UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2000
--------------
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
29, 2000, was 12,603,831 shares.
<PAGE>
FACTORY 2-U STORES, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 29, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Factory 2-U Stores, Inc. Balance Sheets as of July 29, 2000
(Unaudited) and January 29, 2000 ............................................F-1
Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
13 weeks ended July 29, 2000 and July 31, 1999...............................F-3
Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
26 weeks ended July 29, 2000 and July 31, 1999 ..............................F-4
Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
26 weeks ended July 29, 2000 and July 31, 1999 ..............................F-5
Factory 2-U Stores, Inc. Notes to 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 9
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)
<TABLE>
<CAPTION>
July 29, January 29,
2000 2000
---------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,897 $ 9,473
Merchandise inventory 65,302 35,048
Prepaid expenses and other assets 6,007 2,291
Deferred income taxes 2,184 2,184
------ ------
Total current assets 80,390 48,996
Leasehold improvements and equipment,
net of accumulated depreciation and amortization 33,831 27,425
Deferred income taxes 1,032 1,032
Other assets 1,363 1,507
Excess of cost over net assets acquired,
less accumulated amortization of
$10,941 and $10,139 at July 29, 2000 and
January 29, 2000, respectively 28,704 29,506
------- -------
Total assets $ 145,320 $ 108,466
============ ===========
</TABLE>
(continued)
F-1
<PAGE>
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
(continued)
<TABLE>
<CAPTION>
July 29, January 29,
2000 2000
---------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,206 $ 1,251
Accounts payable 43,946 19,994
Income taxes payable 1,774 4,235
Accrued expenses 21,729 22,275
------- -------
Total current liabilities 68,655 47,755
Revolving credit facility 7,000 -
Long-term debt, less current maturities 10,632 10,067
Capital leases and other long-term obligations 1,498 1,658
Deferred rent 2,821 2,556
------ ------
Total liabilities 90,606 62,036
Stockholders' equity:
Series A 9-1/2% convertible preferred stock,
$0.01 par value; 4,500,000 shares authorized,
0 shares issued and outstanding at July 29, 2000
and January 29, 2000 - -
Series B junior convertible, exchangeable preferred stock,
$0.01 par value; 40,000 shares authorized, 0 shares issued
and outstanding at July 29, 2000 and January 29, 2000 - -
Common stock, $0.01 par value; 35,000,000 shares authorized,
12,603,831 and 12,390,817 shares issued and outstanding
at July 29, 2000 and January 29, 2000, respectively 126 124
Stock subscription notes receivable (2,542) (2,710)
Additional paid-in capital 112,941 108,091
Accumulated deficit (55,811) (59,075)
-------- --------
Total stockholders' equity 54,714 46,430
-------- -------
Total liabilities and stockholders' equity $ 145,320 $ 108,466
=========== ===========
</TABLE>
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)
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------------
July 29, July 31,
2000 1999
--------------- ----------------
<S> <C> <C>
Net sales $ 116,678 $ 91,931
Cost of sales 74,543 58,272
------- --------
Gross profit
42,135 33,659
Selling and administrative expenses (exclusive of non-cash
stock-based compensation expense shown below) 36,112 29,282
Pre-opening expenses 664 1,072
Amortization of intangibles 559 590
Condemnation award (1,240) -
Stock-based compensation expense 2,751 -
------ -
Operating income 3,289 2,715
Interest expense 473 663
------ ------
Income before income taxes 2,816 2,052
Income taxes 1,155 841
--------- -------
Net income $ 1,661 $ 1,211
=========== ===========
Earnings per share:
Basic $ 0.13 $ 0.10
Diluted $ 0.13 $ 0.09
Weighted average common shares outstanding:
Basic 12,492 12,159
Diluted 13,030 12,838
</TABLE>
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)
<TABLE>
<CAPTION>
26 Weeks Ended
-----------------------------------
July 29, July 31,
2000 1999
--------------- ------------------
<S> <C> <C>
Net sales $ 225,053 $ 177,030
cost of sales
144,693 114,380
-------- -------
Gross profit
80,360 62,650
Selling and administrative expenses (exclusive of non-cash
stock-based compensation expense shown below) 68,958 55,586
Pre-opening expenses 2,362 2,064
Amortization of intangibles 1,148 1,179
Condemnation award (1,240) -
Stock-based compensation expense 2,751 -
-------- --------
Operating income 6,381 3,821
Interest expense 823 1,202
-------- --------
Income before income taxes 5,558 2,619
Income taxes 2,295 1,074
-------- --------
Net income $ 3,263 $ 1,545
========== ===========
Earnings per share:
Basic $ 0.26 $ 0.13
Diluted $ 0.25 $ 0.12
Weighted average common shares outstanding:
Basic 12,452 12,133
Diluted 12,929 12,707
</TABLE>
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)
<TABLE>
<CAPTION>
26 Weeks Ended
-------------------------------
July 29, July 31,
2000 1999
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Income from operating activities $ 3,263 $ 1,545
Adjustments to reconcile income to net cash
used in operating activities:
Depreciation 4,743 2,983
Amortization of intangibles 1,148 1,179
Amortization of debt discount 565 559
Loss on disposal of equipment 554 468
Deferred rent expense 277 62
Stock-based compensation expense 2,751 -
Other non-cash items 79 144
Changes in operating assets and liabilities:
Merchandise inventory (30,254) (14,055)
Prepaid expenses and other assets (4,020) (1,971)
Accounts payable 23,952 9,228
Accrued expenses and other liabilities (3,531) (2,819)
---------------- --------------
Net cash used in operating activities (473) (2,677)
---------------- --------------
Cash flows used in investing activities:
Purchase of leasehold improvements and equipment (10,265) (7,339)
---------------- --------------
Net cash used in investing activities (10,265) (7,339)
----------------- --------------
</TABLE>
(continued)
F-5
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
(Continued)
<TABLE>
<CAPTION>
26 Weeks Ended
-------------------------------------
July 29, July 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flows from financing activities:
Borrowings on revolving credit facility 77,011 201,847
Payments on revolving credit facility (70,011) (188,236)
Payments on notes payable and capital lease obligations (136) (1,263)
Repurchase of warrants - (457)
Proceeds from exercise of stock options and warrants 1,404 669
Payments of deferred financing costs (275) -
Payments of stock subscription notes receivable 169 201
------ ------
Net cash provided by financing activities 8,162 12,761
------ ------
Net increase (decrease) in cash (2,576) 2,745
Cash at the beginning of the period 9,473 3,124
------ ------
Cash at the end of the period $ 6,897 $ 5,869
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 257 $ 582
Income taxes $ 4,587 $ 2,761
</TABLE>
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
Our 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 our financial statements for the fiscal year ended
January 29, 2000 included in our Form 10-K as filed with the Securities
and Exchange Commission.
In the opinion of our management, the unaudited financial statements as
of and for the 13 and 26 weeks ended July 29, 2000 and July 31, 1999
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 our business, the results of operations for the
interim period may not necessarily be indicative of the results of
operations for a full year.
(2) New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes the SEC's view in applying generally
accepted accounting principles to revenue recognition in financial
statements. This SAB was amended by SAB 101B, which defers the
effective date for all registrants with fiscal years that begin after
December 15, 1999 to allow for the option of implementing no later than
the fourth quarter of fiscal 2000. Our management has reviewed the
impact of SAB No. 101 on our financial statements, and does not believe
that its adoption will have a material impact on our financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
Statement was amended by SFAS No. 137, which defers the effective date
to all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS No. 133 is effective for our first quarter in the fiscal year
beginning February 4, 2001 and we do not expect it to have a material
effect on our financial position or results of operations.
F-7
<PAGE>
(3) Revolving Credit Facility
In March 2000, we entered into a new $50.0 million revolving credit
facility with a financial institution and terminated a prior revolving
credit facility. Under the new revolving credit facility we may borrow
up to 70% of our eligible inventory and 85% of our eligible accounts
receivables, as defined, up to $50.0 million. The new credit facility
also provides a $5.0 million sub-facility for letters of credit. As of
July 29, 2000, interest on the credit facility is at the prime rate, or
at our election, LIBOR plus 1.50%. Under the terms of the new credit
facility, the interest rate may increase or decrease subject to
earnings before interest, tax obligations, depreciation and
amortization expense (EBITDA), as defined, on a rolling four fiscal
quarter basis. Accordingly, prime rate borrowings could range from
prime to prime plus 0.50% and LIBOR borrowings from LIBOR plus 1.50% to
LIBOR plus 2.50%. The new credit facility expires on March 3, 2003,
subject to automatic one-year renewal periods, unless terminated
earlier by either party. We are obligated to pay fees equal to 0.125%
per annum on the unused amount of the new credit facility. The new
credit facility is secured by a first lien on accounts receivable and
inventory and requires us to maintain specified levels of tangible net
worth in the event that our borrowing availability is less than a
specified amount.
At July 29, 2000, based on eligible inventory and accounts receivable,
we had $42.3 million available to borrow under the revolving credit
facility. Of the $42.3 million available to borrow, we had a $7.0
million 30-day LIBOR loan outstanding and the effective interest rate
was 8.15%.
(4) Long-term Debt
As of July 29, 2000, we had outstanding long-term indebtedness, less
current maturities, of $10.6 million. The long-term indebtedness
consists of the New Junior Subordinated Notes, which are non-interest
bearing and are reflected on our balance sheets at the present value
using a discount rate of 10%. As of July 29, 2000, the New Junior
Subordinated Notes had a face value of $16.3 million and a related
unamortized discount of $4.7 million, resulting in a net carrying value
of $11.6 million. The discount is amortized to interest expense as a
non-cash charge until the notes are paid in full. We made a principal
payment on the New Junior Subordinated Notes of $1.0 million in
December 1999. Additional principal payments are scheduled on December
31, 2000 ($1.0 million), December 31, 2001 and December 31, 2002 ($2.0
million), December 31, 2003 and December 31, 2004 ($3.0 million) and on
May 28, 2005 ($5.3 million).
F-8
<PAGE>
(5) Earnings per Share
We compute earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." Under the provisions of SFAS No. 128, basic
earnings per share are computed based on the weighted average shares
outstanding. Diluted earnings per share are computed based on the
weighted average shares outstanding and potentially dilutive common
equivalent shares.
At July 29, 2000 and July 31, 1999, we had 15,500 and no anti-dilutive
stock options outstanding, respectively.
(6) Provision for Income Taxes
We recorded a $1.2 million provision for income taxes for the 13 weeks
ended July 29, 2000. The provision for income taxes is based upon our
estimated effective tax rate for the entire fiscal year. Our estimated
effective tax rate is subject to ongoing review and evaluation.
(7) Stock Options and Warrants
On July 12, 2000, our common stock achieved a market price of $24.89 or
greater for 60 consecutive trading days. As a result, 92,961 stock
options with a market price hurdle of $24.89 became exercisable and we
recorded non-cash stock-based compensation expense of $2.8 million.
As of July 29, 2000, we had options to purchase 1,406,424 shares of our
common stock outstanding. Subsequent to July 29, 2000, 71,419 of these
stock options became exercisable when our common stock achieved a
market price of $33.19 or greater for 60 consecutive trading days.
Consequently, we will record non-cash stock-based compensation expense
of $2.1 million in the quarter ending October 28, 2000.
An additional 71,417 stock options will become exercisable once our
common stock has achieved and maintained a price of $49.78 for 60
consecutive trading days. At that time, we will be required to record
non-cash compensation expense in the minimum amount of $3.0 million.
At July 29, 2000, warrants to purchase 82,690 shares of our common
stock outstanding with an exercise price of $19.91 per share.
(8) Condemnation Award
In October 1998, the City of San Diego filed an action in San Diego
County Superior Court seeking condemnation of real property leased by
us for our store located in downtown San Diego, California. In July
2000, we reached a settlement with the City in which the City paid us
$1.2 million for our loss of goodwill, recovery for the value of
property, plant and equipment abandoned and loss of operating income.
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 our
operations during the 13 and 26 weeks ended July 29, 2000 and July 31, 1999.
Results of Operations
The following discussion and analysis should be read in conjunction with our
Financial Statements and notes thereto included elsewhere in this Form 10-Q. As
of July 29, 2000, we operated 211 stores compared to 178 as of July 31, 1999.
13 Weeks Ended July 29, 2000 Compared to the 13 Weeks Ended July 31, 1999
Net sales were $116.7 million for the 13 weeks ended July 29, 2000 compared to
$91.9 million for the 13 weeks ended July 31, 1999, an increase of $24.7
million, or 26.9%. Comparable store sales increased 2.7%. We opened 11 new
stores and closed 3 stores during the current period.
Gross profit was $42.1 million for the 13 weeks ended July 29, 2000 compared to
$33.7 million for the 13 weeks ended July 31, 1999, an increase of $8.5 million,
or 25.2%. As a percentage of net sales, gross profit was 36.1% for the 13 weeks
ended July 29, 2000 compared to 36.6% for the 13 weeks ended July 31, 1999. The
gross profit percentage of 36.6% for the 13 weeks ended July 31, 1999 was
favorably impacted by approximately 80 basis points. This favorable impact was
the result of refinements in our costing of inventory in the second quarter of
last year. These refinements were related to the implementation of a new
merchandise software package installed in the first quarter of last year. Giving
effect for this improved costing information, gross profit margin for the 13
weeks ended July 29, 2000 improved 30 basis points to 36.1%. This improvement
was the result of improved merchandise mark-up and lower inventory shrink.
Selling and administrative expenses were $36.1million for the 13 weeks ended
July 29, 2000 compared to $29.3 million for the 13 weeks ended July 31, 1999, an
increase of $6.8 million, or 23.3%. The increase in spending was related to the
growth of new stores. As a percentage of net sales, selling and administrative
expenses were 31.0% for the 13 weeks ended July 29, 2000 and 31.9% for the 13
weeks ended July 31, 1999. The improvement in the selling and administrative
ratio was due to sales volume leverage.
Pre-opening expenses were $0.7 million for the 13 weeks ended July 29, 2000
compared to $1.1 million for the 13 weeks ended July 31, 1999, a decrease of
$0.4 million, or 38.1%. Pre-opening expenses were higher last year due to our
remodel program last year during which we completed 70 remodels.
3
<PAGE>
We recorded a non-recurring gain of $1.2 million for the 13 weeks ended July 29,
2000 related to a condemnation award from the City of San Diego for a store
located in downtown San Diego, California. See Note 8 of "Notes to Financial
Statements."
We recorded non-cash stock-based compensation expense of $2.8 million for the 13
weeks ended July 29, 2000 related to certain performance based stock options.
See Note 7 of "Notes to Financial Statements."
Interest expense was $0.5 million for the 13 weeks ended July 29, 2000 compared
to $0.7 million for the 13 weeks ended July 31, 1999, a decrease of $0.2
million. The decrease was due to lower average outstanding borrowings on our
revolving credit facility.
Income taxes were $1.2 million for the 13 weeks ended July 29, 2000 and $0.8
million for the 13 weeks ended July 31, 1999. Income taxes increased as a result
of higher taxable income versus the same period a year ago.
Net income was $1.7 million for the 13 weeks ended July 29, 2000 compared to
$1.2 million for the 13 weeks ended July 31, 1999. The increase in net income
was a result of the operating and other factors cited above.
26 Weeks Ended July 29, 2000 Compared to the 26 Weeks Ended July 31, 1999
Net sales were $225.1 million for the 26 weeks ended July 29, 2000 compared to
$177.0 million for the 26 weeks ended July 31, 1999, an increase of $48.0
million, or 27.1%. Comparable store sales increased 3.4%. We opened 36 new
stores and closed 12 stores during the current period.
Gross profit was $80.4 million for the 26 weeks ended July 29, 2000 compared to
$62.7 million for the 26 weeks ended July 31, 1999, an increase of $17.7
million, or 28.3%. As a percentage of net sales, gross profit was 35.7% for the
26 weeks ended July 29, 2000 compared to 35.4% for the 26 weeks ended July 31,
1999. The increase in gross profit as a percentage of net sales was primarily
attributable to a higher initial markup on merchandise purchases and lower
inventory shrink.
Selling and administrative expenses were $69.0 million for the 26 weeks ended
July 29, 2000 compared to $55.6 million for the 26 weeks ended July 31, 1999, an
increase of $13.4 million, or 24.1%. The increase in spending was related to the
growth of new stores. As a percentage of net sales, selling and administrative
expenses were 30.6% for the 26 weeks ended July 29, 2000 and 31.4% for the 26
weeks ended July 31, 1999. The improvement in the selling and administrative
expense ratio was due to sales volume leverage.
Pre-opening expenses were $2.4 million for the 26 weeks ended July 29, 2000
compared to $2.1 million for the 26 weeks ended July 31, 1999, an increase of
$0.3 million, or 14.4%. The increase in pre-opening expenses was related to
greater pre-opening expenses for 36 new stores this year versus 19 new store
openings and 70 remodels last year.
4
<PAGE>
We recorded a non-recurring gain of $1.2 million for the 26 weeks ended July 29,
2000 related to a condemnation award from the City of San Diego for a store
located in downtown San Diego, California. See Note 8 of "Notes to Financial
Statements."
We recorded non-cash stock-based compensation expense of $2.8 million for the 26
weeks ended July 29, 2000 related to certain performance based stock options.
See Note 7 of "Notes to Financial Statements."
We recorded a non-recurring gain in the amount of $1.2 million for the 26 weeks
ended July 29, 2000 related to a condemnation award from the City of San Diego
for a store located in downtown San Diego, California.
Interest expense was $0.8 million for the 26 weeks ended July 29, 2000 compared
to $1.2 million for the 26 weeks ended July 31, 1999, a decrease of $0.4
million. The decrease was due to lower average outstanding borrowings on our
revolving credit facility.
Income taxes were $2.3 million for the 26 weeks ended July 29, 2000 and $1.1
million for the 26 weeks ended July 31, 1999. Income taxes increased as a result
of higher taxable income versus the same period a year ago.
Net income was $3.3 million for the 26 weeks ended July 29, 2000 compared to
$1.5 million for the 26 weeks ended July 31, 1999. The increase in net income
was a result of the operating and other factors cited above.
Liquidity and Capital Resources
General
As of July 29, 2000, we had outstanding indebtedness and capital leases of $20.3
million.
We finance our operations through credit provided by vendors and other
suppliers, amounts borrowed under our $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
revolving credit facility are based on a percentage of eligible inventory and
accounts receivable, as defined, outstanding from time to time, as more fully
described in Note 3 of Notes to Financial Statements. At July 29, 2000, based on
our eligible inventory and accounts receivable, we had $42.3 million available
to borrow under our revolving credit facility. Of the $42.3 million available to
borrow, we had a $7.0 million 30-day LIBOR loan outstanding and the effective
interest rate was 8.15%.
Our management believes that our sources of cash, including the revolving credit
facility, will be adequate to finance operations, capital requirements and debt
obligations as they become due for at least the next twelve months. See Notes 3
and 4 of Notes to Financial Statements.
5
<PAGE>
Capital Expenditures
We anticipate capital expenditures of approximately $11.0 million during the
remainder of the current fiscal year ending February 3, 2001, which include
costs to open approximately 26 new stores, to construct a new distribution
center, to upgrade information systems and to renovate and expand our
administrative offices. Our management believes that internal cash flow and
borrowings under the revolving credit facility will be sufficient to fund future
capital expenditures.
Inflation
In general, we believe that inflation has had no recent material impact on
operations and none is anticipated in the next fiscal year.
Minimum Wage Increases
We employ, both in our stores and in our 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 and may
continue to increase the hourly wages that we must pay to our employees.
Historically, we have mitigated these increases through policies to manage our
ratio of wages to sales. However, we can make no assurances that these measures
and other steps taken will be adequate to control the impact of any hourly wage
increases in the future and they may have a negative impact on profitability in
the future.
Seasonality and Quarterly Fluctuations
We historically have realized our highest level of sales and income during the
third and fourth quarters of our fiscal year (the quarters ending in October and
January) as a result of the "Back to School" (August and September) and Holiday
(November and December) seasons. The seasonally lower sales in our first two
quarters (February through July), can result in losses during those quarters
even in years in which we will have full year profits.
Year 2000 Issue
The Year 2000 issue was the result of computer systems and software products
coded to accept only 2 digit entries in the date code field. This could have
resulted in system failure or the generation of erroneous data in systems that
do not properly recognize such information.
We diligently addressed the potential Year 2000 issue by utilizing both internal
and external resources as applicable, to identify, correct or reprogram our
internal systems for Year 2000 compliance. In fiscal 1999, we implemented a new
integrated software package to support future growth and to address issues
associated with the Year 2000 at a cost of approximately $2.8 million.
6
<PAGE>
To date, we have not experienced any significant business disruptions or system
failures as a result of the Year 2000 issue and none of our major vendors,
service providers and customers has reported substantial Year 2000 related
problems.
Although the Year 2000 event has occurred, and while there can be no assurance
that there will be no problems related to the Year 2000 issue after January 1,
2000, we believe we will not be adversely impacted by the Year 2000 issue.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995
In December 1995, Congress enacted the Private Securities Litigation Reform Act
of 1995. The Act contains amendments to the Securities Act of 1933 and the
Securities Exchange Act of 1934 which provide protection from liability in
private lawsuits for "forward-looking" statements made by specified persons. We
desire to take advantage of the "safe harbor" provisions of the Act.
Certain statements in this Form 10-Q, or in documents incorporated by reference
into this Form 10-Q, are forward-looking statements. Those forward-looking
statements are subject to uncertainties that may cause the actual results to
differ from the results anticipated by the forward-looking statements. Factors
which may cause actual results to differ from those anticipated by
forward-looking statements include, among others, general economic and business
conditions (both nationally and in the regions in which we operate); government
regulations (including regulations regarding temporary immigration of
agricultural works and minimum wages of agricultural and other workers); claims
asserted against us; competition; changes in our business strategy or
development plans; difficulties attracting and retaining qualified personnel;
the inability to obtain adequate quantities of merchandise at favorable prices;
and the other factors described in our 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 that we anticipate will be realized or that they will
have the expected effects on our business or operations.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk on our fixed rate debt obligations. At July
29, 2000, our fixed rate debt obligations totaled $16.3 million. The fixed rate
debt obligations are non-interest bearing and are discounted at a rate of 10%,
resulting in a net carrying value of $11.6 million. Maturities are $1.0 million,
$2.0 million, $2.0 million, $3.0 million, $3.0 million and $5.3 million in
fiscal year 2000, 2001, 2002, 2003, 2004 and 2005, respectively. While generally
an increase in market interest rates will decrease the value of this debt, and
decreases in rates will have the opposite effect, we are unable to estimate the
impact that interest rate changes will have on the value of this debt as there
is no active public market for the debt and we are unable to determine the
market interest rate at which alternate financing would have been available at
July 29, 2000.
7
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
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
Our annual meeting of stockholders was held on June 27, 2000. H. Whitney Wagner
was elected a director at the meeting with 10,673,639 votes cast for and 663,785
votes withheld. Other directors whose terms of office continued after the
meeting were as follows: Peter V. Handal, Ira Neimark, Ronald Rashkow, Michael
M. Searles and Wm. Robert Wright II.
Other matters voted on and approved at the meeting and the results of those
votes were as follows:
To approve the Factory 2-U Stores, Inc. Employee Stock Purchase Plan
Votes for: 10,023,015
Votes against: 318,718
Withheld: 18,212
To approve an amendment to the Amended and Restated Factory 2-U Stores,
Inc. 1997 Stock Option Plan which increases by 350,000 the number of
shares of common stock issuable upon exercise of options from 1,807,980
to 2,157,980
Votes for: 6,816,533
Votes against: 3,317,844
Withheld: 225,568
Ratification of Arthur Andersen LLP as independent accountants
Votes for: 10,782,276
Votes against: 538,616
Abstentions: 16,041
8
<PAGE>
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.
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 7, 2000
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>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
13 weeks ended 26 weeks ended
-------------- --------------
July 29, 2000 July 31, 1999 July 29, 2000 July 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 1,661 $ 1,211 $ 3,263 $ 1,545
Weighted average number of common shares
outstanding 12,492 12,159 12,452 12,133
Effect of dilutive securities:
Warrants that are common stock 38 36 29 18
equivalents
Options that are common stock equivalents 500 643 448 556
Adjusted common shares outstanding used for
diluted computation 13,030 12,838 12,929 12,707
Earnings per share:
Basic $ 0.13 $ 0.10 $ 0.26 $ 0.13
Diluted $ 0.13 $ 0.09 $ 0.25 $ 0.12
</TABLE>
12
<PAGE>
