-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lush93YfKH/OPajMVggwg1J/dv0/GwpKhWyrkE05yt6NHrACOXNhLjWKIRAopIlO StwFF4NmQRJi5hIk9xp66w== 0000813775-00-000013.txt : 20001212 0000813775-00-000013.hdr.sgml : 20001212 ACCESSION NUMBER: 0000813775-00-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001028 FILED AS OF DATE: 20001211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FACTORY 2 U STORES INC CENTRAL INDEX KEY: 0000813775 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 510299573 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10089 FILM NUMBER: 787017 BUSINESS ADDRESS: STREET 1: 4000 RUFFIN ROAD STREET 2: 6TH FLR CITY: SAN DIEGO STATE: CA ZIP: 92123-1866 MAIL ADDRESS: STREET 1: 4000 RUFFIN ROAD STREET 2: 6TH FLOOR CITY: SAN DIEG STATE: CA ZIP: 92123-1866 FORMER COMPANY: FORMER CONFORMED NAME: FAMILY BARGAIN CORP DATE OF NAME CHANGE: 19940202 FORMER COMPANY: FORMER CONFORMED NAME: DRS INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LONGWOOD GROUP LTD DATE OF NAME CHANGE: 19920527 10-Q 1 0001.txt QUARTERLY REPORT FOR 3RD QUARTER FYE 2/3/2001 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 ------------------------------- ---------- (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. 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 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 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 ------- ------ 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 ------- ------- 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) -------- -------- Total stockholders' equity 63,661 46,430 ------- ------- Total liabilities and stockholders'equity $ 160,432 $ 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 -------------------------------- October 28, October 30, 2000 1999 -------------- --------------- Net sales $ 136,831 $ 104,551 Cost of sales 87,874 67,191 -------- -------- 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 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 ------- ------- 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 ------- ------- Operating income 12,493 7,335 Interest expense, net 1,264 1,824 ------- ------- 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 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 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 ------- ------ Net cash provided by financing activities 15,192 12,073 ------- ------ 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 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 (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 (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 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 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 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 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 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 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 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 EXHIBIT INDEX Exhibit Number Description Page 11.1 Computation of per share income 11 27 Financial Data Schedule (for EDGAR filing only) 12 10 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE (in thousands, except per share data)
13 weeks ended 39 weeks ended -------------- -------------- October 28, 2000 October 30, 1999 October 28, 2000 October 30, 1999 ---------------- ---------------- ---------------- ---------------- 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
11 EX-27 2 0002.txt FDS --
5 This schedule contains summary financial information extracted from the Balance Sheet and Statement of Operations as of and for the 39 weeks ended October 28, 2000 and is qualified in its entirety by reference to such financial statements as included in the Company's Quarterly Report on Form 10-Q. 0000813775 Factory 2-U Stores, Inc. 1,000 9-MOS FEB-03-2001 JUL-29-2000 OCT-28-2000 4,530 0 0 0 77,436 89,538 61,297 22,719 160,432 68,324 0 0 0 127 63,534 160,432 361,884 361,884 232,567 232,567 116,824 0 1,264 11,229 2,130 9,099 0 0 0 9,099 0.73 0.70
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