-----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, RptAI60zbHlqhwWwRJVFY2dcmc+qSVpxWK3dn1Aew5Ss2CPyCNrx2pMtbCTbi0D0 WFgXNS/LEmXPMcV5lXhVFQ== 0000813775-02-000010.txt : 20020613 0000813775-02-000010.hdr.sgml : 20020613 20020613132252 ACCESSION NUMBER: 0000813775-02-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020504 FILED AS OF DATE: 20020613 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: 1934 Act SEC FILE NUMBER: 001-10089 FILM NUMBER: 02678058 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: DRS INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LONGWOOD GROUP LTD DATE OF NAME CHANGE: 19920527 FORMER COMPANY: FORMER CONFORMED NAME: FAMILY BARGAIN CORP DATE OF NAME CHANGE: 19940202 10-Q 1 a20021st10q.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 050402 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 1O-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 4, 2002 ----------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1932 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 common stock, as of June 12, 2002 was 12,949,124 shares. FACTORY 2-U STORES, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 4, 2002 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Factory 2-U Stores, Inc. Balance Sheets as of May 4, 2002, May 5, 2001 (Unaudited) and February 2, 2002....................................F-1 Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the 13 weeks ended May 4, 2002 and May 5, 2001 ........................ F-3 Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the 13 weeks ended May 4, 2002 and May 5, 2001 .........................F-4 Factory 2-U Stores, Inc. Notes to Financial Statements (Unaudited) .F-5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................3 Item 3. Quantitative and Qualitative Disclosures About Market Risk............9 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................10 Item 2. Changes in Securities and Use of Proceeds............................10 Item 3. Defaults Upon Senior Securities......................................10 Item 4. Submission of Matters to a Vote of Security Holders..................10 Item 5. Other Information....................................................10 Item 6. Exhibits and Reports on Form 8-K.....................................10 Signatures....................................................................11 2 PART I Item 1. Financial Statements FACTORY 2-U STORES, INC. Balance Sheets (in thousands, except share and per share data)
May 4, May 5, February 2, 2002 2001 2002 ----------- ----------- ----------- (Unaudited) (Unaudited) ASSETS Current assets: Cash $ 8,360 $ 5,676 $ 17,390 Merchandise inventory 64,369 67,282 54,860 Accounts receivable 1,014 2,235 2,013 Prepaid expenses 6,832 6,474 6,357 Deferred income taxes 3,553 2,503 3,553 ----------- ----------- ----------- Total current assets 84,128 84,170 84,173 Leasehold improvements and equipment, net 34,771 41,465 37,042 Deferred income taxes 7,182 4,992 7,182 Other assets 1,006 1,146 1,011 Excess of cost over net assets acquired, less accumulated amortization of $13,344, $12,142 and $13,344, respectively 26,301 27,503 26,301 ----------- ----------- ----------- Total assets $153,388 $159,276 $155,709 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. (continued) F-1 FACTORY 2-U STORES, INC. Balance Sheets (in thousands, except share and per share data) (continued)
May 4, May 5, February 2, 2002 2001 2002 ----------- ----------- ----------- (Unaudited) (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital leases $ 2,004 $ 2,141 $ 2,019 Accounts payable 37,230 46,181 36,271 Taxes payable 690 2,057 3,332 Accrued expenses 29,729 13,043 27,918 ----------- ----------- ------------ Total current liabilities 69,653 63,422 69,540 Revolving credit facility - 3,200 - Long-term debt 8,638 9,501 8,376 Other long-term obligations 3,578 1,099 3,578 Deferred rent 3,263 3,582 3,649 ----------- ----------- ------------ Total liabilities 85,132 80,804 85,143 ----------- ----------- ------------ Stockholders' equity: Common stock, $0.01 par value; 35,000,000 shares authorized and 12,943,137 shares, 12,775,567 shares and 12,842,146 shares issued and outstanding, respectively 129 128 128 Stock subscription notes receivable (2,149) (2,225) (2,225) Additional paid-in capital 122,124 119,828 121,370 Accumulated deficit (51,848) (39,259) (48,707) ----------- ----------- ----------- Total stockholders' equity 68,256 78,472 70,566 ----------- ----------- ----------- Total liabilities and stockholders' equity $ 153,388 $ 159,276 $ 155,709 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-2 FACTORY 2-U STORES, INC. Statements of Operations (in thousands, except per share data) (Unaudited)
13 Weeks Ended -------------- May 4, May 5, 2002 2001 ----------- ----------- Net sales $ 116,951 $ 125,824 Cost of sales 75,793 84,065 ----------- ----------- Gross profit 41,158 41,759 Selling and administrative expenses 45,698 42,647 Pre-opening and closing expenses 437 854 Amortization of intangibles - 423 ----------- ----------- Operating loss (4,977) (2,165) Interest expense, net 258 331 ------------ ----------- Loss before income taxes (5,235) (2,496) Income tax benefit (2,094) (1,048) ------------ ----------- Net loss $ (3,141) $ (1,448) ============ =========== Loss per share Basic $ (0.24) $ (0.11) Diluted $ (0.24) $ (0.11) Weighted average common shares outstanding Basic 12,903 12,769 Diluted 12,903 12,769
The accompanying notes are an integral part of these financial statements. F-3 FACTORY 2-U STORES, INC. Statements of Cash Flows (in thousands) (Unaudited)
13 Weeks Ended -------------- May 4, May 5, 2002 2001 ----------- ----------- Cash flows from operating activities Loss from operating activities $ (3,141) $ (1,448) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 3,757 3,939 Loss on disposal of equipment 41 71 Deferred rent expense (386) 106 Changes in operating assets and liabilities Merchandise inventory (9,509) (14,838) Prepaid expenses and other assets 536 (821) Accounts payable 958 20,987 Accrued expenses and other liabilities (1,506) (6,628) ----------- ----------- Net cash provided by (used in) operating activities (9,250) 1,368 ----------- ----------- Cash flows from investing activities Purchase of leasehold improvements and equipment (538) (3,691) ----------- ----------- Net cash used in investing activities (538) (3,691) ----------- ----------- Cash flows from financing activities Borrowings on revolving credit facility - 20,472 Payments on revolving credit facility - (17,272) Payments on long-term debt and capital lease obligations (115) (46) Payment of deferred debt issuance costs (40) (40) Proceeds from exercise of stock options 737 146 Payments of stock subscription notes receivable 76 - ----------- ----------- Net cash provided by financing activities 758 3,260 ----------- ----------- Net increase (decrease) in cash (9,030) 937 Cash at the beginning of the period 17,390 4,739 ----------- ----------- Cash at the end of the period $ 8,360 $ 5,676 =========== =========== Supplemental disclosure of cash flow information Cash paid during the period for Interest $ 38 $ 60 Income taxes $ 1,102 $ 5,518 Supplemental disclosure of non-cash financing activities Issuance of common stock to board members as compensation $ 17 $ 38
The accompanying notes are an integral part of these financial statements. F-4 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 accounting principles generally accepted in the United States for annual financial statements and should be read in conjunction with the financial statements for the fiscal year ended February 2, 2002 included in our Form 10-K as filed with the Securities and Exchange Commission. We believe that the unaudited financial statements as of and for the 13 weeks ended May 4, 2002 and May 5, 2001 reflect all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Due to the seasonal nature of our business, the results of operations for the interim period may not necessarily be indicative of the results of operations for a full year. (2) Recent Accounting Pronouncements In August 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of long-lived assets, except for certain obligations of lessees. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not believe the adoption of this statement will have a material impact on our financial position or results of operations. Also in August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for the disposal of a segment of a business (as previously defined in that Opinion). The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 had no impact on our financial position or results of operations. F-5 (3) Restructuring Charge In January 2002, we recorded a restructuring charge of $21.2 million in conjunction with the decision to close 28 under-performing stores, as well as the realignment of our field organization and workforce reductions. The purpose of these restructuring initiatives is to improve store profitability, streamline field operations, reduce costs and improve efficiency. We believe this plan will improve our earnings for fiscal year 2002 and beyond. As of June 4, 2002, we had closed 24 of the 28 under-performing stores and have substantially completed the realignment of our field organization and workforce reductions. The balance of the liability related to the restructuring charge at May 4, 2002, was as follows:
Balance at Balance at February 2, Cash Non-cash May 4, (in thousands) 2002 Payments Charges 2002 - -------------- ------------ ----------- ------------ ------------ Lease termination costs* $ 13,724 $ (418) $ 290 $ 13,596 Inventory liquidation costs (non-cash) 2,870 - (1,309) 1,561 Fixed asset write-downs (non-cash) 2,052 - (1,390) 662 Employee termination costs 1,159 (745) - 414 Other cash costs 1,349 (620) - 729 ------------ ----------- ------------ ------------ $ 21,154 $(1,783) $ (2,409) $ 16,962 ------------ ----------- ------------ ------------
* The non-cash charge portion represents deferred rent adjustment. (4) Adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ---------------------------------------------------------------- In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets", which requires that upon adoption, amortization of goodwill will cease and instead, the carrying value of goodwill be evaluated for impairment at least annually using a fair value test. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed at least annually for impairment using a method appropriate to the nature of the intangible asset. F-6 As required, we adopted SFAS No. 142 on February 3, 2002 and eliminated the amortization of goodwill accordingly. The following table presents a reconciliation of net income and per share data to what would have been reported had the new rules been in effect during the 13-week period ended May 5, 2001 (in thousands, except per share data):
13 Weeks Ended -------------- May 4, 2002 May 5, 2001 ----------- ----------- Reported net loss $ (3,141) $ (1,448) Add back goodwill amortization, net of tax - 232 ----------- ----------- Adjusted net loss $ (3,141) $ (1,216) ----------- ----------- Basic and diluted net loss per common share Reported net loss $ (0.24) $ (0.11) Goodwill amortization, net of tax $ - $ 0.01 Adjusted net loss $ (0.24) $ (0.10)
(5) Revolving Credit Facility We have a $50.0 million revolving credit facility, under which we may borrow up to 70% of our eligible inventory and 85% of our eligible accounts receivable, as defined. The credit facility was amended on April 9, 2002 to increase our $5.0 million sub-facility for letters of credit to $10.0 million. 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 $7.5 million. At May 4, 2002, based on eligible inventory and accounts receivable, we were eligible to borrow $48.1 million under the revolving credit facility; and we were in compliance with all financial and tangible net worth covenants, as defined. At May 4, 2002, we had no outstanding borrowings; and we had a $3.5 million standby letter of credit outstanding. F-7 (6) Long-Term Debt Our long-term debt consists of Junior Subordinated Notes, which are non-interest bearing and are reflected on our balance sheets at the present value using a discount rate of 10%. As of May 4, 2002, the Junior Subordinated Notes had a face value of $13.3 million and a related unamortized discount of $2.7 million, resulting in a net carrying value of $10.6 million. The discount is amortized to interest expense as a non-cash charge until the notes are paid in full. We made a principal payment on the Junior Subordinated Notes of $2.0 million in December 2001. Additional principal payments are scheduled on December 31, 2002 ($2.0 million), December 31, 2003 and December 31, 2004 ($3.0 million) and on May 28, 2005 ($5.3 million). (7) Income (loss) per Share We compute income (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 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 the 13 weeks ended May 4, 2002 and May 5, 2001 because the effect would be anti-dilutive. The following table sets forth the computation of loss per share for the periods indicated:
13 Weeks Ended -------------- May 4, 2002 May 5, 2001 ----------- ----------- Net loss $ (3,141) $ (1,448) Weighted average number of common shares outstanding 12,903 12,769 Effect of dilutive securities Warrants that are common stock equivalents - - Options that are common stock equivalents - - ----------- ----------- Adjusted common shares outstanding used for diluted computation 12,903 12,769 =========== =========== Loss per share Basic $ (0.24) $ (0.11) Diluted $ (0.24) $ (0.11)
F-8 (8) Provision for Income Taxes Based on our estimated effective tax rate for the entire fiscal year, which is subject to ongoing review and evaluation, we recorded a $2.1 million income tax benefit for the 13 weeks ended May 4, 2002. (9) Stock Options and Warrants As of May 4, 2002, we had outstanding options to purchase 1,288,921 shares of our common stock. Included in these outstanding stock options are 9,793 performance-based options, which will become exercisable if the market price hurdle of $49.78 has been achieved and maintained for 60 consecutive days. Should this occur, we will incur a non-cash compensation expense in the minimum amount of $410,000. These performance-based options will expire on various dates through April 29, 2003. At May 4, 2002, warrants to purchase 82,690 shares of our common stock were outstanding. These warrants have an exercise price of $19.91 and expire May 2005. (10) 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. F-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our Financial Statements and notes thereto, included elsewhere in this Form 10-Q. General As of May 4, 2002, we operated 256 stores compared to 251 stores as of May 5, 2001. We opened 5 new stores and closed 28 stores during the 13-week period ended May 4, 2002. For the same period last year, we opened 9 new stores and closed 1 store. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Specifically, we must make estimates in the following areas: o Inventory valuation. Merchandise inventory is stated at the lower of cost or market determined using the retail inventory method ("RIM") on a first-in, first-out basis. Under the RIM, the valuation of inventory at cost and the resulting gross margin are calculated by applying a computed cost-to-retail ratio to the retail value of inventory. RIM is an averaging method that has been widely used in the retail industry due to its practicality. Also, it is recognized that the use of the RIM will result in valuing inventory at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventory. Inherent in the RIM calculation are certain significant management judgments and estimates regarding markdowns and shrinkage, which may from time to time cause adjustments to the gross margin in the subsequent period. Factors that can lead to distortion in the calculation of the inventory balance include applying the RIM to a group of merchandise items that is not fairly uniform in terms of its cost and selling price relationship and turnover, and applying RIM to transactions over a period of time that includes different rates of gross profit, such as those relating to seasonal merchandise items. To minimize the potential of such distortions in the valuation of inventory from occurring, we utilize 74 sub-departments in which fairly homogeneous classes of merchandise items having similar gross margin are grouped. In addition, failure to take markdowns currently may result in an overstatement of cost under the lower of cost or market principle. We believe that our RIM provides an inventory valuation that reasonably approximates cost and results in carrying inventory at the lower of cost or market. 3 o Valuation of goodwill, intangible and other long-lived assets. We use certain assumptions in establishing the carrying value and estimated lives of our long-lived assets and goodwill. The criteria used for these evaluations include management's estimate of the asset's continuing ability to generate income from operations and positive cash flows. If assets are considered to be impaired, the impairment recognized is measured by the amount that the carrying value of the assets exceeds the fair value of the assets. Useful lives and related depreciation or amortization expense are based on our estimate of the period that the assets will generate revenues or otherwise be used in operations. Factors that would influence the likelihood of a material change in our reported results include a significant decline in our stock price and market capitalization compared to our net book value, significant changes in an asset's ability to generate positive cash flows, significant changes in our strategic business objectives and utilization of the asset. o Accrued restructuring costs. We have estimated an amount for the charge and the related liability regarding our restructuring initiatives including store closures, realignment of our field organization and workforce reductions in accordance with the Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Materially different reported results would be likely if the timing and extent of the adopted restructuring plan were changed. o Litigation reserves. Based in part on the advice of our legal counsel, estimated amounts for litigation and claims that are probable and can be reasonably estimated are recorded as liabilities in the balance sheet. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the favorable or unfavorable outcome of the particular litigation. We anticipate these reserves will be remeasured as new facts come to light in any particular case. o Worker's compensation accrual. At the beginning of fiscal 2001, we transitioned to a partially self-insured worker's compensation program. This new program has both specific and aggregate stop-loss amounts. The maximum specific stop-loss is $250,000 per occurrence and the deductible aggregate stop-loss is $3.2 million for the policy year ended January 31, 2002. We utilize internal actuarial methods, as well as an independent third-party actuary for the purpose of estimating ultimate costs for a particular policy year. Based on these actuarial methods along with current available information and insurance industry statistics, the ultimate expected losses for the policy year ended January 31, 2002 were estimated to be approximately $2.6 million. Our estimate is based on average claims experience in our industry and our own experience in terms of frequency and severity of claims, with no explicit provision for adverse fluctuation from year to year and is subject to inherent variability. This variability may lead to ultimate payments being either greater or less than the amounts presented above. 4 o Valuation of deferred income taxes. Valuation allowances are established, if deemed necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in our expected realization of these assets is dependent on future taxable income, our ability to use the net operating loss carryforwards, the effectiveness of our tax planning and strategies among the various tax jurisdictions that we operate in, and any significant changes in the tax treatment we currently receive. Results of Operations 13 Weeks Ended May 4, 2002 Compared to the 13 Weeks Ended May 5, 2001 Net sales were $117.0 million for the 13 weeks ended May 4, 2002 compared to $125.8 million for the 13 weeks ended May 5, 2001, a decrease of $8.9 million, or 7.1%. Comparable store sales for the 13-week period ended May 4, 2002 decreased 11.8% versus a decrease of 6.3% for the same period last year. The decline in net sales was primarily due to reduced customer traffic. Gross profit was $41.2 million for the 13 weeks ended May 4, 2002 compared to $41.8 million for the 13 weeks ended May 5, 2001, a decrease of $601,000 or 1.4%. As a percentage of net sales, gross profit was 35.2% for the 13 weeks ended May 4, 2002 compared to 33.2% for the 13 weeks ended May 5,2001. The improvement in gross profit as a percentage of net sales was attributable to higher cumulative mark-up, lower markdowns associated with less inventory clearance this year and improved labor and freight utilization related to distribution. Selling and administrative expenses were $45.7 million for the 13 weeks ended May 4, 2002 compared to $42.6 million for the 13 weeks ended May 5, 2001, an increase of $3.1 million, or 7.2%. Selling and administrative expenses increased as a result of more stores in operation during the current quarter, increased advertising spending, increased occupancy costs and increased consulting and legal expenses. As a percentage of net sales, selling and administrative expenses were 39.1% and 33.9% for the 13 weeks ended May 4, 2002 and May 5, 2001, respectively. Selling and administrative expenses increased as a percent of sales due to lower average sales volume per store and increased spending as related to items cited above. Pre-opening and closing expenses were $437,000 for the 13 weeks ended May 4, 2002 compared to $854,000 for the same period last year, a decrease of $417,000 or 48.8%. The decrease in pre-opening and closing expenses was due to the opening of 4 fewer new stores during the current period versus the same period last year. We did not record any amortization of intangibles for the 13 weeks ended May 4, 2002 versus $423,000 recorded during the same period last year. This change was due to the elimination of goodwill amortization in conjunction with the adoption of SFAS No. 142 and cessation of amortization associated with certain costs incurred in the ownership change of the Company in fiscal 1997. 5 Interest expense, net was $258,000 for the 13 weeks ended May 4, 2002 compared to $331,000 for the 13 weeks ended May 5, 2001, a decrease of $73,000 or 22.1%. The decrease was due to lower average outstanding borrowings on the revolving credit facility. We recorded an income tax benefit of $2.1 million for the 13 weeks ended May 4, 2002 compared to $1.0 million for the 13 weeks ended May 5, 2001. The increase in income tax benefit was the result of an increased pre-tax loss versus the same period a year ago. For the 13 weeks ended May 4, 2002, the net loss was $3.1 million as compared to $1.4 million for the 13 weeks ended May 5, 2001. The increase in net loss 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 inventory and accounts receivable, as defined, outstanding from time to time, as more fully described in Note 5 of Notes to Financial Statements. At May 4, 2002, we had no outstanding borrowings under our revolving credit facility. During the 13 weeks ended May 4, 2002, we used $9.3 million in operating activities, $538,000 in investing activities and generated $758,000 from financing activities. As a result, we had a net decrease in cash of $9.0 million during our first quarterly period in fiscal 2002 compared to a net increase in cash of $937,000 during the same period last year. We believe that our sources of cash, including the revolving 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. Capital Expenditures We anticipate capital expenditures of approximately $11.7 million for the remainder of the current fiscal year ending February 1, 2003, which includes costs to open new stores, to renovate and relocate existing stores, to upgrade information systems and development of a distribution center in San Diego, California. This new distribution center will be approximately 600,000 square feet and service store operation on the west coast, Arizona, Nevada, and parts of New Mexico. We anticipate that it will become operational in our second quarter of fiscal 2003. We anticipate capital expenditures of approximately $6.5 million for this facility, approximately $4.0 million of which will occur in fiscal 2002. We believe the capital expenditures for this facility and other capital requirements will be financed from internal cash flow. 6 Store Closures and Restructuring Initiatives As previously discussed, we had closed 24 of the 28 under-performing stores as part of our restructuring plan. In addition, we had closed five other stores which were either due to non-renewable leases or relocation opportunities. The majority of the store closures were part of our restructuring initiatives intended to improve future financial performance. The cash charges to close a store principally consisted of lease termination or sublease costs, employee severance and tear-down costs. In addition to the closing of under-performing stores, we also included the realignment of field organization and workforce reductions as part of our restructuring initiatives. We estimate the cash requirement during the remainder of fiscal 2002 for the restructuring would be approximately $10.9 million. We believe that our sources of cash, including the revolving credit facility, should be adequate to fund our restructuring efforts. Contractual Obligations and Commitments The following table summarizes our significant contractual obligations, as well as estimated cash requirements related to the restructuring initiatives, as of May 4, 2002. These should be read in conjunction with "Note 3 - Restructuring Charge" and "Note 6 - Long-Term Debt" in the accompanying unaudited financial statements, as well as our fiscal 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
(in thousands) Junior Accenture Subordinated Operating Capital Restructuring Consulting Notes Leases Leases Charge Agreement Total ---------------- --------------- ------------- ----------------- --------------- ---------------- Fiscal Year: 2002 (remaining 9 months) $ 2,000 $ 25,449 $ 3 $ 10,947 $ 3,218 $ 41,617 2003 3,000 31,798 - 3,578 - 38,376 2004 3,000 28,192 - - - 31,192 2005 5,300 21,330 - - - 26,630 2006 - 14,923 - - - 14,923 Thereafter - 30,560 - - - 30,560 ---------------- --------------- ------------- ----------------- --------------- ---------------- $ 13,300 $152,252 $ 3 $ 14,525 $ 3,218 $183,298 ---------------- --------------- ------------- ----------------- --------------- ----------------
In the first quarter of fiscal 2002, we entered into a master Consulting Services Agreement and a statement of work thereunder (the "Agreement") with Accenture LLP ("Accenture") to provide consulting services on merchandise assortment planning and in-season management, advertising effectiveness and brand development. The consulting services include (1) identification of high impact opportunities, (2) development of an approach plan to realize and sustain the associated benefits of the identified opportunities, (3) assistance in the execution of the approach plan and (4) development of procedures for the 7 company's management to ensure the continuation of the program on a long-term basis. Under the Agreement, we will pay Accenture approximately $3.9 million for services scheduled to be completed by January 2003. In addition, Accenture may become entitled to additional fees up to $1.3 million for fiscal 2002 and $1.0 million for fiscal 2003 if we achieve specified financial targets for fiscal 2002 and fiscal 2003. The Agreement is generally terminable on 30-day notice. If we terminate without cause, we may be obligated to reimburse Accenture for specified termination fees. Forward-Looking Statements In this Quarterly Report on Form 10-Q, we have made both historical and forward-looking statements. All of our statements other than those of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not based on historical facts, but rather reflect our current expectations concerning future results and events. These forward-looking statements generally may be identified by the use of phrases such as "believe", "expect", "anticipate", "intend", "plan", "foresee", "likely", "will" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be different from any future results, performance or achievements expressed or implied by these statements. The following important factors, among others, could affect our future results, causing these results to differ materially from those expressed in any of our forward-looking statements: general economic and business conditions, trends in our business and consumer preferences, especially as may be impacted by economic weakness on consumer spending, the effects of government regulations and legislation, litigation and other claims that may be asserted against us, the effects of intense competition, changes in our business strategy or development plans, including anticipated growth strategies and capital expenditures, the costs and difficulties of attracting and retaining qualified personnel, the effects of increasing labor, utility, fuel and other operating costs, our ability to obtain adequate quantities of suitable merchandise at favorable prices and on favorable terms and conditions, the effectiveness of our operating initiatives and advertising and promotional strategies and other risk factors described in our fiscal 2001 Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. We do not undertake to publicly update or revise any of our forward-looking statements, whether as a result of new information, future events and developments or otherwise, except to the extent that we may be obligated to do so by applicable law. 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to interest rate risk on our long-term debt, which is non-interest bearing and is discounted at an annual rate of 10%. At May 4, 2002, our long-term debt had a face value of $13.3 million with a net carrying value of $10.6 million. While generally an increase in market interest rates will decrease the value of this debt, and decreases in interest 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 May 4, 2002. 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings See our Form 10-K for the fiscal year ended February 2, 2002. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit None. (b) Reports on Form 8-K (1) Item 4 - On May 1, 2002, we filed a report on Form 8-K regarding to the determination not to renew the engagement of Arthur Andersen LLP as our independent public accountants for the fiscal year ending February 1, 2003. (2) Item 4 - On May 8, 2002, we filed a report on Form 8-K regarding to the engagement of Ernst & Young LLP as our independent public accountants for the fiscal year ending February 1, 2003. 10 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: June 13, 2002 By: /s/ Douglas C. Felderman ---------------------------------------------------- Name: Douglas C. Felderman Title: Executive Vice President and Chief Financial Officer (duly authorized officer and principal financial officer) 11 -----END PRIVACY-ENHANCED MESSAGE-----