-----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, VdanHfR9tbJuMHwgtz9HaxvTUSiIOHGkX4ioFHAXKOn3z/ZDCuwJ5fRq1bdnmciZ Q13OlhxXYaNVXBkRXLb7AQ== 0000813775-01-500005.txt : 20010430 0000813775-01-500005.hdr.sgml : 20010430 ACCESSION NUMBER: 0000813775-01-500005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010203 FILED AS OF DATE: 20010427 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-K SEC ACT: SEC FILE NUMBER: 001-10089 FILM NUMBER: 1613110 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-K 1 form10k.txt FORM 10-K FOR FISCAL YEAR ENDED FEBRUARY 3, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended February 3, 2001 Commission File number 0-16309 ------- 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 Identification Number) Incorporation or Organization) 4000 Ruffin Road San Diego, California 92123 ----------------------- ----- (Address of Principal Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (858) 627-1800 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $0.01 par value None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value ----------------------------- (Title of Class) 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 fore 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. YES X NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] At April 13, 2001, the aggregate market value of the voting stock of the Registrant held by non-affiliates was approximately $218,355,062. At April 13, 2001, the Registrant had outstanding 12,773,776 shares of Common Stock, $0.01 par value per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Definitive Proxy Statement for its June 21, 2001 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the Registrant's fiscal year ended February 3, 2001. PART I Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and Management 18 Item 13. Certain Relationships and Related Transactions 19 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 19 2 PART I Item 1. Business THE COMPANY We operate a chain of off-price retail apparel and housewares stores in Alabama, Arizona, California, Louisiana, Nevada, New Mexico, Oklahoma, Oregon, Texas and Washington. We sell branded casual apparel for the family, as well as selected domestics and household merchandise at prices which generally are significantly lower than other discount stores. At February 3, 2001, we operated 243 stores under the name Factory 2-U. Prior to July 31, 1998, we operated through our wholly-owned subsidiaries, General Textiles and Factory 2-U, Inc. We acquired General Textiles (which was our principal operating subsidiary) in 1993. At that time, General Textiles was operating only the Family Bargain Center chain. In November 1995, we acquired Factory 2-U, Inc. and began to coordinate the purchasing, warehousing and delivery operations for the Family Bargain Center and Factory 2-U chains. In July 1998, we merged General Textiles and Factory 2-U, Inc. into a new corporation, General Textiles, Inc. In November 1998, we merged General Textiles, Inc. into ourselves, converted our previous three classes of stock into a single class of Common Stock and changed our name from Family Bargain Corporation to Factory 2-U Stores, Inc. Our stores average 15,000 total square feet and are located mostly in shopping centers. Our products include a broad range of family apparel, domestic goods and housewares. Our typical customers are families with average household income of approximately $35,000, who generally are profiled as discount store shoppers. Our merchandising strategy is to offer first quality recognizable national and discount store brands at a substantial discount, generally 20% to 50% below prices offered by the national discount chains. Our stores are well-lit and present the merchandise primarily on hanging fixtures. We also use strategically placed in-store signage to emphasize the savings and create increased customer awareness. OPERATIONS Operating Strategy We seek to be the leading off-price apparel, domestic goods and housewares retailer to families with more than the average number of children and whose household incomes approximate $35,000 in the markets we serve. The major elements of our operating strategy include: Provide Value to Customers on National and Discount Brand Merchandise: We emphasize providing value to our customers by selling merchandise found in national discount chains at savings of 20% to 50% below prices offered by the national discount chains. We buy excess inventory of recognized brands at bargain prices and pass along the savings to our customers. Target Under-Served Market Segments: Our stores target customers who are under-served in their markets. Typical customers are young, large families with a household income of approximately $35,000. Maximize Inventory Turns: We emphasize rapid inventory turn in our merchandise and marketing strategies because we believe it leads to increased profits and efficient use of capital. Merchandise presentation, an everyday low price strategy, frequent store deliveries and advertising programs all target rapid inventory turn. Expansion Plans Opening of New Stores: We plan to open 65 stores and close 4 stores in the fiscal year ending February 2, 2002 (fiscal 2001). We expect that approximately 60% of our new stores to be opened in fiscal 2001 will be 3 in new markets and the remaining new store growth will be in markets in which we currently operate. New market growth will predominantly be in the southeastern United States. During the fiscal year ended February 3, 2001 (fiscal 2000), we opened 70 new stores and closed 14 stores. During the period from February 4, 2001 through April 13, 2001, we opened 5 new stores and closed 1 store. The number of stores that we opened and closed each quarter during fiscal 2000, 1999 and 1998 were as follows:
Quarter ----------------------------------------------------------- First Second Third Fourth Fiscal Year Beginning Open Close Open Close Open Close Open Close Ending - ----------- --------- -------- ------- -------- -------- -------- -------- ------- -------- -------- 2000 187 25 (9) 11 (3) 20 - 14 (2) 243 1999 168 9 (8) 10 (1) 15 (6) 4 (4) 187 1998 166 - (4) 3 (3) 6 - - - 168
Our average store opening costs for equipment, fixtures, leasehold improvements and preopening expenses currently approximate $315,000. Our average initial inventory for a new store currently approximates $160,000, net of trade credit. Generally, during the two to three month grand opening period, our new stores achieve sales in excess of the sales of an average comparable mature store due to a higher level of advertising and, within six months, generate sales consistent with comparable mature store levels. Renovation Program: We plan to continue the renovation of our older stores. Our store renovations generally include installing new fixtures, redesigning layouts and refurbishing floors and walls. Our average cost to renovate a store currently approximates $50,000. During fiscal 2000, we renovated 5 stores and completed the conversion of our stores to the Factory 2-U name with the conversion of 18 stores. During fiscal 2001, we plan to renovate 8 to 10 stores. Distribution Centers: We opened a new 300,000 square-foot distribution center in Lewisville, Texas in February 2001. This new distribution center will service Texas, parts of New Mexico and new stores that we plan to open in the surrounding states. We also operate a distribution center in the San Diego area which consists of two facilities and a combined total square footage of 365,000 square feet. Generally, manufacturers ship goods directly to our distribution centers or, in the case of certain east coast vendors, to freight consolidators who then ship to our distribution centers. We generally ship merchandise from our distribution centers to our stores within two to three days of receipt utilizing the services of independent trucking companies. We do not typically store merchandise at our distribution centers from season to season. We are currently developing plans to relocate and expand our current distribution center in San Diego, California. This new distribution center would be approximately 500,000 to 600,000 square feet and serve our west coast, Arizona, Nevada and New Mexico markets. It would become operational in our second quarter of fiscal 2002. Buying and Distribution We purchase merchandise from domestic manufacturers, jobbers, importers and other vendors. Our payment terms are typically net 30 days. We continually add new vendors and do not maintain long-term or exclusive purchase commitments or agreements with any vendor. We believe that there are a substantial number of additional sources of supply of first quality, national and discount brand merchandise that will meet our increased inventory needs as we grow. In-Season Goods: Unlike traditional department stores and discount retailers, which primarily purchase merchandise in advance of the selling season (for example, back-to-school clothing is purchased by March), we purchase approximately 80% of our merchandise in-season (i.e., during the selling season). In-season purchases generally represent closeouts of vendors' excess inventories remaining after the traditional wholesale selling season and are often created by other retailers' order cancellations. Sometimes vendors manufacture to meet anticipated demand rather than known demand, anticipating that we are a potential buyer of the excess inventory, typically at prices below wholesale. We believe that in-season buying 4 practices are well suited to our customers, who tend to make purchases on an as-needed basis later into a season. Our in-season buying practice is facilitated by our ability to process and ship merchandise through our distribution centers to our stores, usually within two or three days of receipt from the vendor, and to process a large number of relatively small purchase orders. We believe that we are a desirable customer for vendors seeking to liquidate inventory because we can take immediate delivery of large quantities of in-season goods. We rarely request markdown concessions, advertising allowances or special shipping and packing requirements, but insist on the lowest possible price. We are able to pass these low prices on to our customers. Merchandising and Marketing Our merchandise selection, pricing strategies and store formats are designed to reinforce the concept of value and maximize customer enjoyment of the shopping experience. Our stores offer customers a diverse selection of first quality, in-season merchandise at prices which generally are lower than those of competing discount and off-price stores in their local markets. Nearly all of our stores carry brand name labels, including nationally recognized brands. We deliver new merchandise to our stores at least weekly to encourage frequent shopping trips by our customers and to maximize our inventory turn. As a result of our purchasing practices, store inventory may not always include a full range of colors, sizes and styles in a particular item. We believe, however, that price, quality and product mix are more important to our customers than the availability of a specific item at a given time. We emphasize inventory turn in our merchandising and marketing strategy. Our merchandise presentation, pricing below discounters, frequent store deliveries, staggered vendor shipments, promotional advertising, store-tailored distribution and prompt price reductions on slow moving items are all designed to increase inventory turn. We believe that the pace of our inventory turn leads to increased profits, reduced inventory markdowns, efficient use of capital and customer urgency to make purchase decisions. At our administrative headquarters we receive daily store sales and inventory information from point-of-sale equipment located at each of our stores. This data is reported by stock keeping unit (the "SKU"), permitting us to tailor purchasing and distribution decisions. Our chain-wide computer network also facilitates communications between our administrative headquarters and our stores, enabling corporate management to provide store management with timely pricing and distribution information. Our stores are characterized by easily accessible merchandise displayed on hanging fixtures and open shelves in well-lit areas. Our prices are clearly marked, usually in whole dollars, with the comparative retail-selling price often noted on the price tag. Our major advertising vehicle is the use of a full-color print tab showing actual photos of our merchandise. Our print media is principally delivered to consumers through marriage-mail drops and to a lesser extent, newspaper inserts. Some of our other advertising programs include radio and outdoor billboard promotional activities. Our stores emphasize customer satisfaction to develop customer loyalty and generate repeat business. If a customer is not completely satisfied with any purchase, we will make a full refund or exchange. Most of our sales are for cash, although we accept checks, debit and credit cards. We do not issue credit cards, but do offer layaway and gift card programs. Our layaway program is important to our customers, many of whom do not possess credit cards, because it permits them to pay for purchases over time. Approximately 60% of our sales occur in our third and fourth quarters, during the back-to-school (August and September) and Holiday (November and December) seasons. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Seasonality and Quarterly Fluctuations." 5 Our Stores As of April 13, 2001, we operated 247 stores located in 10 states. Our stores are primarily located in rural and lower income suburban communities and, to a lesser extent, in metropolitan areas. Most of our stores are located in strip shopping centers, where occupancy costs are more favorable. As of April 13, 2001, our stores were located as follows: Strip State Center Metropolitan Other Total ----- ------ ------------ ----- ----- Alabama 1 - - 1 Arizona 25 3 4 32 California 92 10 20 122 Louisiana 1 - - 1 Nevada 7 - - 7 New Mexico 9 - 1 10 Oklahoma 1 - 1 2 Oregon 9 - 5 14 Texas 31 - 10 41 Washington 13 2 2 17 -- - - -- 189 15 43 247 === == == === Our stores range in size from 6,000 square feet to 34,800 square feet, averaging 15,000 square feet. We generally lease previously occupied store sites on terms that we believe are more favorable than those available for newly constructed facilities. After we sign a new store lease, one of our new store opening teams prepares the store for opening by installing fixtures, signs, racks, dressing rooms, checkout counters, cash register systems and other items. An outside service team supervises the merchandising of the new store and trains the new store associates in proper merchandising procedures before the store is opened. We select store sites based on demographic analysis of the market area, sales potential, local competition, occupancy costs, operational fit and proximity to existing store locations. Once we take possession of a store site, it takes approximately eight weeks to open a new store. Our stores typically employ one store manager, two assistant store managers and fifteen to twenty sales associates, most of whom are part-time employees. We train new store managers in all aspects of store operations through our management-training program. Our other store personnel are trained on site. We often promote experienced assistant store managers to fill open manager positions. Our store management team participates in a bonus plan in which they are awarded bonuses upon achieving plan objectives. We believe that the bonus program is an important incentive for our key employees, helps reduce employee turnover and results in lower operating costs. We continually review store performance and from time to time close stores that do not meet our minimal performance criteria. The costs associated with closing stores, which consist primarily of inventory liquidation costs, provisions to write down assets to net realizable value, tear-down costs and the recognition of remaining lease obligations are charged to operations during the fiscal year in which the commitment is made to close a store. We maintain customary commercial liability, fire, theft, business interruption and other insurance policies. Competition We operate in a highly competitive marketplace. We compete with large discount retail chains, such as Wal-Mart, K-Mart, Target and Mervyn's, and with off-price chains, such as TJ Maxx, Ross Stores, Marshall's and MacFrugal's, some of which have substantially greater resources than ours. We also compete with independent and small chain retailers and flea markets (also known as "swap meets") which serve the same low and low-middle income market. We believe that we are well positioned to compete on the basis of the principal competitive factors in our markets, which are price, quality and site location. 6 Employees As of April 13, 2001, we had 5,397 employees (2,950 of whom were part-time employees). Of that total, 5,089 were store employees and store field management, 180 were executives and administrative employees and 128 were warehouse employees. None of our employees is subject to collective bargaining agreements and we consider relations with our employees to be good. Trademarks Except for the trade names "Factory 2-U" and "Family Bargain Center", which are federally registered trademarks, we do not have any material trademarks. Government Regulation Our operations are subject to various federal, state and local laws, regulations and administrative practices affecting our business, including those relating to equal employment and minimum wages. We believe we are in substantial compliance with all federal, state and local laws and regulations governing operations and we have obtained all material licenses and permits required for the operation of our business. We believe that the compliance burdens and risks relating to these laws and regulations do not have a material adverse effect on our business. Item 2. Properties As of April 13, 2001, we operated 247 retail stores located in Alabama, Arizona, California, Louisiana, Nevada, New Mexico, Oklahoma, Oregon, Texas and Washington, under various operating leases with third parties. Our store locations include malls, shopping centers, strip centers, downtown business districts, and stand-alone sites. Our store leases are separately negotiated. The typical lease for our stores is five years with renewal options in five-year increments. Approximately 98% of our leases are "triple net leases" under which we are required to reimburse landlords for insurance, real estate taxes and common area maintenance costs; however for many of those leases, we have negotiated reimbursement limitations on common area costs. Some of our leases require us to pay a minimum monthly rent and a percentage of sales in excess of a specified gross sales level. Our annual rent expense for the 243 stores open at February 3, 2001 was approximately $27.4 million. Our headquarters are located in a 269,000 square-foot multi-use facility at 4000 Ruffin Road, San Diego, California. This facility consists of 54,000 square feet of office space and 215,000 square feet of our San Diego distribution center. During fiscal 2000, we closed the 8,000 square-foot retail store previously located at the facility and converted the space to additional office space. Our lease on this facility expires in September 2005. The lease provides for annual base rent at an average of approximately $1.4 million over the lease term. We lease another 150,000 square feet of our San Diego distribution center at 7130 Miramar Road, San Diego, California. Our lease term expires in April 2002. The lease provides for annual base rent at an average of approximately $0.8 million over the primary lease term. In February 2001, we opened a new 300,000 square-foot distribution center at 1875 Waters Ridge Drive, Lewisville, Texas. Our lease expires in December 2007. The lease provides for annual base rent at an average of approximately $1.0 million over the lease term. 7 Item 3. Legal Proceedings On December 15, 2000, Pamela Jean O'Hara ("O'Hara"), a former employee in our Alameda, California store, filed a lawsuit against us, entitled "Pamela Jean O'Hara, Plaintiff vs. Factory 2-U Stores, Inc., et al., Defendants," Case No. 834123-5, in the Superior Court of the State of California for the County of Alameda (the "O'Hara Lawsuit"). On January 10, 2001, O'Hara and two other former employees in our Alameda store, filed a First Amended Complaint in the O'Hara Lawsuit. The First Amended Complaint in the O'Hara Lawsuit alleges that we violated the California Labor Code and Industrial Wage Commission Orders, as well as the California Unfair Competition Act, by failing to pay overtime to the plaintiffs. Plaintiffs purport to bring this action on behalf of themselves and all other store managers, assistant store managers and other undescribed "similarly-situated employees" in our California stores from December 15, 1996 to present. The First Amended Complaint seeks compensatory damages, interest, penalties, attorneys' fees and disgorged profits, all in unspecified amounts. The First Amended Complaint also seeks injunctive relief requiring payment of overtime to "non-exempt" employees. We believe that the O'Hara Lawsuit is meritless and are vigorously defending against it. On February 15, 2001, we filed an answer in which we denied the material allegations of the First Amended Complaint. The Court has scheduled a hearing on plaintiffs' anticipated motion for class certification for November 9, 2001. The Court has scheduled the trial for July 22, 2002. We are at all times subject to pending and threatened legal actions that arise in the normal course of business. In our opinion, based in part on the advice of legal counsel, the ultimate disposition of other current legal matters will not have a material adverse effect on our financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended February 3, 2001. 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our Common Stock is traded on the NASDAQ National Market under the symbol "FTUS." The following table sets forth the range of high and low sales prices on the NASDAQ National Market of the Common Stock for the periods indicated, as reported by NASDAQ. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. Common Stock ------------ High Low ------ ----- Fiscal 1999 ------------ First Quarter $18.75 $11.00 Second Quarter $27.25 $16.25 Third Quarter $34.13 $20.63 Fourth Quarter $30.00 $17.88 Fiscal 2000 ------------ First Quarter $34.63 $21.75 Second Quarter $41.50 $31.00 Third Quarter $43.13 $27.44 Fourth Quarter $45.19 $28.50 Fiscal Year Ending February 2, 2002 First Quarter (through April 13, 2001) $42.63 $21.00 As of February 3, 2001, we had approximately 370 stockholders of record and approximately 2,100 beneficial stockholders. We have never paid cash dividends on our Common Stock and do not anticipate paying cash dividends in the foreseeable future. The declaration and payment of any cash dividends on our Common Stock in the future will be determined by the Board of Directors in light of conditions then existing, including our earnings, financial condition, cash requirements and contractual, legal and regulatory restrictions relating to the payments of dividends and any other factors that our Board of Directors deems relevant. We are contractually prohibited from paying cash dividends on our Common Stock under the terms of our existing revolving credit facility without the consent of the lender. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Revolving Credit Facility." 9 Item 6. Selected Financial Data The selected financial data set forth below, except for Operating Data, is derived from our audited financial information and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Financial Statements, including the Notes, and Supplementary Data included in this Annual Report on Form 10-K.
Fiscal Year Ended ------------------------------------------------------------------- February 3, January 29, January 30, January 31, February 1, 2001(1) 2000 1999 1998 1997(1) ---- ---- ---- ---- ---- (in thousands, except per share and operating data) Statement of Operations Data Net sales $ 555,670 $ 421,391 $ 338,223 $ 300,592 $ 252,165 Operating income (loss) 31,868 22,753 10,464 5,097 (27,939) Income (loss) from continuing operations before income taxes and extraordinary items 30,322 20,481 6,275 (129) (36,564) Net income (loss) 21,264 12,442 2,269 (129) (37,390) Dividends on Series A Preferred Stock - - 2,593 3,456 3,509 Dividends on Series B Preferred Stock - - 2,210 2,661 - Inducement to convert preferred stock to common stock - - 2,804 - - Net income (loss) applicable to common 21,264 12,442 (5,338) (6,246) (40,899) stock Weighted average shares outstanding Basic 12,589 12,214 3,381 1,477 1,358 Diluted 13,066 12,864 3,381 1,477 1,358 Income (loss) before extraordinary item and discontinued operations applicable to common stock Basic 1.69 1.02 (0.77) (4.23) (29.50) Diluted 1.63 0.97 (0.77) (4.23) (29.50) Net income (loss) per common share(2) Basic 1.69 1.02 (1.58) (4.23) (30.12) Diluted 1.63 0.97 (1.58) (4.23) (30.12) Operating Data Number of stores 243 187 168 166 150 Total selling square footage 2,979,000 2,169,000 1,804,000 1,788,000 1,567,000 Sales per average selling square foot $ 211 $ 209 $ 192 $ 180 $ 172 Comparable store sales growth 4.4% 10.3% 10.9% 3.4% 5.3% Balance Sheet Data Working capital (deficit) $ 18,896 $ 1,241 $(9,179) $ (2,749) $ 248 Total assets 142,265 108,466 90,167 84,817 80,669 Long-term debt and revolving credit facility, including current portion 11,218 11,067 13,773 29,076 37,894 Stockholders' equity 79,737 46,430 27,765 17,218 11,208
- -------------------------------------------------------------------------------- (1) 53-week fiscal year. (2) In December 1997, we adopted SFAS No. 128, "Earnings Per Share." The statement specifies the computation, presentation, and disclosure requirements for basic earnings per share and diluted earnings per share. The statement requires retroactive adoption for all prior periods presented. Additionally, all prior periods presented have been restated giving effect to the reverse stock split that was effected during the fourth quarter of fiscal 1998. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the information set forth under "Selected Financial Data" and "Financial Statements and Supplementary Data." General During the past four fiscal years, a number of events occurred which have had a significant impact on our financial condition. In January 1997, an investment group advised by Three Cities Research, Inc. ("TCR"), purchased a controlling equity interest in us by acquiring all of the Common and Series A Preferred Stock held by our former chairman, vice chairman and chief executive officer and purchasing from us shares of newly authorized Series B Preferred Stock. Subsequent to the close of fiscal 1996, we sold additional shares of the Series B Preferred Stock to these investors, our directors and management. In connection with the change in control, three former directors resigned from the Board of Directors and three managing directors of TCR were appointed to serve on the Board. In March 1998, we appointed Michael M. Searles as the new President and Chief Executive Officer of our operating subsidiaries. Mr. Searles was elected a member of the Board of Directors in March 1998 and Chairman of the Board in November 1998. In July 1998, our two operating subsidiaries, General Textiles and Factory 2-U, Inc., were merged to form General Textiles, Inc. In November 1998, we merged General Textiles, Inc. into ourselves, converted our previous three classes of stock into a single class of Common Stock and changed our name from Family Bargain Corporation to Factory 2-U Stores, Inc. At that time, we had 11,306,000 shares of Common Stock outstanding. We undertook a rights offering and issued to our stockholders transferable rights to purchase an additional 800,000 shares of Common Stock for $13.00 per share. The TCR investors purchased approximately 798,000 shares. During fiscal 2000 and 1999, our operational focus was on improving the operating performance of existing stores and opening new stores. In fiscal 2000, we opened 70 new stores, closed 14 stores and renovated 5 stores. 11 Results of Operations We define our fiscal year by the calendar year in which most of the activity occurs (the fiscal year ended February 3, 2001 is referred to as fiscal 2000). The following table sets forth selected statement of operations data expressed as a percentage of net sales for the periods indicated:
Fiscal Year --------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------ Net sales 100.0% 100.0% 100.0% Cost of sales 64.5 64.3 65.7 --------------------------------------- Gross profit 35.5 35.7 34.3 Selling and administrative expenses 27.8 28.5 28.7 Pre-opening expenses 1.0 0.8 0.8 Amortization of intangibles 0.4 0.6 0.7 Condemnation award (0.2) - - Stock-based compensation expense 0.9 0.5 - Special charges - - 0.7 Merger costs - - 0.3 --------------------------------------- Operating income 5.7 5.4 3.1 Interest expense, net 0.3 0.5 1.2 --------------------------------------- Income before income taxes and extraordinary item 5.5 4.9 1.9 Income taxes 1.6 1.9 0.4 Extraordinary item, net of income tax benefit - - 0.8 --------------------------------------- Net income 3.8 3.0 0.7 Inducement to convert preferred stock to common stock - - 0.9 Preferred stock dividends - - 1.4 --------------------------------------- Net income (loss) applicable to common stock 3.8 3.0 (1.6) ---------------------------------------------------------------------------------------------------
Fiscal 2000 Compared to Fiscal 1999 As of February 3, 2001, we operated 243 stores compared to 187 as of January 29, 2000. In fiscal 2000, we opened 70 new stores and closed 14 stores. Net sales were $555.7 million for fiscal 2000 compared to $421.4 million for fiscal 1999, an increase of $134.3 million or 31.9%. Comparable store sales increased 4.4% in fiscal 2000 versus an increase of 10.3% in fiscal 1999. The increase in net sales was related to new store growth, an increase in comparable store sales and a 53rd week of sales in fiscal 2000. Comparable store sales increased as a result of increased customer traffic and average purchase. Gross profit was $197.3 million for fiscal 2000 compared to $150.4 million for fiscal 1999, an increase of $46.8 million or 31.1%. As a percentage of net sales, gross profit was 35.5% in fiscal 2000 compared to 35.7% in fiscal 1999. The increase in gross profit dollars was related to sales growth. The decrease in gross profit percentage was primarily attributable to higher outbound freight costs and higher distribution center processing costs due to the transfer of in-store marking to our distribution centers. Previously, in-store marking costs were included in selling and administrative expense. 12 Selling and administrative expenses were $154.4 million for fiscal 2000 compared to $120.0 million for fiscal 1999, an increase of $34.4 million or 28.7%. As a percentage of net sales, selling and administrative expenses were 27.8% for fiscal 2000 compared to 28.5% for fiscal 1999. Selling and administrative spending increased due to increased sales volume, new store growth, increased labor rates due to minimum wage increases and higher utility costs in certain operating areas. Selling and administrative expenses as a percentage of net sales decreased primarily due to sales volume leverage and lower corporate incentive bonus charges. Pre-opening expenses were $5.4 million for fiscal 2000 compared to $3.3 million for fiscal 1999, an increase of $2.1 million, or 64.1%. The increase in pre-opening expense spending was related to 70 new store openings this year versus 38 new store openings last year, as well as $1.0 million in fiscal 2000 associated with the opening of our new distribution center in Lewisville, Texas. The new distribution center became fully operational in February 2001. We recorded a non-recurring gain of $1.2 million during fiscal 2000 related to a condemnation award from the City of San Diego for a store located in downtown San Diego, California. We recorded non-cash stock-based compensation expense related to certain performance based stock options during fiscal 2000 in the amount of $4.8 million compared to $2.1 million for fiscal 1999. In fiscal 2000, we recorded non-cash stock-based compensation expense in the amounts of $2.7 million in July 2000 and $2.1 million in August 2000 when stock options with market price hurdles of $24.89 and $33.19, respectively, became exercisable. In fiscal 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. Interest expense, net was $1.5 million in fiscal 2000 compared to $2.3 million in fiscal 1999, a decrease of $0.7 million. The decrease was attributable to lower average borrowings under our revolving credit facility. Federal and state income taxes were $9.1 million in fiscal 2000 compared to $8.0 million in fiscal 1999, an increase of $1.0 million. Income taxes increased as a result of higher taxable income versus the same period a year ago, offset by a favorable adjustment of $2.9 million to our income tax provision during fiscal 2000 for a reduction in our tax valuation allowance and recognition of additional net operating loss carryforwards. Net income was $21.3 million in fiscal 2000 compared to $12.4 million in fiscal 1999. The increase in net income was a result of the operating and other factors cited above. Fiscal 1999 Compared to Fiscal 1998 As of January 29, 2000, we operated 187 stores compared to 168 as of January 30, 1999. In fiscal 1999, we opened 38 new stores and closed 19 stores. Net sales were $421.4 million for fiscal 1999 compared to $338.2 million for fiscal 1998, an increase of $83.2 million or 24.6%. Comparable store sales increased 10.3% in fiscal 1999 over the prior year. The increase in net sales was related to new store growth and an increase in comparable store sales which was due to an increased number of transactions and average purchase. Gross profit was $150.4 million for fiscal 1999 compared to $115.9 million for fiscal 1998, an increase of $34.5 million or 29.8%. As a percentage of net sales, gross profit was 35.7% in fiscal 1999 compared to 34.3% in fiscal 1998. The increase in gross profit as a percentage of net sales was primarily attributable to a higher initial markup on purchases and lower inventory shrinkage. Selling and administrative expenses were $120.0 million for fiscal 1999 compared to $97.1 million for fiscal 1998, an increase of $22.8 million or 23.5%. As a percentage of net sales, selling and administrative expenses were 28.5% for fiscal 1999 compared to 28.7% for fiscal 1998. Approximately $18.5 million of the increase was sales volume related. The increase in selling and administrative expenses was also 13 attributable to increased corporate employee and field supervisor expenses and information systems expenses. Selling and administrative expenses as a percentage of net sales decreased due to sales volume growth. Pre-opening expenses were $3.3 million for fiscal 1999 compared to $2.6 million for fiscal 1998, an increase of $0.7 million or 26.9%. The increase in pre-opening expenses was related to higher pre-opening expenses incurred for 38 new store openings during fiscal 1999 versus 9 new store openings during fiscal 1998. We recorded non-cash stock-based compensation expense during fiscal 1999 in the amount of $2.1 million, which was related to certain stock options with a market price hurdle which became exercisable. We recorded a special charge of $2.4 million in fiscal 1998 in connection with hiring our current President and CEO. Merger costs of $1.0 million recorded in fiscal 1998 represented the expenses associated with the recapitalization, including the merger of Factory 2-U, Inc. and General Textiles into General Textiles, Inc. and the merger of General Textiles, Inc. into ourselves. Interest expense, net was $2.3 million in fiscal 1999 compared to $4.2 million in fiscal 1998, a decrease of $1.9 million. The decrease was attributable to lower average borrowings under our revolving credit facility and the exchange of the subordinated and junior subordinated notes for new notes which resulted in a lower debt discount amortization. See "Liquidity and Capital Resources - Subordinated Notes." Federal and state income taxes were $8.0 million in fiscal 1999 compared to $1.3 million in fiscal 1998, an increase of $6.8 million. Income taxes increased as a result of higher taxable income versus the same period a year ago. We incurred an extraordinary charge of $2.8 million in fiscal 1998 because notes payable associated with the General Textiles bankruptcy were extinguished early and new subordinated notes were issued with more favorable terms. See "Liquidity and Capital Resources - Subordinated Notes." Net income was $12.4 million in fiscal 1999 compared to net income before preferred stock dividends of $2.3 million in fiscal 1998. No dividends were paid or accreted in fiscal 1999 as a result of the recapitalization discussed above. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - General." Net income applicable to common stock was $12.4 million in fiscal 1999 compared to a net loss applicable to common stock of $5.3 million in fiscal 1998. Total preferred stock dividends in fiscal 1998 were $4.8 million, which included non-cash dividends on the Series B Preferred Stock of $2.2 million. The increase in net income was a result of the operating and other factors cited above. Liquidity and Capital Resources General 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 inventories and receivables, as defined, outstanding from time-to-time, as more fully described below. During fiscal 2000 and 1999, net cash provided by operating activities was $17.3 million and $24.5 million, respectively. In fiscal 2000 and 1999, cash used in investing activities was $23.8 million and $16.9 million, respectively, related primarily to new store openings and the construction of our new distribution center. 14 In fiscal 2000, our financing activities provided a net cash flow of $1.8 million, including $2.6 million in proceeds from the exercise of stock options under our stock option plan, $0.2 million in proceeds from the issuance of common stock under our employee stock purchase plan and $0.5 million in payments of stock subscription notes receivable, partially offset by $1.3 million in repayments of our junior subordinated notes and capital lease obligations and payments of deferred debt issuance costs of $0.3 million. In fiscal 1999, we used $1.3 million in our financing activities, which included net repayments of our revolving credit facility of $1.8 million and repayments of our junior subordinated notes and capital lease obligations of $2.4 million, partially offset by $2.2 million in proceeds from the exercise of stock options under our stock option plan and warrants and $1.3 million in payments of stock subscription notes receivable. 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 credit facility includes a $5.0 million sub-facility for letters of credit. As of February 3, 2001, interest on the credit facility was at the prime rate, or at our election, LIBOR plus 1.50%. Under the terms of the 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 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 credit facility. The 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 February 3, 2001, based on eligible inventory and accounts receivable, we were eligible to borrow $42.9 million under the credit facility and had no outstanding balance. Subordinated Notes In fiscal 1998, we exchanged existing Subordinated Reorganization Notes and Junior Subordinated Reorganization Notes for New Subordinated Notes and New Junior Subordinated Notes that eliminated an estimated excess cash flow calculation previously used to determine the timing and amount of payments and provided a fixed debt payment schedule. In accordance with Emerging Issues Task Force 96-19, we accounted for the exchange of the old notes as an extinguishment of debt, and, in connection therewith, recorded an extraordinary loss, net of tax benefit, of $2.8 million. This loss represented increases in the present value of the principal amount of the old notes and fees paid to the lenders. The fees included the issuance of 22,600 shares of pre-recapitalization common stock and warrants to purchase 82,690 shares of pre-recapitalization common stock, both stated at fair market value when they were issued. The New Subordinated Notes totaled $3.3 million and were fully paid on December 8, 1998. The New Junior Subordinated Notes are non-interest bearing and are reflected on our balance sheets at the present value using a discount rate of 10%. As of February 3, 2001, the New Junior Subordinated Notes had a face value of $15.3 million and a related unamortized discount of $4.1 million, resulting in a net carrying value of $11.2 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 during fiscal 2000. Additional principal payments are scheduled on December 31, 2001 and December 31, 2002 ($2.0 million), on December 31, 2003 and December 31, 2004 ($3.0 million) and a final payment on May 28, 2005 ($5.3 million). We believe that our sources of cash, including the credit facility, will be adequate to finance our operations, capital requirements and debt obligations as they become due for at least the next twelve months. 15 As of February 3, 2001, we had outstanding indebtedness, excluding capital leases, in the principal amount of $11.2 million. Capital Expenditures We anticipate capital expenditures of approximately $21.4 million in fiscal 2001, which includes costs to open new stores, to renovate and relocate existing stores, to upgrade information systems and to renovate and expand our administrative offices. We believe that future capital expenditures will be financed from internal cash flow. We are currently developing a plan to relocate and expand our current distribution center in San Diego, California. This new distribution center would be approximately 500,000 to 600,000 square feet and service our west coast, Arizona, Nevada and New Mexico markets. It would become operational in our second quarter of fiscal 2002. As a result, we may incur additional capital expenditures in fiscal 2001 of approximately $5.0 million. We believe the capital expenditures for this facility will be financed from internal cash flow. Inflation In general, we believe that inflation has had no recent material impact on our 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 such employees. Historically, we have mitigated such 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 may have a negative impact on profitability in the future. California Utility Costs In California, where we currently operate 122 stores and which represents almost 50% of our total store base, utility costs for electricity and natural gas have risen significantly over the past year. These costs may continue to increase due to the actions of federal and state governments and agencies, as well as other factors beyond our control. We have attempted to mitigate such increases through energy conservation measures and other cost cutting steps. However, we can make no assurances that these measures and other steps taken will be adequate to control the impact of these utility cost increases in the future, nor can we make assurances as to what impact these utility cost increases may have on our sales related to our core customer base in California. Seasonality and Quarterly Fluctuations We have historically realized our highest levels 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. New Accounting Pronouncements In July 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation." FIN 44 clarifies the application of APB Opinion No. 25, "Accounting for Stock Issued to Employees," with respect to the definition of an 16 "employee" and accounting for modifications of outstanding awards. This interpretation became effective July 1, 2000. We have applied FIN 44 to all new stock options or awards granted after July 1, 2000 and any modifications to existing options or awards performed after July 1, 2000. We believe the implementation of FIN 44 did not have a material effect on our financial position or results of operations. 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 No. 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. We have reviewed the impact of SAB Nos. 101 and 101B on our financial statements and its adoption does not have a material impact on our financial statements. In June 1998, FASB issued 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 defer the effective date to all fiscal quarters of fiscal years beginning after June 15, 2000 and clarify certain provisions of SFAS No. 133. SFAS No. 133 became effective for our first quarter of fiscal 2001 and we do not expect it to have a material effect on our financial position or results of operations. 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 Annual Report on Form 10-K, or in documents incorporated by reference into this Annual Report on Form 10-K, 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 this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to interest rate risk on our fixed rate debt obligations. At February 3, 2001, fixed rate debt obligations totaled approximately $15.3 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 $11.2 million. Maturities are $2.0 million, $2.0 million, $3.0 million, $3.0 million and $5.3 million in fiscal 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 February 3, 2001. 17 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page FACTORY 2-U STORES, INC. Report of Independent Public Accountants F-1 Factory 2-U Stores, Inc. Balance Sheets as of February 3, 2001 and January 29, 2000 F-2 Factory 2-U Stores, Inc. Statements of Operations for fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999 F-4 Factory 2-U Stores, Inc. Statements of Stockholders' Equity for fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999 F-5 Factory 2-U Stores, Inc. Statements of Cash Flows for fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999 F-6 Factory 2-U Stores, Inc. Notes to Financial Statements F-8 All other schedules are omitted because of the absence of conditions under which they are required or because the required information is set forth in the financial statements and notes thereto. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference to the Registrant's Definitive Proxy Statement pursuant to Regulation 14A in connection with the 2001 Annual Meeting of Stockholders under the headings "Proposal 1 - "Election of Directors" and "Executive Officers", which will be filed with the SEC no later than 120 days after the close of the fiscal year ended February 3, 2001. Item 11. Executive Compensation The information required by this item is incorporated herein by reference to the Registrant's Definitive Proxy Statement under the heading "Executive Compensation", which will be filed with the SEC no later than 120 days after the close of the fiscal year ended February 3, 2001. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference to the Registrant's Definitive Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management", which will be filed with the SEC no later than 120 days after the close of the fiscal year ended February 3, 2001. 18 Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated by reference to the Registrant's Definitive Proxy Statement under the heading "Certain Relationships and Related Transactions", which will be filed with the SEC no later than 120 days after the close of the fiscal year ended February 3, 2001. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements. See Index to Financial Statements and Supplementary Data contained in Item 8. 2. Financial Statement Schedules. See Index to Financial Statements and Supplementary Data contained in Item 8. 3. Exhibits. See Item 14(c). (b) Reports on Form 8-K. For the last quarter of the fiscal year ended February 3, 2001, we filed the following reports on Form 8-K: None. (c) Exhibits. Reference is made to the Index to Exhibits immediately preceding the exhibits thereto. (d) Financial Statement Schedules. The required financial statement schedules are entered on the Index to Financial Statements and Supplementary Data contained in Item 8. 19 Index to Exhibits Exhibit Number Document - ------------------------------------------------------------------------------- 2.1 Plan and Agreement of Merger dated June 18, 1998 between Family Bargain Corporation and General Textiles, Inc. (1) 3.1 (i) Restated Certificate of Incorporation (ii) Bylaws (2) 4.1 Junior Subordinated Note Agreement dated April 30, 1998 among General Textiles, American Endeavour Fund Limited and London Pacific Life & Annuity Company (1) 4.2 Form of Warrant dated April 30, 1998 (1) 10.1 Factory 2-U Stores, Inc. Employee Stock Purchase Plan (3) 10.2 Amended and Restated Factory 2-U Stores, Inc. 1997 Stock Option Plan (4) 10.3 Factory 2-U Stores, Inc. Employee Compensation Agreements (5) 10.4 Financing Agreement between The CIT Group/Business Credit, Inc. (as Agent and a Lender) and Factory 2-U Stores, Inc. (as Borrower), dated as of March 3, 2000 (6) 10.5 First Amendment to the Financing Agreement between The CIT Group/Business Credit, Inc. (as Agent and a Lender) and Factory 2-U Stores, Inc. (as Borrower), dated as of March 3, 2000 10.6 Amended Employment Agreement between Factory 2-U Stores, Inc. and Michael M. Searles (6) 11.1 Computation of per share earnings 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants - ----------------------------- (1) Incorporated by reference to Registration Statement on Form S-2, No. 333-58797 filed with the SEC on October 14, 1998. (2) Incorporated by reference to Registration Statement on Form S-1, No. 33-77488, filed with the SEC on April 7, 1994. (3) Incorporated by reference to Registration Statement on Form S-8, No. 333-94123 filed with the SEC on January 5, 2000. (4) Incorporated by reference to Registration Statement on Form S-8, No. 333-40682 filed with the SEC on June 30, 2000. (5) Incorporated by reference to Registration Statement on Form S-8, No. 333-89267 filed with the SEC on October 19, 1999. (6) Incorporated by reference to Form 10-K for the fiscal year ended January 29, 2000. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. FACTORY 2-U STORES, INC. By:/s/ Michael M. Searles ------------------------- Michael M. Searles Chairman of the Board Dated: April 25, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of this Company and in the capacities and on the date indicated. Signature Title Date - ----------- ------ ------ /s/ Michael M. Searles President, Chief Executive - --------------------------- Michael M. Searles Officer and Director (Principal Executive Officer) April 25, 2001 /s/ Douglas C. Felderman Executive Vice President, April 25, 2001 - ---------------------------- Chief Financial Officer Douglas C. Felderman (Principal Financial and Accounting Officer) /s/ Willem de Vogel Director April 25, 2001 - ---------------------------- Willem de Vogel /s/ Peter V. Handal Director April 25, 2001 - ---------------------------- Peter V. Handal /s/ Ronald Rashkow Director April 25, 2001 - ---------------------------- Ronald Rashkow /s/ Wm. Robert Wright II Director April 25, 2001 - ---------------------------- Wm. Robert Wright II 21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Factory 2-U Stores, Inc.: We have audited the accompanying balance sheets of Factory 2-U Stores, Inc. (a Delaware corporation) as of February 3, 2001 and January 29, 2000, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended February 3, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Factory 2-U Stores, Inc. as of February 3, 2001 and January 29, 2000 and the results of its operations and its cash flows for each of the three years in the period ended February 3, 2001 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP San Diego, California February 26, 2001 F-1 FACTORY 2-U STORES, INC. Balance Sheets (in thousands)
February 3, January 29, 2001 2000 ------------- ------------- ASSETS Current assets: Cash $ 4,739 $ 9,473 Merchandise inventory 52,444 35,048 Accounts receivable 3,160 1,354 Prepaid expenses 4,716 937 Deferred income taxes 2,503 2,184 ------------- ------------- Total current assets 67,562 48,996 ------------- ------------- Leasehold improvements and equipment, net of accumulated depreciation and amortization 40,632 27,425 Deferred income taxes 4,992 1,032 Other assets 1,176 1,507 Excess of cost over net assets acquired, less accumulated amortization of $11,742 and $10,139, respectively 27,903 29,506 ------------- ------------- Total assets $ 142,265 $ 108,466 ============= =============
(continued) The accompanying notes are an integral part of these financial statements. F-2 FACTORY 2-U STORES, INC. Balance Sheets (in thousands, except share data)
February 3, January 29, 2001 2000 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital leases $ 2,170 $ 1,251 Accounts payable 25,194 19,994 Income taxes payable 5,458 4,235 Accrued expenses 15,844 22,275 ------------- ------------- Total current liabilities 48,666 47,755 Revolving credit facility - - Long-term debt 9,218 10,067 Capital lease and other long-term obligations 1,126 1,658 Deferred rent 3,518 2,556 ------------- ------------- Total liabilities 62,528 62,036 ------------- ------------- Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value; 35,000,000 shares authorized and 12,759,304 shares and 12,390,817 shares issued and outstanding, respectively 127 124 Stock subscription notes receivable (2,225) (2,710) Additional paid-in capital 119,646 108,091 Accumulated deficit (37,811) (59,075) ------------- ------------- Total stockholders' equity 79,737 46,430 ------------- ------------- Total liabilities and stockholders' equity $ 142,265 $ 108,466 ============== ==============
The accompanying notes are an integral part of these financial statements. F-3 FACTORY 2-U STORES, INC. Statements of Operations (in thousands, except per share data)
Fiscal Year Ended ---------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 ------------- ------------- ------------- Net sales $ 555,670 $ 421,391 $ 338,223 Cost of sales 358,393 270,962 222,332 ------------- ------------- ------------- Gross profit 197,277 150,429 115,891 Selling and administrative expenses (exclusive of non-cash stock-based compensation expense shown below) 154,379 119,951 97,140 Pre-opening expenses 5,371 3,273 2,579 Amortization of intangibles 2,092 2,358 2,358 Condemnation award (1,240) - - Stock-based compensation expense 4,807 2,094 - Special charges - - 2,350 Merger costs - - 1,000 ------------- ------------- ------------- Operating income 31,868 22,753 10,464 Interest expense, net 1,546 2,272 4,189 ------------- ------------- ------------- Income before income taxes and extraordinary item 30,322 20,481 6,275 Income taxes 9,058 8,039 1,256 ------------- ------------- ------------- Income before extraordinary item 21,264 12,442 5,019 Extraordinary item - debt extinguishment, net of income tax benefit - - 2,750 ------------- ------------- ------------- Net income 21,264 12,442 2,269 Inducement to convert preferred stock to common stock - - 2,804 Preferred stock dividends: Series A - - 2,593 Series B - - 2,210 - ------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stock $ 21,264 $ 12,442 $ (5,338) ============= ============= ============= Income (loss) per share Basic Income (loss) before extraordinary item $ 1.69 $ 1.02 $ (0.77) Extraordinary item $ - $ - $ (0.81) Net income (loss) $ 1.69 $ 1.02 $ (1.58) Diluted Income (loss) before extraordinary item $ 1.63 $ 0.97 $ (0.77) Extraordinary item $ - $ - $ (0.81) Net income (loss) $ 1.63 $ 0.97 $ (1.58) Weighted average common shares outstanding Basic 12,589 12,214 3,381 Diluted 13,066 12,864 3,381
The accompanying notes are an integral part of these financial statements. F-4 FACTORY 2-U STORES, INC. Statements of Stockholders' Equity (in thousands, except share data)
Preferred Stock ------------------------------------------------- Series A Series B Common Stock ----------------------- ----------------------- ---------------------- Shares Amount Shares Amount Shares Amount ------------ -------- ------------ -------- ------------ -------- Balance at January 31, 1998 3,638,690 $ 36 33,714 $ - 1,485,291 $ 15 Series A preferred stock dividends - - - - - - Series B preferred stock dividend accretion - - - - - - Issuance of preferred stock to management for notes - - 1,824 - - - Issuance of common stock in debt restructuring - - - - 22,600 - Issuance of common stock in rights offering - - - - 800,000 8 Conversion of preferred stock to common stock (3,638,690) (36) (35,538) - 9,798,468 98 Correction for unsplit units - - - - (184) - Inducement to convert preferred stock to common stock - - - - - - Compensation expense - - - - - - Net income - - - - - - ------------ -------- ------------ -------- ------------ -------- Balance at January 30, 1999 - - - - 12,106,175 121 ------------ -------- ------------ -------- ------------ -------- Issuance of common stock for exercise of stock options and warrants - - - - 294,798 3 Compensation expense related to grant of stock options - - - - - - Compensation expense related to stock option performance - - - - - - Tax effect related to non-qualified stock options - - - - - - Issuance of common stock to Board members as compensation - - - - 4,750 - Correction of prior year conversion - - - - 173 - Repurchase of warrants - - - - - - Payments of notes receivable - - - - - - Cancellation of stock subscriptions receivable - - - (15,079) - - Net income - - - - - - ------------ -------- ------------ -------- ------------ -------- Balance at January 29, 2000 - - - - 12,390,817 124 ------------ -------- ------------ -------- ------------ -------- Issuance of common stock for exercise of stock options - - - - 341,932 3 Compensation expense related to stock option performance - - - - - - Tax effect related to non-qualified stock options - - - - - - Issuance of common stock to Board members and management as compensation - - - - 19,407 - Issuance of common stock under employee stock purchase plan - - - - 7,148 - Payments of notes receivable - - - - - - Net income - - - - - - ------------ -------- ------------ -------- ------------ -------- Balance at February 3, 2001 - $ - - $ - 12,759,304 $ 127 ============ ======== ============ ======== ============ ======== Stock Subscription Additional Notes Paid-in Accumulated Receivable Capital Deficit Total ------------- ---------- ------------ ---------- Balance at January 31, 1998 $ (2,115) $ 85,461 $ (66,179) $ 17,218 Series A preferred stock dividends - - (2,593) (2,593) Series B preferred stock dividend accretion - 2,210 (2,210) - Issuance of preferred stock to management for notes (1,972) 1,972 - - Issuance of common stock in debt restructuring - 789 - 789 Issuance of common stock in rights offering - 9,992 - 10,000 Conversion of preferred stock to common stock - (62) - - Correction for unsplit units - - - - Inducement to convert preferred stock to common stock - 2,804 (2,804) - Compensation expense - 82 - 82 Net income - - 2,269 2,269 ------------- ---------- ------------ ---------- Balance at January 30, 1999 (4,087) 103,248 (71,517) 27,765 ------------- ---------- ------------ ---------- Issuance of common stock for exercise of stock options and warrants - 2,186 - 2,189 Compensation expense related to grant of stock options - 83 - 83 Compensation expense related to stock option performance - 2,094 - 2,094 Tax effect related to non-qualified stock options - 972 - 972 Issuance of common stock to Board members as compensation - 87 - 87 Correction of prior year conversion - - - - Repurchase of warrants - (457) - (457) Payments of notes receivable 1,255 - - 1,255 Cancellation of stock subscriptions receivable 122 (122) - - Net income - - 12,442 12,442 ------------- ---------- ------------ ---------- Balance at January 29, 2000 (2,710) 108,091 (59,075) 46,430 ------------- ---------- ------------ ---------- Issuance of common stock for exercise of stock options - 2,595 - 2,598 Compensation expense related to stock option performance - 4,807 - 4,807 Tax effect related to non-qualified stock options - 3,454 - 3,454 Issuance of common stock to Board members and management as compensation - 519 - 519 Issuance of common stock under employee stock purchase plan - 180 - 180 Payments of notes receivable 485 - - 485 Net income - - 21,264 21,264 ------------- ---------- ------------ ---------- Balance at February 3, 2001 $ (2,225) $ 119,646 $ (37,811) $ 79,737 ============= ========== ============ ==========
The accompanying notes are an integral part of these financial statements. F-5 FACTORY 2-U STORES, INC. Statements of Cash Flows (in thousands)
Fiscal Year Ended ---------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 ------------- ------------- ------------- Cash flows from operating activities: Income from operating activities $ 21,264 $ 12,442 $ 5,019 Adjustments to reconcile income to net cash provided by operating activities Depreciation 10,351 6,859 4,484 Amortization of intangibles 2,092 2,358 2,359 Amortization of debt discount 1,151 1,137 1,430 Loss on disposal of equipment 581 796 163 Deferred rent expense 1,098 364 (362) Stock-based compensation expense 4,807 2,094 - Changes in operating assets and liabilities: Merchandise inventory (17,396) (3,695) (1,533) Prepaid expenses and other assets (7,984) (1,375) (4,117) Accounts payable 5,200 (1,264) 2,255 Accrued expenses and other liabilities (3,840) 4,808 10,120 ------------- ------------- ------------- Net cash provided by operating activities 17,324 24,524 19,818 ------------- ------------- ------------- Cash flows used in investing activities Purchase of leasehold improvements and equipment (23,818) (16,893) (6,798) ------------- ------------- ------------- Net cash used in investing activities (23,818) (16,893) (6,798) ------------- ------------- -------------
(continued) The accompanying notes are an integral part of these financial statements. F-6 FACTORY 2-U STORES, INC. Statements of Cash Flows (in thousands)
Fiscal Year Ended ---------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 ------------- ------------- ------------- Cash flows provided by (used in) financing activities: Borrowings on revolving credit facility 111,711 454,157 354,816 Payments on revolving credit facility (111,711) (456,000) (365,630) Payments of long-term debt and capital lease obligations (1,253) (2,426) (9,445) Cash payments of preferred stock dividends - - (2,593) Proceeds from issuance of common stock, net 180 - 10,000 Payments of deferred debt issuance costs (250) - (211) Repurchase of warrants - (457) - Proceeds from exercise of stock options and warrants 2,598 2,189 - Payments of stock subscription notes receivable 485 1,255 - ------------- ------------- ------------- Net cash provided by (used in) financing activities 1,760 (1,282) (13,063) ------------- ------------- ------------- Net increase (decrease) in cash (4,734) 6,349 (43) Cash at the beginning of the period 9,473 3,124 3,167 ------------- ------------- ------------- Cash at the end of the period $ 4,739 $ 9,473 $ 3,124 ============= ============= ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 651 $ 1,295 $ 2,679 Income taxes $ 9,559 $ 6,011 $ 111 Supplemental disclosures of non-cash investing and financing activities: Acquisition of equipment financed by capital leases $ - $ - $ 970 Issuance of Series B Preferred Stock for notes $ - $ - $ 1,972 Series B Preferred Stock dividend accretion $ - $ - $ 2,210 Conversion of preferred stock to common stock inducement charge $ - $ - $ 2,804 Tax effect related to non-qualified stock options $ 3,454 $ 972 $ - Issuance of common stock to board members and management as compensation $ 519 $ 87 $ -
The accompanying notes are an integral part of these financial statements. F-7 FACTORY 2-U STORES, INC. Notes to Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business We operate a chain of off-price retail apparel and housewares stores in Alabama, Arizona, California, Louisiana, Nevada, New Mexico, Oklahoma, Oregon, Texas and Washington. We sell branded casual apparel for the family, as well as selected domestics and household merchandise at prices which generally are significantly lower than other discount stores. At February 3, 2001, we operated 243 stores under the name Factory 2-U. Fiscal Year Our fiscal year is based on a 52/53 week year ending on the Saturday nearest January 31. Fiscal year ended February 3, 2001 included 53 weeks and fiscal years ended January 29, 2000 and January 30, 1999 included 52 weeks. We define our fiscal year by the calendar year in which most of the activity occurs (e.g. the fiscal year ended February 3, 2001 is referred to as fiscal 2000). Merchandise Inventory Merchandise inventory is stated at the lower of cost or market determined using the retail inventory method on a first-in, first-out basis. In addition, consistent with industry practice, we capitalize certain buying, warehousing, storage and transportation costs. At February 3, 2001 and January 29, 2000, such costs included in inventory were $4.7 million and $2.4 million, respectively. Leasehold Improvements and Equipment Leasehold improvements and equipment are stated at original cost less accumulated depreciation and amortization. Equipment under capital leases is stated at the present value of minimum lease payments at the date of acquisition. We calculate depreciation and amortization using the straight-line method over the shorter of the estimated useful lives of the related asset or the lease term, generally five years. Excess of Cost Over Net Assets Acquired Excess of cost over net assets acquired ("goodwill") is amortized on a straight-line basis over 25 years. We assess the recoverability of goodwill by determining whether its balance can be recovered from the future undiscounted operating cash flows. The impairment, if any, is measured based on the excess of the carrying value of the asset over the asset's fair value or discounted estimates of future cash flows. F-8 Asset Impairment We assess potential asset impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset to be held and used is measured by comparing the carrying amount of the asset to future net cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount that the carrying value of the asset exceeds the fair value of the asset. Fair Value of Financial Instruments The carrying amounts of all receivables, payables and accrued expenses approximate fair value due to the short-term nature of such instruments. The carrying amount of the revolving credit facility approximates fair value due to the floating rate on such instrument. The carrying value of long-term debt with fixed payment terms approximates fair value. Advertising Costs Advertising costs are expensed as incurred. Advertising costs for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999 were approximately $17.7 million, $12.3 million and $9.9 million, respectively. Deferred Rent Rent expense under non-cancelable operating lease agreements is recorded on a straight-line basis over the life of the respective leases. The excess rent expense over rent paid is accounted for as deferred rent (Note 8). Store Pre-opening and Closing Costs Pre-opening costs (costs of opening new stores, including grand opening promotions, training and store set-up costs) are expensed as incurred. Costs associated with closing stores, consisting primarily of inventory liquidation costs, non-recoverable investment in fixed assets and any future lease obligations, are recognized as operating expense when the decision to close a store is made. Income Taxes Income taxes are accounted for under the asset and liability method required by SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date (Note 7). Stock-Based Compensation We have elected under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to continue using the intrinsic value method of accounting for employee stock- based compensation in accordance with Accounting Principles Board No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees." Under the intrinsic value method, F-9 compensation expense is recognized only in the event that the exercise price of options granted is less than the market price of the underlying stock on the date of grant. The fair value method generally requires entities to recognize compensation expense over the vesting period of options based on the estimated fair value of the options granted. We have disclosed the pro forma effect of using the fair value based method to account for our stock-based compensation as required by SFAS No. 123 (Note 10). Dividend Accretion Our Series B Preferred Stock had an increasing rate dividend feature (Note 9). Accordingly, we recorded dividends on Series B Preferred Stock using the effective interest method to recognize the dividends ratably over the estimated period in which the stock would have been outstanding. We converted the Series B Preferred Stock to common stock in November 1998 and, therefore, no additional dividends have been accreted since fiscal 1998 (Note 3). Earnings (Loss) per Common Share We compute earnings (loss) per share in accordance with SFAS No. 128, "Earnings Per Share." Under the provisions of SFAS No. 128, basic earnings (loss) per share is computed based on the weighted average shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average shares outstanding and potentially dilutive common equivalent shares. Common equivalent shares are not included in the computation of diluted loss per share for fiscal 1998 because the effect would be anti-dilutive. Use of Estimates Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with generally accepted accounting principles in the United States. Actual results could differ from those estimates. Reclassifications Certain prior period amounts have been reclassified to conform their presentation to the fiscal 2000 financial statements. New Accounting Pronouncements In July 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation." FIN 44 clarifies the application of APB No. 25 with respect to the definition of an "employee" and accounting for modifications of outstanding awards. This interpretation became effective July 1, 2000. We have applied FIN 44 to all new stock options or awards granted after July 1, 2000 and any modifications to existing options or awards performed after July 1, 2000. We believe the implementation of FIN 44 did not have a material effect on our financial position or results of operations. In December 1999, the Securities and Exchange Commission (the "SEC") 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 No. 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. We have reviewed the impact of SAB Nos. 101 and 101B on our financial statements and its adoption does not have a material impact on our financial statements. F-10 In June 1998, FASB issued 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 defer the effective date to all fiscal quarters of fiscal years beginning after June 15, 2000 and clarify certain provisions of SFAS No. 133. SFAS No. 133 became effective for our first quarter of fiscal 2001 and we do not expect it to have a material effect on our financial position or results of operations. 2. SPECIAL CHARGES During fiscal 1998, we recorded charges to operations in the amount of $1.0 million for costs related to the merger of our wholly-owned subsidiary, General Textiles, Inc. into us and the Recapitalization (Note 3). In addition, we recorded special charges in the amount of $2.4 million in connection with the hiring of our current President and CEO. 3. RECAPITALIZATION In fiscal 1998, we initiated a multi-phased plan to restructure our capitalization (the "Recapitalization"), which included restructuring the subordinated and junior subordinated debt in a manner that removed an estimated excess cash flow calculation previously used to determine the timing and amounts of payments and replaced that term with a fixed debt payment schedule (Note 6). The debt restructuring resulted in an extraordinary charge of $2.8 million, net of tax benefit, in the first quarter ended April 30, 1998. On July 31, 1998, our two operating subsidiaries, General Textiles and Factory 2-U, Inc., merged to form General Textiles, Inc. (the "Subsidiary Merger"). On November 23, 1998, we carried out a Recapitalization in which all of our outstanding shares were converted into a single class of Common Stock. Under the Plan of Recapitalization, each outstanding share of Pre-Recapitalization Common Stock was converted into .30133 shares of Common Stock, each outstanding share of Series A 9-1/2% Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") was converted into one share of Common Stock and each outstanding share of Series B Junior Convertible, Exchangeable Preferred Stock (the "Series B Preferred Stock") was converted into 173.33 shares of Common Stock. In connection with this conversion, we recorded a reduction to net income applicable to common stockholders in the amount of $2.8 million pertaining to the conversion of Series A and Series B Preferred Stock to Common Stock pursuant to the Plan of Recapitalization, in accordance with SFAS No. 84, "Induced Conversions of Convertible Debt." The amount of the reduction represents the fair value of Post-Recapitalization Common Stock transferred in excess of the fair value of common stock issuable pursuant to the original conversion terms of the Preferred Stock. In conjunction with the Recapitalization, General Textiles, Inc. was merged into Family Bargain Corporation and we changed our name to Factory 2-U Stores, Inc. The last phase of the Recapitalization was a rights offering in which 800,000 shares of Post-Recapitalization Common Stock were sold to existing stockholders at $13 per share. We received proceeds of $10.0 million, net of $400,000 of related expenses. F-11 4. LEASEHOLD IMPROVEMENTS AND EQUIPMENT Leasehold improvements and equipment consist of the following:
February 3, January 29, (in thousands) 2001 2000 ----------------------------- Furniture, fixtures and equipment $ 53,561 $ 35,609 Leasehold improvements 11,295 7,891 Automobiles 645 748 Equipment under capital leases 678 1,047 ------------ ------------ 66,179 45,295 Less accumulated depreciation and amortization (25,547) (17,870) ------------ ------------ $ 40,632 $ 27,425 ============ ============
5. ACCRUED EXPENSES Accrued expenses consist of the following:
February 3, January 29, (in thousands) 2001 2000 ----------------------------- Accrued compensation and related costs $ 6,287 $ 7,882 Sales tax payable 2,686 5,128 Other accrued expenses 6,871 9,265 ------------ ------------ $ 15,844 $ 22,275 ============ ============
6. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY Long-term debt and revolving credit facility consist of the following:
February 3, January 29, (in thousands) 2001 2000 ----------------------------- Junior subordinated notes, discounted at a rate of 10.0%, principal payments in annual installments ranging from $2.0 million to $3.0 million, final balloon payment of $5.3 million due May 2005 $ 11,218 $ 11,067 Less current maturities (2,000) (1,000) ------------ ------------ Long-term debt and revolving credit facility, net of current maturities $ 9,218 $ 10,067 ============ ============
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 credit facility includes a $5.0 million sub-facility for letters of credit. As of February 3, 2001, interest on the credit facility was at the prime rate, or at our election, LIBOR plus 1.50%. Under the terms of the 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 F-12 plus 1.50% to LIBOR plus 2.50%. The 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 credit facility. The 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 February 3, 2001, based on eligible inventory and accounts receivable, we were eligible to borrow $42.9 million under the credit facility and had no outstanding balance. Subordinated Notes In fiscal 1998, we exchanged existing Subordinated Reorganization Notes and Junior Subordinated Reorganization Notes for New Subordinated Notes and New Junior Subordinated Notes that eliminated an estimated excess cash flow calculation previously used to determine the timing and amount of payments and provided a fixed debt payment schedule. In accordance with Emerging Issues Task Force 96-19, we accounted for the exchange of the old notes as an extinguishment of debt, and, in connection therewith, recorded an extraordinary loss, net of tax benefit, of $2.8 million. This loss represented increases in the present value of the principal amount of the old notes and fees paid to the lenders. The fees included the issuance of 22,600 shares of pre-recapitalization common stock and warrants to purchase 82,690 shares of pre-recapitalization common stock, both stated at fair market value when they were issued. We paid the New Subordinated Notes totaling $3.3 million in full in December 1998. The New Junior Subordinated Notes are non-interest bearing and are reflected on our balance sheets at the present value using a discount rate of 10%. As of February 3, 2001, the New Junior Subordinated Notes had a face value of $15.3 million and a related unamortized discount of $4.1 million, resulting in a net carrying value of $11.2 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 during fiscal 2000. Additional principal payments are scheduled on December 31, 2001 and December 31, 2002 ($2.0 million), on December 31, 2003 and December 31, 2004 ($3.0 million) and a final payment on May 28, 2005 ($5.3 million). F-13 7. INCOME TAXES Significant components of the provision for income taxes are as follows:
Fiscal Year Ended ------------------------------------------------- February 3, January 29, January 30, (in thousands) 2001 2000 1999 ------------------------------------------------- Federal Income Tax Provision Current $ 11,249 $ 6,592 $ 2,857 Deferred (3,596) (302) (1,914) ----------- ----------- ------------ 7,653 6,290 943 ----------- ----------- ------------ Current 2,088 1,822 698 Deferred (683) (73) (385) ----------- ----------- ------------ 1,405 1,749 313 ----------- ----------- ------------ $ 9,058 $ 8,039 $ 1,256 =========== =========== ============
The principal temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
February 3, January 29, (in thousands) 2001 2000 ----------------------------- Deferred tax assets Net operating loss carryforwards $ 8,409 $ 9,426 Compensated absences and bonuses 2,696 1,227 Deferred rent 1,695 1,304 Closed store accrual 229 593 Excess of tax over book inventory 875 520 Accrued expenses 762 1,285 Other 1,080 346 ------------ ------------ Total gross deferred tax assets 15,746 14,701 Less valuation allowance (7,647) (10,711) ------------ ------------ Net deferred tax assets 8,099 3,990 ------------ ------------ Deferred tax liabilities Leasehold improvements and equipment, principally due to differences in depreciation recognized on fixed assets 604 774 ------------ ------------ Deferred tax liabilities 604 774 ------------ ------------ Net deferred tax asset $ 7,495 $ 3,216 ============ ============
We have established a valuation allowance because we are uncertain when we may realize the benefits of our deferred tax assets and annual limitations on the usage of net operating loss carryforwards. F-14 The difference between the expected income tax expense (benefit) computed by applying the U.S. federal income tax rate of 35%, 35% and 34% to net income from continuing operations for fiscal 2000, 1999 and 1998, respectively, and actual expense is a result of the following:
Fiscal Year Ended ------------------------------------------------- February 3, January 29, January 30, (in thousands) 2001 2000 1999 ------------------------------------------------- Amortization of goodwill 656 657 658 Change in valuation allowance (3,064) (784) (2,017) Merger costs - - 410 Business credits (86) (52) (150) State income taxes, net of federal income tax benefit 1,819 1,059 374 Refund of taxes (900) - - Other, net 21 (9) (199) ----------- ----------- ------------ $ 9,058 $ 8,039 $ 1,256 =========== =========== ============
At February 3, 2001, we had net operating loss carryforwards for federal income tax purposes of approximately $24.2 million that expire starting in fiscal 2012. In the event of a change in ownership under the provisions of the Internal Revenue Code, the annual use of net operating loss carryforwards may be limited. 8. LEASE COMMITMENTS We operate retail stores, distribution centers and administrative offices under various operating leases. Total rent expense was approximately $29.9 million, $22.0 million and $18.0 million, including contingent rent expense of approximately $435,000, $447,000 and $240,000, for fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999, respectively. Rent expense is recorded on a straight-line basis over the life of the lease. For fiscal 2000 and 1999, rent expense charged to operations exceeded cash payment requirements by approximately $1.1 million and $364,000, respectively, and resulted in an increase to the deferred rent liability for the same amount. For fiscal 1998, cash payment requirements exceeded rent expense charged to operations by approximately $362,000, resulting in a decrease to the deferred rent liability for the same amount. We are also obligated under various capital leases for equipment that expire at various dates during the next two years. Equipment and related accumulated amortization recorded under capital leases are as follows:
February 3, January 29, (in thousands) 2001 2000 ----------------------------- Equipment 678 966 ------------ ------------ 678 1,047 Less accumulated amortization (508) (535) ------------ ------------ $ 170 $ 512 ============ ============
F-15 At February 3, 2001, the future minimum lease payments under capital leases and operating leases with remaining non-cancelable terms are as follows:
Capital Operating (in thousands) Leases Leases ----------------------------- Fiscal year: 2001 $ 180 $ 27,876 2002 20 25,191 2003 - 23,050 2004 - 19,823 2005 - 12,802 Thereafter - 24,512 ------------ ------------ Total minimum lease payments 200 $ 133,254 ============ Less amount representing interest (rates ranging from 9.0% to 14.8%) (10) ------------ Present value of capital lease obligation 190 Less current maturities (170) ------------ Long-term capital lease obligation $ 20 ============
9. STOCKHOLDERS' EQUITY Prior to the Recapitalization, we were authorized to issue Series A Preferred Stock, Series B Preferred Stock and Common Stock. In connection with the Recapitalization, we converted all shares of our Series A and Series B Preferred Stock into Post-Recapitalization Common Stock and effected a reverse stock split, which converted all shares of our Pre-Recapitalization Common Stock into .30133 shares of Post-Recapitalization Common Stock (Note 3). 10. STOCK OPTIONS AND WARRANTS At February 3, 2001, warrants to purchase 82,690 common shares were outstanding. These warrants have an exercise price of $19.91 and expire in May 2005. We have a stock option plan, the Amended and Restated Family Bargain Corporation 1997 Stock Option Plan. Options may be granted as incentive or nonqualified stock options. We may grant up to 2,157,980 options under this Plan. The options are issued at fair market value with exercise prices equal to our stock price on the date of grant. Options vest over three to five years; are exercisable in whole or in installments; and expire from five to ten years from the date of grant. F-16 Our Board of Directors has granted stock options to members of the Board and to our management. A summary of our stock option activity and related information is as follows:
Number of Weighted average options * exercise prices * ----------------------------- Outstanding January 31, 1998 930,417 $ 7.07 Granted 452,147 6.88 Exercised - - Canceled (57,667) 7.27 ----------- ----- Outstanding January 30, 1999 1,324,897 7.00 Granted 454,232 17.93 Exercised (257,482) 6.90 Canceled (141,209) 7.86 ----------- ----- Outstanding January 29, 2000 1,380,438 10.53 Granted 335,584 28.35 Exercised (341,932) 7.60 Canceled (88,658) 16.85 ----------- ----- Outstanding February 3, 2001 1,285,432 $15.52 Exercisable at February 3, 2001 539,151 $ 9.29
* Options for January 31, 1998 have been converted at .30133 per option under the Recapitalization. The following table summarizes information about the stock options outstanding at February 3, 2001:
Weighted-average Number contractual Weighted-average Number Weighted-average Range of exercise of options life exercise of options exercise prices outstanding (Years) price exercisable price --------------------- -------------- -------------- ------------- ------------- -------------- $ 0.00 to $ 4.23 754 1.8 $ 4.15 754 $ 4.15 $ 4.23 to $ 8.45 578,324 3.3 $ 6.95 443,483 $ 6.90 $ 8.45 to $12.68 159,920 8.0 $12.07 28,684 $11.98 $12.68 to $16.90 62,500 8.1 $15.06 14,500 $15.24 $16.90 to $21.13 25,150 5.1 $18.71 4,150 $19.75 $21.13 to $25.35 140,805 8.5 $24.05 14,780 $24.19 $25.35 to $29.58 255,736 7.7 $27.31 26,800 $26.06 $29.58 to $33.80 19,993 9.6 $31.85 - $ - $33.80 to $38.03 32,750 9.0 $36.55 2,500 $37.56 $38.03 to $42.25 9,500 6.1 $40.62 3,500 $41.80 --------- --- ------ ------------ ------ 1,285,432 5.8 $15.52 539,151 $ 9.29 ========= === ====== ============ ======
F-17 During fiscal 1997 and 1998, we granted options which, subject to time vesting conditions, originally were to become exercisable in 25% installments when the Common Stock price reached the following market price hurdles and maintained those prices for 60 consecutive trading days: $19.91, $24.89, $33.19 and $49.78. In December 1998, the Board of Directors removed the first two market price hurdles for those optionees that were employees, making one-half of those options granted exercisable only subject to time vesting conditions. As a result, we recorded compensation expense in the amount of $82,000. During fiscal 1999, the market price of our stock was $19.91 or greater for at least 60 consecutive trading days; therefore, all 92,960 options with a market price hurdle of $19.91 became exercisable. We recorded a non-cash compensation charge of approximately $2.1 million in connection with this event. In July 2000, our Common Stock achieved a market price of $24.89 or greater for 60 consecutive trading days. As a result, all 92,961 stock options with a market price hurdle of $24.89 became exercisable and we recorded non-cash stock-based compensation expense of $2.7 million. In August 2000, our Common Stock achieved a market price of $33.19 or greater for 60 consecutive trading days; therefore, 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. There are an additional 65,731 stock options outstanding that 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. SFAS No. 123 "Accounting for Stock-Based Compensation" was issued by the FASB in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to ours. We have adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for stock options awarded under this plan been determined consistent with SFAS No. 123, our net income and earnings per share would have reflected the following pro forma amounts:
Fiscal Year Ended ------------------------------------------------ February 3, January 29, January 30, (in thousands, except per share data) 2001 2000 1999 ----------- ----------- ----------- Net Income (Loss): As Reported $ 21,264 $ 12,442 $ (5,338) Pro Forma $ 18,759 $ 11,485 $ (6,249) Basic EPS: As Reported $ 1.69 $ 1.02 $ (1.58) Pro Forma $ 1.49 $ 0.94 $ (1.85) Diluted EPS: As Reported $ 1.63 $ 0.97 $ (1.58) Pro Forma $ 1.44 $ 0.89 $ (1.85)
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models also require the input of highly subjective assumptions such as expected option life and expected stock price volatility. Because our employee stock-based compensation plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, we believe that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from those plans. The weighted-average fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions: (i) expected dividend yield of 0.00%, (ii) expected volatility of 98.75%, 103.33% and 106.89% for fiscal 2000, 1999 and 1998, respectively, (iii) expected life of seven years for fiscal 2000 and three to five years for fiscal 1999 and 1998, and (iv) risk-free interest rate of 5.01%, 6.68% and 5.55% for fiscal 2000, 1999 and 1998, respectively. F-18 11. EMPLOYEE BENEFITS We sponsor a defined contribution plan, qualified under Internal Revenue Code Section 401(k), for the benefit of employees who have completed twelve months of service and who work a minimum of 1,000 hours during that twelve month period. We make a matching contribution equal to 20% of participating employees' voluntary contributions. Participants may contribute from 1% to 15% of their compensation annually, subject to IRS limitations. We contributed approximately $208,000, $199,000 and $167,000 in fiscal 2000, 1999 and 1998, respectively. We also sponsor the Factory 2-U Stores, Inc. Employee Stock Purchase Plan which allows eligible employees to acquire shares of our Common Stock at a discount from market price, at periodic intervals, paid for with accumulated payroll deductions. The discount is 15% of the lower of the market price per share as quoted on the NASDAQ National Market on the first and last day of an offering period. Our stockholders approved the Plan at the annual meeting of stockholders in June 2000. The Plan will terminate when all 350,000 shares available for issuance under the Plan are sold although the Plan may be terminated earlier by us at any time. As of February 3, 2001, eligible employees have purchased 7,148 shares of our Common Stock under the Plan. 12. COMMITMENTS AND CONTINGENCIES We are at all times subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of our management, based in part on the advice of legal counsel, the ultimate disposition of these current matters will not have a material adverse effect on our financial position or results of operations. We have entered into an employment contract with one of our officers, which defines his duties and compensation and which could provide severance in the event of his termination of employment. 13. RELATED PARTY TRANSACTIONS In March 1997, we entered into an agreement with Three Cities Research, Inc. ("TCR") engaging TCR to act as financial advisor to us. Under this agreement, we pay TCR an annual fee of $50,000 and reimburse TCR for all of its out-of-pocket expenses incurred for services rendered, up to an aggregate of $50,000 annually. We reimbursed TCR for out-of-pocket expenses in the approximate amounts of $37,000, $46,000 and $48,000 during fiscal 2000, 1999 and 1998, respectively. TCR controls approximately 24% of our outstanding common stock and certain principals of TCR are members of our Board of Directors. F-19 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The results of operations for fiscal 2000 and 1999 were as follows:
First Second Third Fourth (in thousands, except per share data) Quarter Quarter Quarter Quarter ------- ------- ------- ------- Fiscal 2000 Net Sales $108,375 $116,678 $136,831 $193,786 Gross profit 38,225 42,135 48,957 67,960 Operating income 3,092 3,289 6,112 19,375 Net income 1,602 1,661 5,836 12,165 Earnings per share: Basic $ 0.13 $ 0.13 $ 0.46 $ 0.95 Diluted $ 0.12 $ 0.13 $ 0.44 $ 0.92 First Second Third Fourth (kn thousands, except per share data) Quarter Quarter Quarter Quarter ------- ------- ------- ------- Fiscal 1999 Net Sales $85,099 $91,931 $104,551 $139,810 Gross profit 28,991 33,659 37,360 50,420 Operating income 1,105 2,715 3,514 15,418 Net income 334 1,211 1,706 9,191 Earnings per share: Basic $ 0.03 $ 0.10 $ 0.14 $ 0.74 Diluted $ 0.03 $ 0.09 $ 0.13 $ 0.70
As a result of rounding differences, total amounts disclosed in the Statements of Operations may not agree to the sum of the amounts disclosed above for the four quarters. EX-3 2 restatedcertofinc.txt RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF FACTORY 2-U STORES, INC., a Delaware corporation Factory 2-U Stores, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies that: 1. The name of the Corporation is Factory 2-U Stores, Inc. The name under which the Corporation was originally incorporated is BMA Life Care Corp. and the original Certificate of Incorporation was filed with the Delaware Secretary of State on March 6, 1987. 2. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Certificate of Incorporation of the Corporation as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. 3. The text of the Certificate of Incorporation as amended or supplemented heretofore is hereby restated without further amendments or changes to read as herein set forth in full: FIRST: The name of the Corporation is Factory 2-U Stores, Inc. SECOND: The Corporation's registered office in the State of Delaware is located at 2711 Centerville Road, Wilmington, Delaware 19808, New Castle County. The registered agent in charge thereof is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a Corporation may be organized under the Delaware General Corporation Law. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Thirty-Five Million (35,000,000) shares of Common Stock, par value $.01 per share ("Common Stock"), and Seven Million Five Hundred Thousand (7,500,000) shares of Preferred Stock, par value $.01 per share ("Preferred Stock"). The Board of Directors is authorized, subject to the limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each of such series and the qualifications, limitations and restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, or payment of shares of that series; (h) Any other relative rights, preferences and limitations of that series. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the common shares with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution to holders of 2 shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. All the Preferred Stock of any one series shall be identical with each other in all respects, except that the shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative. Except as to the particulars fixed by the Board as hereinabove provided or as provided in the description of the series, all Preferred Stock shall otherwise be of equal rank, regardless of series, and shall be identical in all respects. FIFTH: The Board of Directors is authorized and empowered to make, alter, amend and rescind the By-Laws of the Corporation, but By-Laws made by the Board may be altered or repealed, and new By-Laws made, by the stockholders. SIXTH: No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: The material facts as to his interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by a vote sufficient for such purpose without counting the vote of the interested director or directors; or The material facts as to his interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specially approved in good faith by vote of the stockholders; or The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 3 SEVENTH: INDEMNIFICATION AND INSURANCE: (a) RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition: provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. (b) RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph (a) of this Section is not paid in full by the Corporation within 4 thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) Notwithstanding any limitation to the contrary contained in paragraphs (a) and (b) of this Section, the Corporation shall, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (d) INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. EIGHTH: Under Section 102(b)(7) of the Delaware General Corporation Law, and other provisions of the Delaware General Corporation Law, no director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. 5 Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. NINTH: Election of directors need not be by written ballot unless so provided in the By-Laws of the Corporation. TENTH: Except as otherwise required by statute, the books of the Corporation may be kept outside the State of Delaware, at such place or places as provided in the By-Laws of the Corporation or from time to time designated by the Board of Directors. ELEVENTH: Any Director or the entire Board of Directors may be removed with or without cause by the holders of a majority of the shares then entitled to vote at an election of Directors. 6 4. This Restated Certificate of Incorporation was duly adopted by the board of directors of the Corporation pursuant to Section 245 of the Delaware General Corporation Law and does not amend the Certificate of Incorporation. IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be signed by Douglas C. Felderman, its authorized officer this 21st day of March, 2001. Factory 2-U Stores, Inc. By:/s/ Douglas C. Felderman --------------------------------------- Name: Douglas C. Felderman Title:EVP - CFO EX-10 3 citamendment.txt FIRST AMENDMENT TO FINANCING AGREEMENT Exhibit 10.5 FIRST AMENDMENT TO FINANCING AGREEMENT THIS FIRST AMENDMENT TO FINANCING AGREEMENT (this "Amendment"), dated as of April 13, 2000, is entered into by and between FACTORY 2-U STORES, INC., a Delaware corporation (the "Company"), and THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation ("CITBC"), in its capacity as Lender and Agent under the Financing Agreement referred to below, with reference to the following facts: RECITALS A. The Company and CITBC, in its capacity as Lender and Agent, are parties to that certain Financing Agreement, dated as of March 3, 2000 (the "Financing Agreement"), pursuant to which CITBC as Lender and Agent have provided the Company with certain secured loans. B. The Company, and CITBC, in its capacity as Lender and Agent, wish to amend the Financing Agreement (i) to change the definition of Required Lenders, (ii) to require the Company to undertake an annual physical inventory, and (iii) to restrict the Agent's ability to make overadvances, all as further described below. NOW, THEREFORE, the parties hereby agree as follows: 1. Defined Terms. All initially capitalized terms used in this Amendment without definition shall have the respective meanings assigned thereto in the Financing Agreement. 2. Amendment to Definition of "Required Lenders". The definition of "Required Lenders" as described in Section 1of the Financing Agreement is hereby amended such that the definition shall read in full as follows:- "Required Lenders shall mean Lenders holding more than fifty percent (50%) of the outstanding loans, advances, extensions of credit and commitments to the Company hereunder, except that where there are one or more Lenders not affiliated with Agent, it shall include at least one Lender which is not also the Agent or an affiliate of the Agent." -1- 3. Additional Duties of the Company. Section 7.13 of the Financing Agreement is hereby amended to add the following additional language to the end of Section 7.13: "In addition, the Company agrees to undertake not less than one physical inventory per year. The Company will provide to the Agent the results of the physical inventory." 4. Restriction on the Agent's Ability to make Overadvances Section 14.10(e) of the Financing Agreement is amended to read in full as follows: "(e) intentionally make any Revolving Credit Loan or assist in opening any Letter of Credit hereunder if after giving effect thereto the total of Revolving Loans and Letters of Credit hereunder for the Company would exceed 100% of the maximum amount available under Section 3 hereof, provided, however, the Agent, without the consent of all Lenders, for not more than one 60 consecutive day period during any 180 consecutive day period, may make such loans or assist in the opening of such Letters of Credit where the total of Revolving Loans and Letters of Credit hereunder for the Company during such period does not exceed 110% of the maximum amount available under Section 3 hereof." 5. Condition Precedent. The effectiveness of this Amendment shall be subject to the prior satisfaction of the following condition: (a) Execution and Delivery of this Amendment. CITBC shall have received this Amendment, duly executed by the Company. 7. Otherwise Not Affected. Except as expressly amended hereby, the Financing Agreement shall remain unaltered and in full force and effect. 8. Counterparts. This Amendment may be executed in multiple counterparts, each of which shall constitute an original, and all of which, taken together, shall constitute but one and the same instrument. [remainder of page intentionally left blank] -2- IN WITNESS WHEREOF, the parties have executed this Amendment by their respective duly authorized officers as of the date first set forth above. FACTORY 2-U STORES, INC., a Delaware corporation By /s/ Douglas C. Felderman Title: Chief Financial Officer By /s/ John W. Swygert Title: Assistant Secretary THE CIT GROUP/BUSINESS CREDIT, INC., as Agent and Lender By /s/ Jeff Chiu Title: Assistant Vice President -3- EX-11 4 computationeps.txt COMPUTATION OF EARNINGS (LOSS) PER SHARE EXHIBIT 11.1 FACTORY 2-U STORES, INC. COMPUTATION OF EARNINGS (LOSS) PER SHARE (in thousands, except per share data)
Fiscal Year Ended February 3, January 29, January 30, 2001 2000 1999 --------------- -------------- --------------- The computation of net income (loss) available and adjusted shares outstanding follows: Income before extraordinary item $ 21,264 $ 12,442 $ 5,019 Extraordinary item, net of income tax benefit - - 2,750 ---------- ---------- ---------- Net income 21,264 12,442 2,269 Less: ---------- ---------- ---------- Inducement to convert preferred stock to common stock - - 2,804 Series A preferred stock dividends - - 2,593 Series B preferred stock dividends - - 2,210 ---------- ---------- ---------- Net income (loss) applicable to common stock $ 21,264 $ 12,442 $ (5,338) ========== ========== ========== Weighted average number of common shares outstanding * 12,589 12,214 3,381 Add assumed exercise of: Warrants that are common stock equivalents 33 18 - Options that are common stock equivalents 444 632 - ---------- ---------- ---------- Adjusted shares outstanding, used for diluted computation 13,066 12,864 3,381 ========== ========== ========== Earnings (loss) per share: Basic: Income (loss) before extraordinary item $ 1.69 $ 1.02 $ (0.77) Extraordinary item $ - $ - $ (0.81) Net income (loss) $ 1.69 $ 1.02 $ (1.58) Diluted: Income (loss) before extraordinary item $ 1.63 $ 0.97 $ (0.77) Extraordinary item $ - $ - $ (0.81) Net income (loss) $ 1.63 $ 0.97 $ (1.58)
* The weighted average number of common shares outstanding for fiscal year 1998 has been restated for the reverse stock split (factor is .30133) which took place on November 23, 1998. EX-23 5 consent.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 333-76011, 333-89267, 333-94123 and 333-40682. San Diego, California April 23, 2001 -----END PRIVACY-ENHANCED MESSAGE-----