706 2,251 3,252 (4,365)
Less:
Series A preferred stock dividends - (865) - (2,593)
Series B preferred stock dividends - (779) - (2,210)
---------- ---------- ---------- -----------
Net income (loss) available to
common shareholders $ 1,706 $ 607 $ 3,252 $ (9,168)
Weighted average number of
common shares outstanding 12,229,633 1,507,892 12,156,840 1,500,524
Add assumed exercise of:
Warrants that are common stock equivalents 23,954 - 20,066 -
Options that are common stock equivalents 768,544 12,305 627,316 -
Convertible preferred stock:
Series A Preferred - 2,807,999 - -
Series B Preferred - 5,633,754 - -
Adjusted shares outstanding,
used for diluted computation 13,022,131 9,961,951 12,804,221 1,500,524
Earnings (loss) per share:
Basic:
Income (loss) before extraordinary item $ 0.14 $ 0.40 $ 0.27 $ (4.28)
Extraordinary item per share - - - (1.83)
Net income (loss) $ 0.14 $ 0.40 $ 0.27 $ (6.11)
Diluted:
Income (loss) before extraordinary item $ 0.13 $ 0.23 $ 0.25 $ (4.28)
Extraordinary item per share - - - (1.83)
Net income (loss) $ 0.13 $ 0.23 $ 0.25 $ (6.11)
- ------------------------------------------------------------- --------------- ---------------- -- ---------------- ---------------
</TABLE>
* The weighted average number of common shares outstanding for prior periods
have been restated for the reverse stock split (factor is .30133) that took
place effective November 23, 1998.
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet and Statement of Operations as of and for the 39 weeks ended
October 30, 1999 and is qualified in its entirety by reference to such financial
statements as included in the Company's Quarterly Report on Form 10-Q.
</LEGEND>
<CIK> 0000813775
<NAME> Factory 2-U Stores, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> AUG-1-1999
<PERIOD-END> OCT-30-1999
<CASH> 4,341
<SECURITIES> 0
<RECEIVABLES> 1,371
<ALLOWANCES> 28
<INVENTORY> 54,233
<CURRENT-ASSETS> 63,019
<PP&E> 41,792
<DEPRECIATION> 16,478
<TOTAL-ASSETS> 120,948
<CURRENT-LIABILITIES> 69,805
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 34,853
<TOTAL-LIABILITY-AND-EQUITY> 120,948
<SALES> 281,581
<TOTAL-REVENUES> 281,581
<CGS> 181,571
<TOTAL-COSTS> 181,571
<OTHER-EXPENSES> 92,675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,824
<INCOME-PRETAX> 5,511
<INCOME-TAX> 2,259
<INCOME-CONTINUING> 3,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,252
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.25
</TABLE>
