10-Q 1 0001.txt QUARTERLY REPORT FOR 2ND QUARTER FYE 2/3/2001 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. 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 PART I Item 1. Financial Statements FACTORY 2-U STORES, INC. Balance Sheets (in thousands, except share data)
July 29, January 29, 2000 2000 ---------------- ----------------- (Unaudited) 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 ============ ===========
(continued) F-1 FACTORY 2-U STORES, INC. Balance Sheets (in thousands, except share data) (continued)
July 29, January 29, 2000 2000 ---------------- ----------------- (Unaudited) 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 =========== ===========
The accompanying notes are an integral part to these financial statements. F-2 FACTORY 2-U STORES, INC. Statements of Operations (in thousands, except per share data) (Unaudited)
13 Weeks Ended ---------------------------------- July 29, July 31, 2000 1999 --------------- ---------------- 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
The accompanying notes are an integral part to these financial statements. F-3 FACTORY 2-U STORES, INC. Statements of Operations (in thousands, except per share data) (Unaudited)
26 Weeks Ended ----------------------------------- July 29, July 31, 2000 1999 --------------- ------------------ 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
The accompanying notes are an integral part to these financial statements. F-4 FACTORY 2-U STORES, INC. Statements of Cash Flows (in thousands) (Unaudited)
26 Weeks Ended ------------------------------- July 29, July 31, 2000 1999 ----------------- --------------- 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) ----------------- --------------
(continued) F-5 FACTORY 2-U STORES, INC. Statements of Cash Flows (in thousands) (Continued)
26 Weeks Ended ------------------------------------- July 29, July 31, 2000 1999 ----------------- ----------------- 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
The accompanying notes are an integral part to these financial statements. F-6 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 (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 (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 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 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 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 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 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 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 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 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 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 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE (in thousands, except per share data)
13 weeks ended 26 weeks ended -------------- -------------- July 29, 2000 July 31, 1999 July 29, 2000 July 31, 1999 ------------- ------------- ------------- ------------- 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
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