UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2000
----------------
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
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(Address of principal executive office) (Zip Code)
(858) 627-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
The number of shares outstanding of the registrant's of common stock, as of
October 28, 2000, was 12,738,280 shares.
<PAGE>
FACTORY 2-U STORES, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Factory 2-U Stores, Inc. Balance Sheets as of October 28, 2000
(Unaudited) and January 29, 2000 ...................................F-1
Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
13 weeks ended October 28, 2000 and October 30, 1999................F-3
Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
39 weeks ended October 28, 2000 and October 30, 1999 ...............F-4
Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
39 weeks ended October 28, 2000 and October 30, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...........7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 8
Item 2. Changes in Securities and Use of Proceeds.............................8
Item 3. Defaults Upon Senior Securities.......................................8
Item 4. Submission of Matters to a Vote of Security Holders...................8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K .....................................8
Signatures ....................................................9
Exhibit Index ...................................................10
2
<PAGE>
PART I
Item 1. Financial Statements
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
October 28, January 29,
2000 2000
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash $ 4,530 $ 9,473
Merchandise inventory 77,436 35,048
Prepaid expenses and other assets 4,622 2,291
Deferred income taxes 2,950 2,184
------- -------
Total current assets 89,538 48,996
Leasehold improvements and equipment,
net of accumulated depreciation
and amortization 38,578 27,425
Deferred income taxes 2,756 1,032
Other assets 1,256 1,507
Excess of cost over net assets acquired,
less accumulated amortization of
$11,341 and $10,139 at October 28, 2000 and
January 29, 2000, respectively 28,304 29,506
------- ------
Total assets $ 160,432 $ 108,466
=========== ===========
(continued)
F-1
<PAGE>
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
(continued)
October 28, January 29,
2000 2000
-------------- --------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,177 $ 1,251
Accounts payable 43,998 19,994
Income taxes payable 3,128 4,235
Accrued expenses 20,021 22,275
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Total current liabilities 68,324 47,755
Revolving credit facility 13,000 -
Long-term debt, less current maturities 10,926 10,067
Capital leases and other long-term obligations 1,439 1,658
Deferred rent 3,082 2,556
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Total liabilities 96,771 62,036
Stockholders' equity:
Common stock, $0.01 par value; 35,000,000 shares
authorized, 12,738,280 and 12,390,817 shares
issued and outstanding at October 28, 2000
and January 29, 2000, respectively 127 124
Stock subscription notes receivable (2,425) (2,710)
Additional paid-in capital 115,935 108,091
Accumulated deficit (49,976) (59,075)
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Total stockholders' equity 63,661 46,430
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Total liabilities and stockholders'equity $ 160,432 $ 108,466
============ ===========
The accompanying notes are an integral part to these financial statements.
F-2
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FACTORY 2-U STORES, INC.
Statements of Operations
(in thousands, except per share data)
(Unaudited)
13 Weeks Ended
--------------------------------
October 28, October 30,
2000 1999
-------------- ---------------
Net sales $ 136,831 $ 104,551
Cost of sales 87,874 67,191
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Gross profit 48,957 37,360
Selling and administrative expenses
(exclusive of non-cash stock-based
compensation expense shown below) 38,759 30,392
Pre-opening expenses 1,548 770
Amortization of intangibles 482 590
Stock-based compensation expense 2,056 2,094
------ ------
Operating income 6,112 3,514
Interest expense, net 441 622
------ ------
Income before income taxes 5,671 2,892
Income tax (benefit)/ provision (165) 1,186
--------- -------
Net income $ 5,836 $ 1,706
=========== ===========
Earnings per share:
Basic $ 0.46 $ 0.14
Diluted $ 0.44 $ 0.13
Weighted average common shares outstanding:
Basic 12,686 12,230
Diluted 13,168 13,022
The accompanying notes are an integral part to these financial statements.
F-3
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Operations
(in thousands, except per share data)
(Unaudited)
39 weeks Ended
--------------------------------
October 28, October 30,
2000 1999
--------------- ---------------
Net sales $ 361,884 $ 281,581
Cost of sales 232,567 181,571
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Gross profit 129,317 100,010
Selling and administrative expenses
(exclusive of non-cash stock-based
compensation expense shown below) 107,717 85,978
Pre-opening expenses 3,910 2,834
Amortization of intangibles 1,630 1,769
Condemnation award (1,240) -
Stock-based compensation expense 4,807 2,094
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Operating income 12,493 7,335
Interest expense, net 1,264 1,824
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Income before income taxes 11,229 5,511
Income taxes 2,130 2,259
------- -------
Net income $ 9,099 $ 3,252
=========== ===========
Earnings per share:
Basic $ 0.73 $ 0.27
Diluted $ 0.70 $ 0.25
Weighted average common shares outstanding:
Basic 12,530 12,157
Diluted 13,009 12,804
The accompanying notes are an integral part to these financial statements.
F-4
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
(Unaudited)
39 weeks Ended
-------------------------------
October 28, October 30,
2000 1999
--------------- ---------------
Cash flows from operating activities:
Income from operating activities $ 9,099 $ 3,252
Adjustments to reconcile income to net cash
provided by (used in) operating activities:
Depreciation 7,433 4,776
Amortization of intangibles 1,630 1,769
Amortization of debt discount 858 848
Loss on disposal of equipment 554 464
Deferred rent expense 596 515
Stock-based compensation expense 4,807 2,094
Other non-cash items 122 83
Changes in operating assets and liabilities:
Merchandise inventory (42,388) (22,880)
Prepaid expenses and other assets (4,999) (1,324)
Accounts payable 24,004 14,115
Accrued expenses and other liabilities (4,746) (2,200)
------------ ------------
Net cash provided by (used in)
operating activities (3,030) 1,512
------------ ------------
Cash flows used in investing activities:
Purchase of leasehold improvements
and equipment (17,105) (12,368)
------------ ------------
Net cash used in investing activities (17,105) (12,368)
------------ ------------
(continued)
F-5
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
(Continued)
39 weeks Ended
----------------------------------
October 28, October 30,
2000 1999
-------------- -------------
Cash flows from financing activities:
Borrowings on revolving credit facility 102,201 316,293
Payments on revolving credit facility (89,201) (304,668)
Payments on notes payable and
capital lease obligations (207) (1,335)
Repurchase of warrants - (457)
Proceeds from exercise of
stock options and warrants 2,389 2,038
Payments of deferred financing costs (275) -
Payments of stock subscription notes receivable 285 202
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Net cash provided by financing activities 15,192 12,073
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Net increase (decrease) in cash (4,943) 1,217
Cash at the beginning of the period 9,473 3,124
------- -------
Cash at the end of the period $ 4,530 $ 4,341
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 424 $ 934
Income taxes $ 5,628 $ 3,021
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 39 weeks ended October 28, 2000 and October 30,
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 periods 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 Nos. 137 and 138, which defers the
effective date to all fiscal quarters of fiscal years beginning after
June 15, 2000 and clarifies certain provisions of SFAS No. 133,
respectively. 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
receivable, as defined, up to $50.0 million. The new credit facility
includes a $5.0 million sub-facility for letters of credit. As of
October 28, 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 October 28, 2000, based on eligible inventory and accounts
receivable, we were eligible to borrow $50.0 million under the
revolving credit facility, of which $13.0 million was outstanding at
the end of the period. At October 28, 2000, we had a balance of $7.0
million outstanding at a prime rate of 9.5% and a $6.0 million 30-day
LIBOR loan outstanding with an effective interest rate of 8.12%.
(4) Long-term Debt
As of October 28, 2000, we had outstanding long-term indebtedness, less
current maturities, of $10.9 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 October 28, 2000, the New Junior
Subordinated Notes had a face value of $16.3 million and a related
unamortized discount of $4.4 million, resulting in a net carrying value
of $11.9 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 October 28, 2000 and October 30, 1999, we had 40,750 and
37,750 anti-dilutive stock options outstanding, respectively.
(6) Provision for Income Taxes
For the 13 weeks ended October 28, 2000, we recorded a $2.3 million
provision for income taxes, which is based upon our estimated effective
tax rate for the entire fiscal year. This was offset by a favorable
adjustment of $2.5 million to our income tax provision for a reduction
in the Company's tax valuation allowance. Our estimated effective tax
rate is subject to ongoing review and evaluation.
(7) Stock Options and Warrants
As of October 28, 2000, we had options to purchase 1,284,839 shares of
our common stock outstanding.
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. On
August 22, 2000, our common stock achieved a market price of $33.19 or
greater for 60 consecutive trading days. As a result, 71,419 stock
options with a market price hurdle of $33.19 became exercisable and we
recorded non-cash stock-based compensation expense of $2.1 million. An
additional 65,957 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 $2.8 million.
At October 28, 2000, warrants to purchase 82,690 shares of our common
stock were 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 39 weeks ended October 28, 2000 and October 30,
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 October 28, 2000, we operated 231 stores compared to 187 as of October 30,
1999.
13 Weeks Ended October 28, 2000 Compared to the 13 Weeks Ended October 30, 1999
Net sales were $136.8 million for the 13 weeks ended October 28, 2000 compared
to $104.6 million for the 13 weeks ended October 30, 1999, an increase of $32.3
million, or 30.9%. Comparable store sales increased 7.0%. We opened 20 new
stores and none were closed during the current period.
Gross profit was $49.0 million for the 13 weeks ended October 28, 2000 compared
to $37.4 million for the 13 weeks ended October 30, 1999, an increase of $11.6
million, or 31.0%. As a percentage of net sales, gross profit was 35.8% for the
13 weeks ended October 28, 2000 compared to 35.7% for the 13 weeks ended October
30, 1999. Our gross margin percentage improved due to lower markdown volume net
of higher distribution and marking costs.
Selling and administrative expenses were $38.8 million for the 13 weeks ended
October 28, 2000 compared to $30.4 million for the 13 weeks ended October 30,
1999, an increase of $8.4 million, or 27.5%. The increase in spending was
related to new store growth. As a percentage of net sales, selling and
administrative expenses were 28.3% for the 13 weeks ended October 28, 2000 and
29.1% for the 13 weeks ended October 30, 1999. The improvement in the selling
and administrative ratio was primarily due to sales volume leverage.
Pre-opening expenses were $1.5 million for the 13 weeks ended October 28, 2000
compared to $0.8 million for the 13 weeks ended October 30, 1999, an increase of
$0.8 million, or 101.0%. The increase in pre-opening expenses was primarily due
to higher pre-opening expenses incurred for 20 new store openings in the current
period versus 15 new store openings last year. In addition, we recorded $0.3
million in the current period associated with the opening of our new
distribution center in Lewisville, Texas. We expect to incur an additional $0.5
million to $0.7 million in the fourth quarter of fiscal 2000 related to the
opening of this new distribution center. The new distribution center is expected
to be fully operational in February 2001.
We recorded non-cash stock-based compensation expense of $2.1 million for each
of the 13 weeks ended October 28, 2000 and October 30, 1999, related to certain
performance based stock options. See Note 7 of "Notes to Financial Statements."
3
<PAGE>
Interest expense was $0.4 million for the 13 weeks ended October 28, 2000
compared to $0.6 million for the 13 weeks ended October 30, 1999, a decrease of
$0.2 million. The decrease was due to lower average outstanding borrowings on
our revolving credit facility.
Income tax was a $0.2 million benefit for the 13 weeks ended October 28, 2000
compared to the income tax provision of $1.2 million for the 13 weeks ended
October 30, 1999. In the current period, we recorded a $2.3 million provision
for income taxes versus $1.2 million for the 13 weeks ended October 30, 1999.
This increase is the result of higher taxable income versus the same period a
year ago. During the current period, the $2.3 million provision for income taxes
was offset by a favorable adjustment of $2.5 million to our income tax provision
for a reduction in our tax valuation allowance.
Net income was $5.8 million for the 13 weeks ended October 28, 2000 compared to
$1.7 million for the 13 weeks ended October 30, 1999. The increase in net income
was a result of the operating and other factors cited above.
39 weeks Ended October 28, 2000 Compared to the 39 weeks Ended October 30, 1999
Net sales were $361.9 million for the 39 weeks ended October 28, 2000 compared
to $281.6 million for the 39 weeks ended October 30, 1999, an increase of $80.3
million, or 28.5%. Comparable store sales increased 4.7%. We opened 56 new
stores and closed 12 stores during the current period.
Gross profit was $129.3 million for the 39 weeks ended October 28, 2000 compared
to $100.0 million for the 39 weeks ended October 30, 1999, an increase of $29.3
million, or 29.3%. As a percentage of net sales, gross profit was 35.7% for the
39 weeks ended October 28, 2000 compared to 35.5% for the 39 weeks ended October
30, 1999. The improvement in gross margin was primarily attributable to a higher
initial markup on merchandise purchases and lower markdown volume.
Selling and administrative expenses were $107.7 million for the 39 weeks ended
October 28, 2000 compared to $86.0 million for the 39 weeks ended October 30,
1999, an increase of $21.7 million, or 25.3%. The increase in spending was
related to new store growth. As a percentage of net sales, selling and
administrative expenses were 29.8% for the 39 weeks ended October 28, 2000 and
30.5% for the 39 weeks ended October 30, 1999. The improvement in the selling
and administrative expense ratio was primarily due to sales volume leverage.
Pre-opening expenses were $3.9 million for the 39 weeks ended October 28, 2000
compared to $2.8 million for the 39 weeks ended October 30, 1999, an increase of
$1.1 million, or 38.0%. The increase in pre-opening expenses was related to
higher pre-opening expenses incurred for 56 new store openings this year versus
34 new store openings last year, as well as $0.3 million in the current period
associated with the opening of our new distribution center in Lewisville, Texas.
We expect to incur an additional $0.5 million to $0.7 million in the fourth
quarter of fiscal 2000 related to the opening of this new distribution center.
The new distribution center is expected to be fully operational in February
2001.
4
<PAGE>
We recorded a non-recurring gain of $1.2 million for the 39 weeks ended October
28, 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 related to certain
performance based stock options of $4.8 million and $2.1 million for the 39
weeks ended October 28, 2000 and October 30, 1999, respectively. In the current
period, we recorded non-cash stock-based compensation expense in the aggregate
amount of $4.8 million when stock options with market price hurdles of $24.89
and $33.19 became exercisable in July and August 2000. For the 39 weeks ended
October 30, 1999, we recorded non-cash stock-based compensation expense of $2.1
million when stock options with a market price hurdle of $19.91 became
exercisable in October 1999. See Note 7 of "Notes to Financial Statements."
Interest expense was $1.3 million for the 39 weeks ended October 28, 2000
compared to $1.8 million for the 39 weeks ended October 30, 1999, a decrease of
$0.6 million. The decrease was due to lower average outstanding borrowings on
our revolving credit facility.
Income taxes were $2.1 million for the 39 weeks ended October 28, 2000 and $2.3
million for the 39 weeks ended October 30, 1999. For the 39 weeks ended October
28, 2000, we recorded a $4.6 million provision for income taxes versus $2.3
million for the 39 weeks ended October 30, 1999. This increase is the result of
higher taxable income versus the same period a year ago. During the current
period, the $4.6 million provision for income taxes was offset by a favorable
adjustment of $2.5 million to our income tax provision for a reduction in our
tax valuation allowance.
Net income was $9.1 million for the 39 weeks ended October 28, 2000 compared to
$3.3 million for the 39 weeks ended October 30, 1999. The increase in net income
was a result of the operating and other factors cited above.
Liquidity and Capital Resources
General
As of October 28, 2000, we had outstanding indebtedness and capital leases of
$26.5 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 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 October 28, 2000, based on
eligible inventory and accounts receivable, we were eligible to borrow $50.0
million under the revolving credit facility, of which $13.0 million was
outstanding at the end of the period. At October 28, 2000, we had a balance of
$7.0 million outstanding at a prime rate of 9.5% and a $6.0 million 30-day LIBOR
loan outstanding with an effective interest rate of 8.12%.
5
<PAGE>
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."
Capital Expenditures
We anticipate capital expenditures of approximately $4.9 million during the
remainder of the current fiscal year ending February 3, 2001, which include
costs to open approximately 13 new stores, to complete the construction of a new
distribution center, to upgrade information systems and to renovate and expand
our administrative offices.
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;
the management of our growth; 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk on our fixed rate debt obligations. At
October 28, 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 $11.9 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 October 28, 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
None.
Item 5. Other Information
On June 28, 2000, Ira Neimark resigned as a member of our Board of
Directors. He remains a consultant to the Board of Directors. On September 21,
2000, H. Whitney Wagner resigned as a member of our Board of Directors to pursue
other interests. Neither Mr. Neimark nor Mr. Wagner resigned as a result of a
disagreement with us on any matter relating to our operations, policies or
practices.
On December 5, 2000, the Board elected to replace Mr. Wagner as a Class I
director with Willem de Vogel, whose term of office will extend until the annual
meeting of stockholders in 2003. Mr. De Vogel is a general partner of Three
Cities Fund II, L.P., one of our largest shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of per share loss (1 page)
27 Financial Data Schedule (1 page)
(b) Reports on Form 8-K
None.
8
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FACTORY 2-U STORES, INC.
Date: December 11, 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)
9
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EXHIBIT INDEX
Exhibit
Number Description Page
11.1 Computation of per share income 11
27 Financial Data Schedule (for EDGAR filing only) 12
10
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EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
-------------- --------------
October 28, 2000 October 30, 1999 October 28, 2000 October 30, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income $ 5,836 $ 1,706 $ 9,099 $ 3,252
Weighted average number of common
shares outstanding 12,686 12,230 12,530 12,157
Effect of dilutive securities:
Warrants that are common stock
equivalents 34 24 31 20
Options that are common stock
equivalents 448 768 448 627
Adjusted common shares outstanding used
for diluted computation 13,168 13,022 13,009 12,804
Earnings per share:
Basic $ 0.46 $ 0.14 $ 0.73 $ 0.27
Diluted $ 0.44 $ 0.13 $ 0.70 $ 0.25
</TABLE>
11
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