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 July 31, 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 July
31, 1999, was 12,214,984 shares.
<PAGE>
FACTORY 2-U STORES, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Factory 2-U Stores, Inc. Balance Sheets as of July 31, 1999
(Unaudited) and January 30, 1999 ............................................F-1
Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
13 weeks ended July 31, 1999 and August 1, 1998..............................F-3
Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
26 weeks ended July 31, 1999 and August 1, 1998 .............................F-4
Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
26 weeks ended July 31 and August 1, 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 ...................................................7
Item 2. Changes in Securities and Use of Proceeds............................7
Item 3. Defaults Upon Senior Securities......................................7
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 ....................................9
Signatures ..................................................10
Exhibit Index ..................................................11
2
<PAGE>
PART I
Item 1. Financial Statements
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
July 31, January 30,
1999 1999
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash $ 5,869 $ 3,124
Merchandise inventory 45,408 31,353
Prepaid expenses and other assets 3,276 1,137
Deferred income taxes 1,747 1,690
------ -----
Total current assets 56,300 37,304
Leasehold improvements and equipment,
net of accumulated depreciation
and amortization 22,075 18,187
Deferred income taxes 937 1,149
Other assets 2,027 2,419
Excess of cost over net assets acquired,
less accumulated amortization of $9,338
and $8,537 at July 31, 1999 and
January 30, 1999, respectively 30,307 31,108
------- ------
Total assets $ 111,646 $ 90,167
======== ======
(continued)
F-1
<PAGE>
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
(continued)
July 31, January 30,
1999 1999
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,281 $ 1,818
Accounts payable 30,486 21,258
Income taxes payable 960 2,656
Accrued expenses 17,478 20,151
Revolving credit notes 15,453 -
------- -------
Total current liabilities 65,658 45,883
------- ------
Revolving credit notes - 1,843
Long-term debt, less current maturities 10,489 10,530
Capital leases and other long-term obligations 3,286 2,257
Deferred rent 2,344 1,889
------ -----
Total liabilities 81,777 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 July 31, 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 July 31, 1999
and January 30, 1999, respectively - -
Common stock, $0.01 par value,
35,000,000 shares authorized and 12,214,984
shares issued and outstanding at July 31, 1999,
and 80,000,000 shares authorized and
12,106,175 shares issued and outstanding at
January 30, 1999 122 121
Stock subscription notes receivable (3,885) (4,087)
Additional paid-in capital 103,603 103,248
Accumulated deficit (69,971) (71,517)
-------- --------
Total stockholders' equity 29,869 27,765
------- ------
Total liabilities and stockholders' equity $ 111,646 $ 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
-----------------------------------
July 31, 1999 August 1, 1998
---------------- -----------------
Net sales $ 91,931 $ 73,456
Cost of sales 58,272 48,494
------- ------
Gross profit 33,659 24,962
------ ------
Selling and administrative expenses 30,354 24,330
Amortization of intangibles 590 590
---- ---
Operating income (loss) 2,715 42
Interest expense 663 1,094
---- -----
Income (loss) before income taxes 2,052 (1,052)
Income taxes 841 25
---- ----
Income (loss) before dividends 1,211 (1,077)
Preferred stock dividends - Series A - (864)
Preferred stock dividends - Series B - (728)
---- -----
Net Income (loss) available
to common stockholders $ 1,211 $ (2,669)
========= ==========
Earnings (loss) per share:
Basic $ 0.10 $ (1.77)
Diluted $ 0.09 $ (1.77)
Weighted average common shares outstanding
Basic 12,159 1,508
Diluted 12,838 1,508
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)
26 Weeks Ended
--------------------------------
July 31, 1999 August 1, 1998
Net sales $ 177,030 $ 139,951
Cost of sales 114,380 93,143
-------- ------
Gross profit 62,650 46,808
Selling and administrative expenses 57,650 45,524
Amortization of intangibles 1,179 1,179
Special charges - 1,500
---- -----
Operating income (loss) 3,821 (1,395)
Interest expense 1,202 2,372
------ -----
Income (loss) before income taxes and
extraordinary item 2,619 (3,767)
Income taxes 1,074 99
------ -----
Income (loss) before extraordinary item 1,545 (3,866)
Extraordinary item - debt extinguishment
(less applicable income taxes of $0) - 2,750
Income (loss) before dividends 1,545 (6,616)
Preferred stock dividends - Series A - (1,728)
Preferred stock dividends - Series B - (1,431)
------ -------
Net income (loss) available
to common stockholders $ 1,545 $ (9,775)
=========== ============
Earnings (loss) per share:
Basic:
Income (loss) before extraordinary item $ 0.13 $ (4.69)
Extraordinary item $ - $ (1.84)
Net income (loss) $ 0.13 $ (6.53)
Diluted:
Income (loss) before extraordinary item $ 0.12 $ (4.69)
Extraordinary item $ - $ (1.84)
Net income (loss) $ 0.12 $ (6.53)
Weighted average common shares outstanding
Basic 12,133 1,497
Diluted 12,707 1,497
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)
26 weeks ended
------------------------------
July 31, August 1,
1999 1998
----------------- --------------
Cash flows from operating activities:
Income (loss) before dividends $ 1,545 $ (6,616)
Adjustments to reconcile income (loss)
to net cash used in operating
activities:
Depreciation and amortization 4,162 3,494
Debt discount amortization 559 881
Extraordinary loss on debt extinguishment - 2,750
Loss on disposal of equipment - 148
Deferred rent expense - (79)
Changes in operating assets and liabilities:
Merchandise inventory (14,055) (11,044)
Prepaid expenses (1,503) (2,178)
Accounts payable 9,228 5,355
Accrued expenses and other (2,757) 1
------------ ------------
Net cash used in operating activities (2,821) (7,288)
------------ ------------
Cash flows from investing activities:
Purchase of leasehold improvements and equipment (7,339) (1,979)
Net cash used in investing activities (7,339) (1,979)
------------- ------------
(continued)
F-5
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
(Continued)
26 weeks ended
---------------------------------
July 31, August 1,
1999 1998
------------- ------------
Cash flows from financing activities:
Borrowings on revolving credit facility 201,847 163,854
Payments on revolving credit facility (188,236) (149,520)
Payments on notes payable and
capital lease obligations (1,263) (1,977)
Proceeds from issuance of common stock 1 -
Buyback of warrants (457) -
Proceeds from exercise of stock options 317 -
Proceeds from exercise of warrants 412 -
Grant of stock options below market price 83 -
Payment of deferred debt issuance costs - (46)
Proceeds from stock subscription notes receivable 201 -
Payment of dividends on Series A preferred stock - (1,728)
-------- -------
Net cash provided by financing activities 12,905 10,583
-------- -------
Net increase in cash 2,745 1,316
Cash at the beginning of the period 3,124 3,167
-------- -------
Cash at the end of the period $ 5,869 $ 4,483
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 582 $ 1,243
Income taxes $ 2,761 $ 74
Supplemental disclosures of non-cash
investing activities:
Capital lease purchases $ - $ 882
Supplemental disclosures of non-cash
financing activities:
Series B preferred stock dividends $ - $ 1,431
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 26 weeks ending August 1, 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 26 weeks ended July 31, 1999 and August 1, 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 July 31, 1999, the Company had outstanding long-term
indebtedness, less current maturities, in the principal amount of $10.5
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
$5.8 million at July 31, 1999, resulting in a net carrying value of
$11.5 million, of which $1.0 million is a current maturity, as
reflected in the July 31, 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
Company and its lender agreed to amend certain terms and conditions of
the revolving credit facilities between the lender and 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 July 31, 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 July 31, 1999, the Company owed $15.5 million under the
Facility and had $25.5 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 the Company or its lender. 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. The Facility is secured by all the assets of
the Company.
(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.
The preferred stock and other common stock equivalents were not
considered as converted for the thirteen week period ended August 1,
1998 because the calculation was anti-dilutive. At July 31, 1999, there
were 1,560,415 potentially dilutive common stock options and warrants
outstanding.
(5) Provision for Income Taxes
The Company recorded a $0.8 million provision for income taxes as
reflected in the accompanying statements of operations for the 13 weeks
ended July 31, 1999.
(6) Stock Options and Warrants
At July 31, 1999, the Company had outstanding warrants exercisable for
82,690 shares of common stock with an exercise price of $19.91 per
share.
As of July 31, 1999, the Company had outstanding options to purchase
1,477,725 shares of common stock. Of those options, 371,784 become
exercisable when specified market price hurdles for the Company's
common stock have been achieved and maintained for 60 consecutive
trading days, subject to vesting conditions (92,960 are exercisable at
a market price hurdle of $19.91; 92,961 are exercisable at $24.89;
92,931 are exercisable at $33.19; and 92,932 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
$19.91, $24.89, $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 $1.2 million, $1.6 million, $2.4
million and $3.9 million, respectively.
F-9
<PAGE>
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 26 weeks ended July 31, 1999 and August
1, 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 July 31, 1999 there were 178 stores in operation versus 162 at
August 1, 1998.
13 Weeks Ended July 31, 1999 Compared to the 13 Weeks Ended August 1, 1998
Net sales were $91.9 million for the 13 weeks ended July 31, 1999 compared to
$73.5 million for the 13 weeks ended August 1, 1998, an increase of
approximately $18.4 million, or 25.2%. Comparable store sales increased 13.1%.
The Company opened 12 new stores and closed 3 stores during the current period.
Gross profit was $33.7 million for the 13 weeks ended July 31, 1999 compared to
$25.0 million for the 13 weeks ended August 1, 1998, an increase of
approximately $8.7 million, or 34.8%. As a percentage of sales, gross profit was
36.6% for the 13 weeks ended July 31, 1999 compared to 34.0% for the 13 weeks
ended August 1, 1998. The increase in the gross profit margin is primarily
attributable to a higher markup, lower shrinkage and lower markdown volume.
Selling and administrative expenses were $30.4 million for the 13 weeks ended
July 31, 1999 compared to $24.3 million for the 13 weeks ended August 1, 1998,
an increase of approximately $6.1 million, or 24.8%. The increase was largely
attributable to expenses associated with the growth in net sales. As a
percentage of sales, selling and administrative expenses were 33.0% for the 13
weeks ended July 31, 1999 and 33.1% for the 13 weeks ended August 1, 1998.
Interest expense was $0.7 million for the 13 weeks ended July 31, 1999 and $1.1
million for the 13 weeks ended August 1, 1998. 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 $0.8 million for the 13 weeks ended July 31, 1999 and $0.03
million for the 13 weeks ended August 1, 1998. Income taxes increased as a
result of higher taxable income versus the same period a year ago.
3
<PAGE>
The net income available to common stockholders was $1.2 million for the 13
weeks ended July 31, 1999 compared to a net loss available to common
stockholders of $2.7 million for the 13 weeks ended August 1, 1998. The increase
in net income for the 13 weeks ended August 1, 1998 is a result of the operating
factors cited above.
26 Weeks Ended July 31, 1999 Compared to the 26 Weeks Ended August 1, 1998
Net sales were $177.0 million for the 26 weeks ended July 31, 1999 compared to
$140.0 million for the 26 weeks ended August 1, 1998, an increase of $37.0
million, or 26.5%. Comparable store sales increased 17.1%. The Company opened 16
new stores and closed 6 stores.
Gross profit was $62.7 million for the 26 weeks ended July 31, 1999 compared to
$46.8 million for the 26 weeks ended August 1, 1998, an increase of $15.9
million, or 33.8%. As a percentage of sales, gross profit was 35.4% for the 26
weeks ended July 31, 1999 compared to 33.4% for the 26 weeks ended August 1,
1998. The increase in the gross profit margin is primarily attributable to a
higher markup, lower shrinkage and lower markdown volume.
Selling and administrative expenses were $57.7 million for the 26 weeks ended
July 31, 1999 compared to $45.5 million for the 26 weeks ended August 1, 1998,
an increase of approximately $12.2 million, or 26.6%. The increase was largely
sales volume related. As a percentage of sales, selling and administrative
expenses were 32.6% for the 26 weeks ended July 31, 1999 compared to 32.5% for
the 26 weeks ended August 1, 1998.
The special charge of $1.5 million in fiscal 1998 represents various expenses
incurred in connection with hiring the President and CEO.
Interest expense was $1.2 million for the 26 weeks ended July 31, 1999 and $2.4
million for the 26 weeks ended August 1, 1998. 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 $1.1 for the 26 weeks ended July 31, 1999 compared to
$0.1 for the 26 weeks ended August 1, 1998. Income taxes increased as a result
of increased taxable income.
An extraordinary charge of $2.8 million was incurred for the 26 weeks ended
August 1, 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 $1.5 million for the 26
weeks ended July 31, 1999 compared to a net loss available to common
stockholders of $9.8 million for the 26 weeks ended August 1, 1998. The increase
in net income for the 26 weeks ended July 31, 1999 is a result of the operating
factors cited above.
4
<PAGE>
Liquidity and Capital Resources
General
As of July 31, 1999, the Company had outstanding indebtedness in the principal
amount of $26.9 million.
The Company finances its operations through credit provided by vendors and other
suppliers, 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 Note 2 (Long-term Debt) and Note 3 (Revolving Credit
Facility) of Notes to Financial Statements.
Management believes that the Company's sources of cash, including the Facility,
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.
Capital Expenditures
The Company anticipates spending approximately $8.2 million on capital
expenditures during the remainder of the current fiscal year ending January 29,
2000 which includes costs to open approximately 17 new stores, to renovate 24
existing stores, to relocate approximately 9 existing stores 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.
5
<PAGE>
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.
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 is currently seeking to insure that the software and operating
systems included in its new integrated software package are Year 2000 compliant.
The Company is also in the process of requesting 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 intends to develop contingency plans such as the use
of alternate vendors or manual systems prior to October 1999.
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.
6
<PAGE>
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-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 have 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.
7
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
a. The Company's annual meeting of stockholders was held on June 23, 1999.
b. The directors elected at the meeting were as follows:
Director Votes Votes
For Against Withheld
Ira Neimark 9,311,155 0 7,125
Michael Searles 9,311,155 0 7,125
Other directors whose terms of office continued after the meeting are as
follows: Peter V. Handal, Ronald Rashkow, H. Whitney Wagner and Wm. Robert
Wright II. James D. Somerville resigned as a director effective June 23, 1999
and John J. Borer III did not stand for re-election.
c. Other matters voted on at the meeting and the results of those votes were as
follows:
Approval of the amendment of the Certificate of Incorporation to reduce to
35,000,000 the number of shares of common stock the Company is authorized to
issue.
Votes for: 9,305,738
Votes against: 2,959
Abstentions: 9,583
Ratification of Arthur Andersen LLP as independent accountants
Votes for: 9,224,835
Votes against: 37,016
Abstentions: 56,429
Item 5. Other Information
None.
8
<PAGE>
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.
9
<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: September 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)
10
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
11.1 Computation of per share income (loss) 12
27 Financial Data Schedule (for EDGAR filing only) 13
11
<PAGE>
<TABLE>
EXHIBIT 11.1
COMPUTATION OF PER SHARE INCOME (LOSS)
<CAPTION>
13 weeks ended 39 weeks ended
-------------- --------------
<S> <C> <C> <C> <C>
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
The computation of net income (loss)
available and adjusted shares outstanding
follows:
Income (loss) from continuing operations $ 1,211 $ (1,077) $ 1,545 $ (3,866)
Extraordinary item - - - (2,750)
Net income (loss) 1,211 (1,077) 1,545 (6,616)
Less:
Series A preferred stock dividends - (864) - (1,728)
Series B preferred stock dividends - (728) - (1,431)
Net income (loss) used for basic and
diluted computation $ 1,211 $ (2,669) $ 1,545 $ (9,775)
Weighted average number of common shares
outstanding * 12,158,607 1,507,892 12,132,614 1,496,840
Add assumed exercise of:
Warrants that are common stock equivalents 36,243 - 18,122 -
Options that are common stock equivalents 642,850 - 556,702 -
Series A Preferred - - - -
Series B Preferred - - - -
Adjusted shares outstanding, used for
diluted computation 12,837,701 1,507,892 12,707,437 1,496,840
Basic:
Income (loss) before extraordinary item $ 0.10 $ (1.77) $ 0.13 $ (4.69)
Extraordinary item per share - - - (1.84)
Net income (loss) $ 0.10 $ (1.77) $ 0.13 $ (6.53)
Diluted:
Income (loss) before extraordinary item $ 0.09 $ (1.77) $ 0.12 $ (4.69)
Extraordinary item per share - - - (1.84)
Net income (loss) $ 0.09 $ (1.77) $ 0.12 $ (6.53)
</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 effect November 23, 1998.
12
<PAGE>
<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 26 weeks ended July 31, 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> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> MAY-2-1999
<PERIOD-END> JUL-31-1999
<CASH> 5,869
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 45,408
<CURRENT-ASSETS> 56,300
<PP&E> 36,763
<DEPRECIATION> 14,688
<TOTAL-ASSETS> 111,646
<CURRENT-LIABILITIES> 65,658
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 29,747
<TOTAL-LIABILITY-AND-EQUITY> 111,646
<SALES> 177,030
<TOTAL-REVENUES> 177,030
<CGS> 114,380
<TOTAL-COSTS> 114,380
<OTHER-EXPENSES> 58,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,202
<INCOME-PRETAX> 2,619
<INCOME-TAX> 1,074
<INCOME-CONTINUING> 1,545
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,545
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
</TABLE>
