-----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, C2Dq+I4mdTSVi5kqkmvTGatkUjpAN51tGkURF8YQUFIepCN3j5axpSu+teNS+c2T qq+uLlpm1xL/PvwmwanogQ== 0000813775-99-000059.txt : 19990914 0000813775-99-000059.hdr.sgml : 19990914 ACCESSION NUMBER: 0000813775-99-000059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FACTORY 2 U STORES INC CENTRAL INDEX KEY: 0000813775 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 510299573 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10089 FILM NUMBER: 99710464 BUSINESS ADDRESS: STREET 1: 4000 RUFFIN ROAD STREET 2: 6TH FLR CITY: SAN DIEGO STATE: CA ZIP: 92123-1866 BUSINESS PHONE: 6196271800 MAIL ADDRESS: STREET 1: 4000 RUFFIN ROAD STREET 2: 6TH FLOOR CITY: SAN DIEG STATE: CA ZIP: 92123-1866 FORMER COMPANY: FORMER CONFORMED NAME: FAMILY BARGAIN CORP DATE OF NAME CHANGE: 19940202 FORMER COMPANY: FORMER CONFORMED NAME: DRS INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LONGWOOD GROUP LTD DATE OF NAME CHANGE: 19920527 10-Q 1 QUARTERLY REPORT FOR 2ND QTR FYE 1/29/2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 1O-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 1-10089 FACTORY 2-U STORES, INC. (Exact name of registrant as specified in its charter) Delaware 51-0299573 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4000 Ruffin Road, San Diego, CA 92123-1866 (Address of principal executive office) (Zip Code) (858) 627-1800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO The number of shares outstanding of the registrant's of common stock, as of July 31, 1999, was 12,214,984 shares. FACTORY 2-U STORES, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Factory 2-U Stores, Inc. Balance Sheets as of July 31, 1999 (Unaudited) and January 30, 1999 ............................................F-1 Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the 13 weeks ended July 31, 1999 and August 1, 1998..............................F-3 Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the 26 weeks ended July 31, 1999 and August 1, 1998 .............................F-4 Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the 26 weeks ended July 31 and August 1, 1998 ...................................F-5 Factory 2-U Stores, Inc. Notes to Consolidated Financial Statements (Unaudited) ...........................................................F-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................3 PART II. OTHER INFORMATION Item 1. Legal Proceedings ...................................................7 Item 2. Changes in Securities and Use of Proceeds............................7 Item 3. Defaults Upon Senior Securities......................................7 Item 4. Submission of Matters to a Vote of Security Holders..................8 Item 5. Other Information ...................................................8 Item 6. Exhibits and Reports on Form 8-K ....................................9 Signatures ..................................................10 Exhibit Index ..................................................11 2 PART I Item 1. Financial Statements FACTORY 2-U STORES, INC. Balance Sheets (in thousands, except share data) July 31, January 30, 1999 1999 -------------- -------------- (Unaudited) ASSETS Current assets: Cash $ 5,869 $ 3,124 Merchandise inventory 45,408 31,353 Prepaid expenses and other assets 3,276 1,137 Deferred income taxes 1,747 1,690 ------ ----- Total current assets 56,300 37,304 Leasehold improvements and equipment, net of accumulated depreciation and amortization 22,075 18,187 Deferred income taxes 937 1,149 Other assets 2,027 2,419 Excess of cost over net assets acquired, less accumulated amortization of $9,338 and $8,537 at July 31, 1999 and January 30, 1999, respectively 30,307 31,108 ------- ------ Total assets $ 111,646 $ 90,167 ======== ====== (continued) F-1 FACTORY 2-U STORES, INC. Balance Sheets (in thousands, except share data) (continued) July 31, January 30, 1999 1999 ------------- ------------ (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations $ 1,281 $ 1,818 Accounts payable 30,486 21,258 Income taxes payable 960 2,656 Accrued expenses 17,478 20,151 Revolving credit notes 15,453 - ------- ------- Total current liabilities 65,658 45,883 ------- ------ Revolving credit notes - 1,843 Long-term debt, less current maturities 10,489 10,530 Capital leases and other long-term obligations 3,286 2,257 Deferred rent 2,344 1,889 ------ ----- Total liabilities 81,777 62,402 ------- ------ Stockholders' equity: Series A convertible preferred stock, $0.01 par value; 0 and 4,500,000 shares authorized, 0 shares issued and outstanding (aggregate liquidation preference of $0) at July 31, 1999 and January 30, 1999 - - Series B junior convertible, exchangeable preferred stock, $0.01 par value; 40,000 shares authorized, 0 shares issued and outstanding (aggregate liquidation preference of $0) at July 31, 1999 and January 30, 1999, respectively - - Common stock, $0.01 par value, 35,000,000 shares authorized and 12,214,984 shares issued and outstanding at July 31, 1999, and 80,000,000 shares authorized and 12,106,175 shares issued and outstanding at January 30, 1999 122 121 Stock subscription notes receivable (3,885) (4,087) Additional paid-in capital 103,603 103,248 Accumulated deficit (69,971) (71,517) -------- -------- Total stockholders' equity 29,869 27,765 ------- ------ Total liabilities and stockholders' equity $ 111,646 $ 90,167 ============ =========== The accompanying notes are an integral part to these financial statements. F-2 FACTORY 2-U STORES, INC. Statements of Operations (in thousands, except per share data) (Unaudited) 13 Weeks Ended ----------------------------------- July 31, 1999 August 1, 1998 ---------------- ----------------- Net sales $ 91,931 $ 73,456 Cost of sales 58,272 48,494 ------- ------ Gross profit 33,659 24,962 ------ ------ Selling and administrative expenses 30,354 24,330 Amortization of intangibles 590 590 ---- --- Operating income (loss) 2,715 42 Interest expense 663 1,094 ---- ----- Income (loss) before income taxes 2,052 (1,052) Income taxes 841 25 ---- ---- Income (loss) before dividends 1,211 (1,077) Preferred stock dividends - Series A - (864) Preferred stock dividends - Series B - (728) ---- ----- Net Income (loss) available to common stockholders $ 1,211 $ (2,669) ========= ========== Earnings (loss) per share: Basic $ 0.10 $ (1.77) Diluted $ 0.09 $ (1.77) Weighted average common shares outstanding Basic 12,159 1,508 Diluted 12,838 1,508 The accompanying notes are an integral part to these financial statements. F-3 FACTORY 2-U STORES, INC. Statements of Operations (in thousands, except per share data) (Unaudited) 26 Weeks Ended -------------------------------- July 31, 1999 August 1, 1998 Net sales $ 177,030 $ 139,951 Cost of sales 114,380 93,143 -------- ------ Gross profit 62,650 46,808 Selling and administrative expenses 57,650 45,524 Amortization of intangibles 1,179 1,179 Special charges - 1,500 ---- ----- Operating income (loss) 3,821 (1,395) Interest expense 1,202 2,372 ------ ----- Income (loss) before income taxes and extraordinary item 2,619 (3,767) Income taxes 1,074 99 ------ ----- Income (loss) before extraordinary item 1,545 (3,866) Extraordinary item - debt extinguishment (less applicable income taxes of $0) - 2,750 Income (loss) before dividends 1,545 (6,616) Preferred stock dividends - Series A - (1,728) Preferred stock dividends - Series B - (1,431) ------ ------- Net income (loss) available to common stockholders $ 1,545 $ (9,775) =========== ============ Earnings (loss) per share: Basic: Income (loss) before extraordinary item $ 0.13 $ (4.69) Extraordinary item $ - $ (1.84) Net income (loss) $ 0.13 $ (6.53) Diluted: Income (loss) before extraordinary item $ 0.12 $ (4.69) Extraordinary item $ - $ (1.84) Net income (loss) $ 0.12 $ (6.53) Weighted average common shares outstanding Basic 12,133 1,497 Diluted 12,707 1,497 The accompanying notes are an integral part to these financial statements. F-4 FACTORY 2-U STORES, INC. Statements of Cash Flows (in thousands) (Unaudited) 26 weeks ended ------------------------------ July 31, August 1, 1999 1998 ----------------- -------------- Cash flows from operating activities: Income (loss) before dividends $ 1,545 $ (6,616) Adjustments to reconcile income (loss) to net cash used in operating activities: Depreciation and amortization 4,162 3,494 Debt discount amortization 559 881 Extraordinary loss on debt extinguishment - 2,750 Loss on disposal of equipment - 148 Deferred rent expense - (79) Changes in operating assets and liabilities: Merchandise inventory (14,055) (11,044) Prepaid expenses (1,503) (2,178) Accounts payable 9,228 5,355 Accrued expenses and other (2,757) 1 ------------ ------------ Net cash used in operating activities (2,821) (7,288) ------------ ------------ Cash flows from investing activities: Purchase of leasehold improvements and equipment (7,339) (1,979) Net cash used in investing activities (7,339) (1,979) ------------- ------------ (continued) F-5 FACTORY 2-U STORES, INC. Statements of Cash Flows (in thousands) (Continued) 26 weeks ended --------------------------------- July 31, August 1, 1999 1998 ------------- ------------ Cash flows from financing activities: Borrowings on revolving credit facility 201,847 163,854 Payments on revolving credit facility (188,236) (149,520) Payments on notes payable and capital lease obligations (1,263) (1,977) Proceeds from issuance of common stock 1 - Buyback of warrants (457) - Proceeds from exercise of stock options 317 - Proceeds from exercise of warrants 412 - Grant of stock options below market price 83 - Payment of deferred debt issuance costs - (46) Proceeds from stock subscription notes receivable 201 - Payment of dividends on Series A preferred stock - (1,728) -------- ------- Net cash provided by financing activities 12,905 10,583 -------- ------- Net increase in cash 2,745 1,316 Cash at the beginning of the period 3,124 3,167 -------- ------- Cash at the end of the period $ 5,869 $ 4,483 ============ =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 582 $ 1,243 Income taxes $ 2,761 $ 74 Supplemental disclosures of non-cash investing activities: Capital lease purchases $ - $ 882 Supplemental disclosures of non-cash financing activities: Series B preferred stock dividends $ - $ 1,431 The accompanying notes are an integral part to these financial statements. F-6 FACTORY 2-U STORES, INC. Notes to Financial Statements (Unaudited) (1) Unaudited Interim Financial Statements The accompanying unaudited financial statements do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the financial statements for the fiscal year ended January 30, 1999 included in the Factory 2-U Stores, Inc. (the "Company") Form 10-K as filed with the Securities and Exchange Commission. The unaudited consolidated financial statements for the 13 and 26 weeks ending August 1, 1998 include the accounts of Family Bargain Corporation and its subsidiaries. All significant intercompany transactions were eliminated in consolidation. On November 23, 1998, the Company carried out a Recapitalization in which all of the Company's stock was converted into a single class of Common Stock. Under the Plan of Recapitalization, each share of Pre-Recapitalization Common Stock was converted into .30133 shares of Common Stock, each share of Series A Preferred Stock was converted into one share of Common Stock and each share of Series B Preferred Stock was converted into 173.33 shares of Common Stock. In connection with the Recapitalization, General Textiles, Inc. was merged into Family Bargain Corporation and the Company's name was changed to Factory 2-U Stores, Inc. In the opinion of management, the unaudited financial statements as of and for the 13 and 26 weeks ended July 31, 1999 and August 1, 1998 reflect all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Due to the seasonal nature of the Company's business, the results of operations for the interim period may not necessarily be indicative of the results of operations for a full year. (2) Long-term Debt As of July 31, 1999, the Company had outstanding long-term indebtedness, less current maturities, in the principal amount of $10.5 million. At January 31, 1998, the Company had outstanding $22.9 million face value of Trade Subordinated Notes, Subordinated Reorganization Notes and Junior Subordinated Reorganization Notes. These notes were non-interest bearing, except for certain contingent interest payments and were subject to minimum principal payment requirements based on the annual excess cash flows of General Textiles. Accordingly, they were discounted to carrying values based on estimated future cash flows of General Textiles at discount rates ranging from 6% to 25%. F-7 Effective April 30, 1998, the Company exchanged the Subordinated Reorganization Notes and the Junior Subordinated Reorganization Notes (the "Old Notes") for new notes (the "New Subordinated Notes" and the "New Junior Subordinated Notes", collectively, the "New Notes"). The New Notes removed an estimated excess cash flow calculation previously used to determine the timing and amount of payments. Further, the New Notes provide a fixed schedule for debt principal payments. In accordance with EITF 96-19, the Company recorded the exchange of the Old Notes as an extinguishment of debt, and in connection therewith, recorded an extraordinary loss, net of taxes, of $2.8 million. This loss represents the amount by which the present value of the New Notes exceeded the present value of the Old Notes for which they were exchanged 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 bore interest at 9.2% per annum through March 31, 1999, after which the interest rate would increase by one percent per annum each year up to a maximum of 13.2%. Principal was due in annual payments ranging from $0.2 million to $0.4 million with a balloon payment of $2.1 million due May 28, 2003. The entire balance of $3.3 million was paid on December 8, 1998. The New Junior Subordinated Notes have a face value of $17.3 million, are non-interest bearing and are reflected on the accompanying balance sheets at the present value using a discount rate of 10%. The unamortized discount related to the New Junior Subordinated Notes was $5.8 million at July 31, 1999, resulting in a net carrying value of $11.5 million, of which $1.0 million is a current maturity, as reflected in the July 31, 1999 balance sheet (see Financial Statements). The discount is amortized to interest expense as a non-cash charge until the notes are paid in full. Further, the New Junior Subordinated Notes require principal payments at December 31, 1999 and December 31, 2000 of $1.0 million, at December 31, 2001 and December 31, 2002 of $2.0 million, at December 31, 2003 and December 31, 2004 of $3.0 million and a final payment at May 28, 2005 of $5.3 million. (3) Revolving Credit Notes The Company maintains a $50.0 million revolving credit facility with a financial institution secured by all the assets of the Company. Amounts which may be borrowed under the working capital facility are based on a percentage of eligible inventories, as defined, outstanding from time to time, as more fully described below. On July 31, 1998, the Company's two operating subsidiaries, General Textiles and Factory 2-U, Inc., merged to form a new Delaware corporation named General Textiles, Inc. As a result, in July 1998, the Company and its lender agreed to amend certain terms and conditions of the revolving credit facilities between the lender and General Textiles and Factory 2-U. The covenants and financial ratios were reset to reflect anticipated earnings, capital expenditures and cash flow of the Company during fiscal 1998 and the facilities were combined into one revolving credit facility (the "Facility"). F-8 At July 31, 1999 the Company could borrow up to $50.0 million at the prime rate plus 0.75%, subject to limitations based on inventory levels. At July 31, 1999, the Company owed $15.5 million under the Facility and had $25.5 million available to borrow under the Facility. The Facility expires in March 2000 but is subject to one year automatic renewal periods, unless terminated by the Company or its lender. The balance owed under the Facility fluctuates as the Company borrows to meet working capital requirements and due to the seasonal nature of the Company's business. The Company pays fees of 0.25% on the unused portion of the Facility. The Facility is secured by all the assets of the Company. (4) Earnings per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings per Share" (SFAS No. 128), which the Company adopted as of January 31, 1998. This Statement sets forth the basis for the computation of "basic" earnings per share and "diluted" earnings per share from the previous method of computing both "primary" and "fully diluted" earnings per share. The preferred stock and other common stock equivalents were not considered as converted for the thirteen week period ended August 1, 1998 because the calculation was anti-dilutive. At July 31, 1999, there were 1,560,415 potentially dilutive common stock options and warrants outstanding. (5) Provision for Income Taxes The Company recorded a $0.8 million provision for income taxes as reflected in the accompanying statements of operations for the 13 weeks ended July 31, 1999. (6) Stock Options and Warrants At July 31, 1999, the Company had outstanding warrants exercisable for 82,690 shares of common stock with an exercise price of $19.91 per share. As of July 31, 1999, the Company had outstanding options to purchase 1,477,725 shares of common stock. Of those options, 371,784 become exercisable when specified market price hurdles for the Company's common stock have been achieved and maintained for 60 consecutive trading days, subject to vesting conditions (92,960 are exercisable at a market price hurdle of $19.91; 92,961 are exercisable at $24.89; 92,931 are exercisable at $33.19; and 92,932 are exercisable at $49.78). Assuming all options with market price hurdles are fully vested, when the market price of the Company's common stock reaches $19.91, $24.89, $33.19 and $49.78 for the specified periods of time, the Company will be required to record aggregate non-cash compensation expense in the minimum amounts of $1.2 million, $1.6 million, $2.4 million and $3.9 million, respectively. F-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Management's discussion of the results of operations provides analysis of the Company's operations during the 13 and 26 weeks ended July 31, 1999 and August 1, 1998. Results of Operations The following discussion and analysis should be read in conjunction with the Company's Financial Statements and notes thereto included elsewhere in this Form 10-Q. As of July 31, 1999 there were 178 stores in operation versus 162 at August 1, 1998. 13 Weeks Ended July 31, 1999 Compared to the 13 Weeks Ended August 1, 1998 Net sales were $91.9 million for the 13 weeks ended July 31, 1999 compared to $73.5 million for the 13 weeks ended August 1, 1998, an increase of approximately $18.4 million, or 25.2%. Comparable store sales increased 13.1%. The Company opened 12 new stores and closed 3 stores during the current period. Gross profit was $33.7 million for the 13 weeks ended July 31, 1999 compared to $25.0 million for the 13 weeks ended August 1, 1998, an increase of approximately $8.7 million, or 34.8%. As a percentage of sales, gross profit was 36.6% for the 13 weeks ended July 31, 1999 compared to 34.0% for the 13 weeks ended August 1, 1998. The increase in the gross profit margin is primarily attributable to a higher markup, lower shrinkage and lower markdown volume. Selling and administrative expenses were $30.4 million for the 13 weeks ended July 31, 1999 compared to $24.3 million for the 13 weeks ended August 1, 1998, an increase of approximately $6.1 million, or 24.8%. The increase was largely attributable to expenses associated with the growth in net sales. As a percentage of sales, selling and administrative expenses were 33.0% for the 13 weeks ended July 31, 1999 and 33.1% for the 13 weeks ended August 1, 1998. Interest expense was $0.7 million for the 13 weeks ended July 31, 1999 and $1.1 million for the 13 weeks ended August 1, 1998. Lower average borrowings under the Company's revolving credit facility and the exchange of the Old Notes for the New Notes which resulted in a lower debt discount amortization reduced interest expense in the current year. See "Liquidity and Capital Resources." Income taxes were $0.8 million for the 13 weeks ended July 31, 1999 and $0.03 million for the 13 weeks ended August 1, 1998. Income taxes increased as a result of higher taxable income versus the same period a year ago. 3 The net income available to common stockholders was $1.2 million for the 13 weeks ended July 31, 1999 compared to a net loss available to common stockholders of $2.7 million for the 13 weeks ended August 1, 1998. The increase in net income for the 13 weeks ended August 1, 1998 is a result of the operating factors cited above. 26 Weeks Ended July 31, 1999 Compared to the 26 Weeks Ended August 1, 1998 Net sales were $177.0 million for the 26 weeks ended July 31, 1999 compared to $140.0 million for the 26 weeks ended August 1, 1998, an increase of $37.0 million, or 26.5%. Comparable store sales increased 17.1%. The Company opened 16 new stores and closed 6 stores. Gross profit was $62.7 million for the 26 weeks ended July 31, 1999 compared to $46.8 million for the 26 weeks ended August 1, 1998, an increase of $15.9 million, or 33.8%. As a percentage of sales, gross profit was 35.4% for the 26 weeks ended July 31, 1999 compared to 33.4% for the 26 weeks ended August 1, 1998. The increase in the gross profit margin is primarily attributable to a higher markup, lower shrinkage and lower markdown volume. Selling and administrative expenses were $57.7 million for the 26 weeks ended July 31, 1999 compared to $45.5 million for the 26 weeks ended August 1, 1998, an increase of approximately $12.2 million, or 26.6%. The increase was largely sales volume related. As a percentage of sales, selling and administrative expenses were 32.6% for the 26 weeks ended July 31, 1999 compared to 32.5% for the 26 weeks ended August 1, 1998. The special charge of $1.5 million in fiscal 1998 represents various expenses incurred in connection with hiring the President and CEO. Interest expense was $1.2 million for the 26 weeks ended July 31, 1999 and $2.4 million for the 26 weeks ended August 1, 1998. Lower average borrowings this year under the Company's revolving credit facility and the exchange of the Old Notes for the New Notes which resulted in a lower debt discount amortization reduced interest expense in the current year. See "Liquidity and Capital Resources." Income taxes increased to $1.1 for the 26 weeks ended July 31, 1999 compared to $0.1 for the 26 weeks ended August 1, 1998. Income taxes increased as a result of increased taxable income. An extraordinary charge of $2.8 million was incurred for the 26 weeks ended August 1, 1998 as a result of notes payable associated with the General Textiles bankruptcy being extinguished early and new notes with terms more favorable to the Company being issued. The net income available to common stockholders was $1.5 million for the 26 weeks ended July 31, 1999 compared to a net loss available to common stockholders of $9.8 million for the 26 weeks ended August 1, 1998. The increase in net income for the 26 weeks ended July 31, 1999 is a result of the operating factors cited above. 4 Liquidity and Capital Resources General As of July 31, 1999, the Company had outstanding indebtedness in the principal amount of $26.9 million. The Company finances its operations through credit provided by vendors and other suppliers, amounts borrowed under its $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 working capital facility are based on a percentage of eligible inventories, as defined, outstanding from time to time, as more fully described elsewhere in this Form 10-Q. See Note 2 (Long-term Debt) and Note 3 (Revolving Credit Facility) of Notes to Financial Statements. Management believes that the Company's sources of cash, including the Facility, will be adequate to finance its operations and meet obligations under its existing indebtedness as they become due for at least the next twelve months. Capital Expenditures The Company anticipates spending approximately $8.2 million on capital expenditures during the remainder of the current fiscal year ending January 29, 2000 which includes costs to open approximately 17 new stores, to renovate 24 existing stores, to relocate approximately 9 existing stores and to upgrade information systems. Management believes that future expenditures will be financed from internal cash flow and the Facility. Inflation In general, the Company believes that inflation has had no recent material impact on operations and none is anticipated in the next fiscal year. Minimum Wage Increases The Company employs, both in its stores and in its 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 the hourly wages payable by the Company to such employees. To mitigate the impact of such wage increases, the Company has instituted policies to manage its ratio of wages to sales. Management believes that these measures will be adequate to control the impact of hourly wage increases on the overall profitability of its operations for the foreseeable future. 5 Seasonality and Quarterly Fluctuations The Company historically has realized, and expects to continue to realize, its highest level of sales and income during the third and fourth quarters of its fiscal year (the quarters ending in October and January) as a result of the "Back to School" (August and September) and Christmas (November and December) seasons. The seasonally lower sales in the Company's first two quarters (February through July), can result in the Company's incurring losses during those quarters even in years in which it will have full year profits. Year 2000 Issue Many currently installed computer systems and software products are coded to accept only 2 digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept 4 digit entries to distinguish 21st century dates from 20th century dates. Systems that do not properly recognize such information could generate erroneous data or fail. As a result, computer systems and/or software used by many companies may need to be upgraded to comply with Year 2000 requirements. The Company is utilizing both internal and external resources as applicable, to identify, correct or reprogram its internal systems for Year 2000 compliance. The effect on the Company's future results of operations is being determined as part of the detailed conversion process. In February 1999, the Company implemented a new integrated software package to support future growth and to address the issues associated with the Year 2000. This system implementation substantially completed the Company's internal program to address the Company's Year 2000 issues. The new software installation cost $2.8 million. The Company is currently seeking to insure that the software and operating systems included in its new integrated software package are Year 2000 compliant. The Company is also in the process of requesting information and assurances from its major vendors, service providers and customers about their state of Year 2000 compliance and readiness. In the event that significant Year 2000 issues are identified with such parties, and in contemplation of the possibility of such problems, the Company intends to develop contingency plans such as the use of alternate vendors or manual systems prior to October 1999. Although, based on a review of its data processing, operational and other computer-based systems, the Company does not currently believe that it will experience any significant adverse effects or material unbudgeted costs resulting therefrom, there can be no assurance in that regard. The failure to correct a material Year 2000 problem could result in an interruption in or a failure of certain normal activities or operations. Such interruptions or failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Because there is general uncertainty about the Year 2000 problem, including uncertainty about the Year 2000 readiness of suppliers and customers, it is not possible to predict whether Year 2000 problems will occur or what consequences such problems will have on results of operations, liquidity or financial condition. 6 However, the Company's plans to address Year 2000 issues are intended to minimize, to the extent feasible, the possibility of interruptions of normal operations. There can, however, be no assurance that the Company will be successful in doing so. Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private Securities Litigation Reform Act of 1995 Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations or elsewhere in this Form 10-Q that are not related to historical results are forward-looking statements. Actual results may differ materially from those projected or implied in the forward-looking statements. Risks and uncertainties which could effect the Company include, but are not limited to, general and local economic and weather conditions that affect buying patterns of the Company's customers, changes in consumer spending and the Company's ability to anticipate buying patterns and implement appropriate inventory strategies, continued availability of capital and financing, competitive factors, expansion plans, risks and uncertainties associated with the failure of the Company or its suppliers or customers to be Year 2000 compliant, and other factors affecting the Company's business beyond the Company's control as well as other factors described in the Company's other filings with the Securities and Exchange Commission. Consequently, all of the forward-looking statements are qualified by these cautionary statements and there can be no assurance that the results or developments anticipated by the Company will be realized or that they will have the expected effects on the Company or its business or operations. Actual results could differ materially from those contemplated or expressed in any forward-looking statements. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is at all times subject to pending and threatened legal actions, which arise out of the normal course of business. In the opinion of management, based in part on the advice of legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. 7 Item 4. Submission of Matters to a Vote of Security Holders a. The Company's annual meeting of stockholders was held on June 23, 1999. b. The directors elected at the meeting were as follows: Director Votes Votes For Against Withheld Ira Neimark 9,311,155 0 7,125 Michael Searles 9,311,155 0 7,125 Other directors whose terms of office continued after the meeting are as follows: Peter V. Handal, Ronald Rashkow, H. Whitney Wagner and Wm. Robert Wright II. James D. Somerville resigned as a director effective June 23, 1999 and John J. Borer III did not stand for re-election. c. Other matters voted on at the meeting and the results of those votes were as follows: Approval of the amendment of the Certificate of Incorporation to reduce to 35,000,000 the number of shares of common stock the Company is authorized to issue. Votes for: 9,305,738 Votes against: 2,959 Abstentions: 9,583 Ratification of Arthur Andersen LLP as independent accountants Votes for: 9,224,835 Votes against: 37,016 Abstentions: 56,429 Item 5. Other Information None. 8 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Computation of per share loss (1 page) 27 Financial Data Schedule (1 page) (b) Reports on Form 8-K None. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FACTORY 2-U STORES, INC. Date: September 13, 1999 By: /s/ Douglas C. Felderman Name: Douglas C. Felderman Title: Executive Vice President and Chief Financial Officer (duly authorized officer and principal financial officer) 10 EXHIBIT INDEX Exhibit Number Description Page 11.1 Computation of per share income (loss) 12 27 Financial Data Schedule (for EDGAR filing only) 13 11 EXHIBIT 11.1 COMPUTATION OF PER SHARE INCOME (LOSS)
13 weeks ended 39 weeks ended -------------- -------------- July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998 The computation of net income (loss) available and adjusted shares outstanding follows: Income (loss) from continuing operations $ 1,211 $ (1,077) $ 1,545 $ (3,866) Extraordinary item - - - (2,750) Net income (loss) 1,211 (1,077) 1,545 (6,616) Less: Series A preferred stock dividends - (864) - (1,728) Series B preferred stock dividends - (728) - (1,431) Net income (loss) used for basic and diluted computation $ 1,211 $ (2,669) $ 1,545 $ (9,775) Weighted average number of common shares outstanding * 12,158,607 1,507,892 12,132,614 1,496,840 Add assumed exercise of: Warrants that are common stock equivalents 36,243 - 18,122 - Options that are common stock equivalents 642,850 - 556,702 - Series A Preferred - - - - Series B Preferred - - - - Adjusted shares outstanding, used for diluted computation 12,837,701 1,507,892 12,707,437 1,496,840 Basic: Income (loss) before extraordinary item $ 0.10 $ (1.77) $ 0.13 $ (4.69) Extraordinary item per share - - - (1.84) Net income (loss) $ 0.10 $ (1.77) $ 0.13 $ (6.53) Diluted: Income (loss) before extraordinary item $ 0.09 $ (1.77) $ 0.12 $ (4.69) Extraordinary item per share - - - (1.84) Net income (loss) $ 0.09 $ (1.77) $ 0.12 $ (6.53)
* The weighted average number of common shares outstanding for prior periods have been restated for the reverse stock split (factor is .30133) that took place effect November 23, 1998. 12 EX-27 2 FDS --
5 This schedule contains summary financial information extracted from the Balance Sheet and Statement of Operations as of and for the 26 weeks ended July 31, 1999 and is qualified in its entirety by reference to such financial statements as included in the Company's Quarterly Report on Form 10-Q. 0000813775 Factory 2-U Stores, Inc. 1,000 6-MOS JAN-29-2000 MAY-2-1999 JUL-31-1999 5,869 0 0 0 45,408 56,300 36,763 14,688 111,646 65,658 0 0 0 122 29,747 111,646 177,030 177,030 114,380 114,380 58,829 0 1,202 2,619 1,074 1,545 0 0 0 1,545 0.13 0.12
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