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 May 1, 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)
(619) 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 May
1, 1999, was 12,107,729 shares.
<PAGE> 2
FACTORY 2-U STORES, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 1, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Factory 2-U Stores, Inc. Balance Sheets as of
May 1, 1999 (Unaudited) and January 30, 1999 ..........................F-1
Factory 2-U Stores, Inc. Statements of Operations (Unaudited)
for the 13 weeks ended May 1, 1999 and May 2, 1998 ....................F-3
Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited)
for the 13 weeks ended May 1, 1999 and May 2, 1998........................F-4
Factory 2-U Stores, Inc. Notes to Financial Statements (Unaudited) ........F-6
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................................................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
<PAGE>
PART I
Item 1. Financial Statements
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
May 1, January 30,
1999 1999
(Unaudited)
Assets
Current assets:
Cash $ 4,562 $ 3,124
Merchandise inventories 36,191 31,353
Prepaid expenses and other assets 3,384 1,137
Deferred income taxes 1,747 1,690
--------- ---------
Total current assets 45,884 37,304
Leasehold improvements and equipment, net 19,953 18,187
Deferred income taxes 762 1,149
Other assets, net 2,191 2,419
Excess of cost over net assets acquired,
less accumulated amortization of
$8,937 and $8,537 at May 1, 1999 and
January 30, 1999, respectively 30,708 31,108
---------- ---------
Total assets $ 99,498 $ 90,167
======= ======
(continued)
F-1
<PAGE>
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
(Continued)
May 1, January 30,
1999 1999
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,315 $ 1,818
Accounts payable 28,107 21,258
Income taxes payable 57 2,656
Accrued expenses 15,968 20,151
Revolving credit notes 11,386 -
--------- ---------
Total current liabilities 56,833 45,883
Revolving credit notes - 1,843
Long-term debt, less current maturities 10,206 10,530
Capital lease and other long-term obligations 2,308 2,257
Deferred rent 2,298 1,889
--------- ---------
Total liabilities 71,645 62,402
--------- ---------
Stockholders' equity:
Series A convertible preferred stock,
$.01 par value, 4,500,000 shares authorized,
0 shares issued and outstanding
(aggregate liquidation preference of $0)
at May 1, 1999 and January 30, 1999 - -
Series B junior convertible, exchangeable
preferred stock, $.01 par value,
40,000 shares authorized,
0 shares issued and outstanding
(aggregate liquidation preference of $0)
at May 1, 1999 and January 30, 1999,
respectively - -
Common stock, $.01 par value,
80,000,000 shares authorized,
12,107,729 and 12,106,175 shares issued an
outstanding at May 1, 1999 and January 30, 1999,
respectively 121 121
Stock subscription notes receivable (4,057) (4,087)
Additional paid-in capital 102,971 103,248
Accumulated deficit (71,182) (71,517)
---------- ---------
Total stockholders' equity 27,853 27,765
--------- ---------
Total liabilities and stockholders' equity $ 99,498 $ 90,167
======== ========
See accompanying notes to financial statements.
F-2
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Operations
(in thousands, except per share data)
(Unaudited)
13 Weeks Ended
May 1, May 2,
1999 1998
Net sales $ 85,099 $ 66,495
Cost of sales 56,108 44,649
-------- --------
Gross profit 28,991 21,846
Selling and administrative expenses 27,297 21,194
Amortization of intangibles 589 589
Special charges - 1,500
-------- --------
Operating income (loss) 1,105 (1,437)
Interest expense (539) (1,278)
--------- --------
Income (loss) before income taxes and
extraordinary item 566 (2,715)
Income taxes (232) (74)
---------- ---------
Income (loss) before extraordinary item 334 (2,789)
Extraordinary item - debt extinguishment
(less applicable income taxes of $0) - (2,750)
----------- ----------
Income (loss) before dividends 334 (5,539)
Preferred stock dividends - Series A - (864)
Preferred stock dividends - Series B - (703)
------------ -----------
Net income (loss) available
to common stockholders $ 334 $ (7,106)
============ ===========
Basic and diluted earnings per share:
Income (loss) before extraordinary item $ 0.03 $ (2.92)
Extraordinary item $ - $ (1.86)
Net income (loss) $ 0.03 $ (4.78)
Weighted average common shares outstanding:
Basic 12,107 1,486
Diluted 12,577 1,486
See accompanying notes to financial statements.
F-3
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
(Unaudited)
13 Weeks Ended
------------------------------
May 1, May 2,
1999 1998
------------ -----------
Cash Flows from Operating Activities:
Income (loss) before dividends $ 334 $ (5,539)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 2,018 1,678
Debt discount amortization 276 601
Extraordinary loss on debt extinguishment - 2,750
Changes in operating assets and liabilities:
Merchandise inventories (4,837) (4,361)
Prepaid expenses and other assets (3,129) (3,240)
Accounts payable 6,848 (991)
Accrued expenses and other (4,977) (2,660)
-------- ---------
Net cash used in operating activities (3,467) (11,762)
-------- ---------
Cash Flows from Investing Activities:
Purchase of leasehold improvements
and equipment (3,266) (504)
Net cash used in investing activities (3,266) (504)
--------- ----------
Cash Flows from Financing Activities:
Borrowings on revolving credit notes 98,890 85,170
Payments on revolving credit notes (89,347) (69,852)
Payments on notes payable and capital
lease obligations (1,125) (978)
Payment of deferred debt issuance costs - (45)
Purchase of warrants (288) -
Exercise of stock options 11 -
Proceeds from stock subscription notes receivable 30 -
Payment of dividends on Series A preferred stock - (864)
--------- ----------
Net cash provided by financing activities 8,171 13,431
-------- ----------
(continued)
F-4
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
(Continued)
13 Weeks Ended
---------------------------
May 1, May 2,
1999 1998
------------ -----------
Net increase in cash $ 1,438 $ 1,165
Cash at the beginning of the period 3,124 3,167
-------- --------
Cash at the end of the period $ 4,562 $ 4,332
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 170 $ 535
Cash paid during the period for income taxes $ 2,647 $ 74
Supplemental disclosure of non-cash investing activities:
Capital lease purchases $ - $ 333
Supplemental disclosure of non-cash financing activities:
Series B preferred stock dividends $ - $ 703
See accompanying notes to financial statements.
F-5
<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 weeks ending May 2, 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 weeks ended May 1, 1999 and May 2, 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 May 1, 1999, the Company had outstanding long-term indebtedness in
the principal amount of $10.2 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%.
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 exceeds
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 $6.1 million at May 1, 1999, resulting in
a net carrying value of $11.2 million, of which $1.0 million is a current
maturity, as reflected in the May 1, 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 Facility
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 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. (the "Subsidiary Merger"). 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").
At May 1, 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 May 1,
1999, the Company owed $11.4 million under the Facility and had $22.6 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 the
Company or its lender. The balance owed under the Facility fluctuates based on
working capital requirements. Because of the seasonal nature of the Company's
business, borrowings are usually greatest between August and December. 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.
The Company was not in compliance with the current ratio covenant in the
Facility as of May 1, 1999. The lender has waived that requirement at May 1,
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.
The preferred stock and other common stock equivalents were not considered
for the thirteen week period ended May 2, 1998, as converted because the
calculation was anti-dilutive. At May 1, 1999, there were 1,893,528 potentially
dilutive common stock options and warrants outstanding.
(5) Provision for Income Taxes
An amount for federal alternative minimum taxes was recorded for the 13
weeks ended May 2, 1998. The Company recorded a $0.2 million provision for
income taxes as reflected in the accompanying statements of operations for the
13 weeks ended May 1, 1999.
(6) Stock Options and Warrants
On March 5, 1999, the Company purchased 49,769 of its outstanding warrants
for $5.78 per warrant, or $0.3 million. Those warrants had an exercise price of
$6.22 per share and were to expire on March 14, 2001. At May 1, 1999, the
Company had 320,000 warrants outstanding with an exercise price of $16.50 per
share and 82,690 warrants outstanding with an exercise price of $19.91 per
share.
As of May 1, 1999, the Company had 1,490,838 stock options outstanding. Of
those options, 385,721 are exercisable when certain common stock market price
hurdles are achieved and maintained for 60 consecutive trading days, subject to
vesting conditions (92,960 are exercisable, when the Company's common stock
reaches market price hurdles in the amount of $19.91; 92,961 are exercisable at
$24.89; 99,900 are exercisable at $33.19; and 99,900 are exercisable at $49.78).
Assuming all options with market price hurdles are fully vested, when the
Company's common stock market price is $19.91, $24.89, $33.19 and $49.78, the
Company will be required to record aggregate non-cash compensation expense in
the minimum amounts of $1.2 million, $1.6 million, $2.6 million and $4.2
million, respectively.
<PAGE> 3
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
Management's discussion of the results of operations provides an analysis
of the Company's operations during the 13 weeks ended May 1, 1999 and May 2,
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 May 1, 1999 there were 169 stores in operation versus 162 stores at
May 2, 1998.
13 Weeks Ended May 1, 1999 Compared to the 13 Weeks Ended May 2, 1998
Net sales were $85.1 million for the 13 weeks ended May 1, 1999 compared to
$66.5 million for the 13 weeks ended May 2, 1998, an increase of $18.6 million,
or 28.0%. Comparable sales increased 21.4%, or $13.9 million.
Gross profit was $29.0 million for the 13 weeks ended May 1, 1999 compared to
$21.8 million for the 13 weeks ended May 2, 1998, an increase of approximately
$7.2 million. As a percentage of sales, gross profit was 34.1% for the 13 weeks
ended May 1, 1999 compared to 32.9% for the 13 weeks ended May 2, 1998. The
increase in the gross profit margin is primarily attributable to lower markdowns
and reduced shrinkage.
Selling and administrative expenses were $27.3 for the 13 weeks ended May 1,
1999 compared to $21.2 million for the 13 weeks ended May 2, 1998, an increase
of approximately $6.1 million. As a percentage of sales, selling and
administrative expenses increased to 32.1% for the 13 weeks ended May 1, 1999
from 31.9% for the 13 weeks ended May 2, 1998. The increase as a percentage of
sales is primarily due to an increase in the minimum wage.
Amortization of intangibles was $0.6 million for the 13 weeks ended May 1, 1999
and $0.6 million for the 13 weeks ended May 2, 1998.
The special charge of $1.5 million for the 13 weeks ended May 2, 1998 represents
various expenses incurred in connection with hiring the current President and
CEO of the Company. Such expenses included a signing bonus, moving expenses,
costs to liquidate a former residence, and executive search fees.
Interest expense was $0.5 million for the 13 weeks ended May 1, 1999 and $1.3
million for the 13 weeks ended May 2, 1998, a decrease of approximately $0.8
million or 61.5%. The decrease is due primarily to a lower balance on the
revolving credit facility.
<PAGE> 4
Federal income taxes of $0.1 million were accrued for the 13 weeks ended
May 1, 1999 and $0.1 million were paid in anticipation of an alternative minimum
tax for the 13 weeks ended May 2, 1998.
An extraordinary charge of $2.8 million was incurred for the 13 weeks ended May
2, 1998 because notes payable associated with the General Textiles bankruptcy
were extinguished and new notes with terms favorable to the Company were issued.
The net income available to common stockholders was $0.3 million for the 13
weeks ended May 1, 1999 as compared to the net loss available to common
stockholders of $7.1 million for the 13 weeks ended May 2, 1998. The increase in
net income for the 13 weeks ended May 1, 1999 is a result of the operating
factors cited above. Additionally, as a result of the Recapitalization that took
place on November 23, 1998, the Company no longer pays dividends on preferred
stock. Dividends of $1.6 million were charged to income for the 13 weeks ended
May 2, 1998.
Liquidity and Capital Resources
General
As of May 1, 1999, the Company had outstanding indebtedness in the principal
amount of $22.6 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 below.
Revolving Credit Facility
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. As a result of the Subsidiary Merger, 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 the Facility.
At May 1, 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 May 1, 1999,
the Company owed $11.4 million under the Facility and had $22.6 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 the
Company or its lender. The balance owed under the Facility fluctuates based on
working capital requirements. Because of the seasonal nature of the Company's
business, borrowings are usually greatest between August and December. 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.
<PAGE> 5
The Company was not in compliance with the current ratio covenant in the
Facility as of May 1, 1999. The lender has waived that requirement at May 1,
1999.
Subordinated Notes
At May 2, 1998, the Company had outstanding $22.3 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%.
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 $2,750,000. This loss represents the amount
by which the present value of the New Notes exceeds 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 $3,250,000 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 $200,000 to $400,000 with a balloon payment of
$2,050,000 due May 28, 2003. The entire balance of $3,250,000 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 $6.1 million at May 1, 1999, resulting in
a net carrying value of $11.2 million, of which $1.0 million is a current
maturity, as reflected in the May 1, 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.
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.
<PAGE> 6
Capital Expenditures
The Company anticipates spending approximately $12 million on capital
expenditures during the remainder of the current fiscal year which includes
costs to open new stores, to renovate and/or relocate 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 this wage increase, 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.
Seasonality and Quarterly Fluctuations
The Company historically has realized 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.
<PAGE> 7
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, the Company will develop contingency plans
such as the use of alternate vendors or manual systems.
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 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,
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 and other factors
affecting the Company's business beyond the Company's control. 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.
<PAGE> 8
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
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.
<PAGE> 9
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: May 24, 1999
By: /s/ Jonathan W. Spatz____
Name: Jonathan W. Spatz
Title: Executive Vice President and Chief Operating Officer
(duly authorized officer and principal financial officer)
<PAGE> 10
EXHIBIT INDEX
Exhibit
Number Description Page
11.1 Computation of per share income 11
27 Financial Data Schedule 12
<PAGE> 11
COMPUTATION OF PER SHARE INCOME (LOSS)
13 weeks ended
- --------------------------------------------------------------------------------
May 1, May 2,
1999 1998
The computation of net income (loss)
available and adjusted shares outstanding
follows:
Income (loss) from continuing operations $ 334 $ (2,789)
Extraordinary item - (2,750)
Net income (loss) 334 (5,539)
Less:
Series A preferred stock dividends - (864)
Series B preferred stock dividends - (703)
Net income used for basic and diluted computation $ 334 $ (7,106)
Weighted average number of
common shares outstanding 12,106,636 1,485,789
Add:
Assumed exercise of those options
that are common stock equivalents 470,553 -
Assumed exercise of convertible preferred stock:
Series A Preferred - -
Series B Preferred - -
Adjusted shares outstanding,
used for diluted computation 12,577,189 1,485,789
Basic and Diluted:
Income (loss) before extraordinary item $ 0.03 $ (2.92)
Extraordinary item per share - (1.86)
Net income (loss) applicable to common stock $ 0.03 $ (4.78)
- --------------------------------------------------------------------------------
The weighted average number of common shares outstanding has been restated
for the reverse stock split (factor is .30133) that took place effect November
23, 1998.
<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 13 weeks endeed May
1, 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> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-1-1999
<CASH> 4,562
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 36,191
<CURRENT-ASSETS> 45,884
<PP&E> 33,553
<DEPRECIATION> 13,600
<TOTAL-ASSETS> 99,498
<CURRENT-LIABILITIES> 56,833
<BONDS> 0
0
0
<COMMON> 121
<OTHER-SE> 27,732
<TOTAL-LIABILITY-AND-EQUITY> 99,498
<SALES> 85,099
<TOTAL-REVENUES> 85,099
<CGS> 56,108
<TOTAL-COSTS> 56,108
<OTHER-EXPENSES> 27,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 539
<INCOME-PRETAX> 566
<INCOME-TAX> 232
<INCOME-CONTINUING> 334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 334
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
