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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal period ended January 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to__________
Commission File number 0-16309
FAMILY BARGAIN CORPORATION
(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: (619) 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)
Series A 9 1/2% Cumulative Convertible Preferred 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 be 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]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO ___
At April 17, 1998 the aggregate market value of the voting stock of the
Registrant held by non-affiliates was approximately $12,336,000.
At April 17, 1998 the Registrant had outstanding 4,929,122 shares of Common
Stock, $0.01 par value per share.
2
FORM 10-K INDEX
PART I
Item 1. Business 3
Item 2. Properties 8
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 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 25
3
PART I
Item 1. Business
THE COMPANY
Through its wholly-owned subsidiaries, General Textiles and Factory 2-U, Inc.
("Factory 2-U"), Family Bargain Corporation (the "Company"), at January 31,
1998, operated 166 off-price retail apparel and home goods stores under the
names Family Bargain Center and Factory 2-U in Arizona, California, Nevada, New
Mexico, Oregon, Texas and Washington. The Company acquired General Textiles in
1993, while General Textiles was operating under Chapter 11 of the U.S.
Bankruptcy Code. The Company purchased Factory 2-U in November 1995.
The Company's 127 Family Bargain Center and 39 Factory 2-U stores sell primarily
first quality, in-season clothing for men, women and children and home goods at
retail prices which generally are lower than the prices of competing discount
and regional off-price stores. The Company's stores sell merchandise at bargain
prices by purchasing in-season, excess inventory and close-out merchandise at
substantially discounted wholesale prices and by setting retail prices which
pass along the savings to customers.
Typical customers of the Company's stores are low-income families, including
agricultural, service and other blue-collar workers, a significant portion of
whom are of Hispanic origin or members of other ethnic groups. The Company's
store merchandising selection, everyday low price strategy and store format are
designed to reinforce the concept of value and enhance the customers' shopping
experience while maximizing inventory turns.
Family Bargain Centers, which average 11,950 square feet, and Factory 2-U
stores, which average 17,357 square feet, are designed in a self-service format
that affords easy access to merchandise displayed on bargain tables, hanger
racks and open shelves. Stores are stocked with new merchandise at least weekly.
Prices are clearly marked, often with a comparable retail price. Most stores
display signs in English and Spanish and are staffed with bilingual personnel.
The playing of locally popular music, the use of brightly colored pennants and
occasional festive outdoor promotions enhance store atmosphere.
OPERATIONS
Operating Strategy
The Company seeks to be the leading off-price apparel and home goods retailer to
lower income customers in the markets it serves. The major elements of its
operating strategy include:
Provide First Quality Merchandise at Bargain Prices: The Company's stores sell
first quality merchandise at bargain prices by purchasing in-season, excess
inventory and close-out merchandise at substantially discounted wholesale prices
and by setting retail prices which pass along the savings to customers.
Target Under-Served MarketSegments, Including the Hispanic Market: The Company's
stores target customers who are under-served in many markets. Typical customers
are low-income families, including agricultural, service and other blue collar
workers, a significant portion of whom are of Hispanic origin or members of
other ethnic groups. The Company's store merchandise selection is a product of
purchasing and marketing programs tailored to the purchasing patterns of
customers in each store.
Maximize Inventory Turns: General Textiles and Factory 2-U emphasize inventory
turn in their merchandise and marketing strategies. Merchandise presentation, an
everyday low price strategy, frequent store deliveries, and advertising programs
all target rapid inventory turn, which management believes leads to increased
profits and efficient use of capital.
4
Low Operating Costs: The Company's stores maintain low operating costs primarily
through their self-service formats, use of part-time labor, selection of
suitable locations with low rental expenses and an overall focus on cost
controls.
Expansion Plans
Opening of New Stores: The Company plans to increase its store count by 3 to 169
stores in the fiscal year ending January 30, 1999 (fiscal 1998). The new stores
will be opened in markets in which the Company currently operates. During fiscal
1997, the Company opened 23 new stores and closed 7 stores. During the period
from January 31, 1998 through April 4, 1998, four stores closed and no new
stores were opened. Average store opening expenses for equipment, fixtures,
leasehold improvements and preopening costs are approximately $195,000. Average
initial inventory for a new store is approximately $275,000. Generally, during
the two to three month grand opening period, a new store achieves sales in
excess of sales of an average comparable mature store and, within six months,
generates sales consistent with comparable mature store levels.
Renovation and Relocation Program: The Company plans to renovate and relocate
stores; relocation will be considered as superior sites become available in
their markets. Store renovations generally include installing new fixtures,
redesigning layouts and refurbishing floors and walls. The cost to renovate or
relocate a store is approximately $50,000. During fiscal 1997, the Company
renovated twenty stores and relocated one store.
Customers
The Company's primary customers are families with annual household income of
under $25,000, many of whom are employed in the agricultural sector or are
blue-collar workers. A significant portion of the Company's customers is of
Hispanic origin or members of other minority ethnic groups including
African-Americans, Asians and Native Americans. The Company estimates, that
approximately 50% to 55% of its customers are of Hispanic origin. According to
the U.S. Bureau of the Census, the Hispanic population in the states where the
Company's stores are located (Arizona, California, Nevada, New Mexico, Oregon,
Texas and Washington) grew from 5.7 million in 1980 to 9.4 million in 1990, a
65% increase. The overall population for these states grew by 24% in the same
period. The Hispanic population in the states where the Company's stores are
located is projected to grow by 25%, from 10.6 million to 13.2 million, in the
period from 1993 to 2000 (according to the U.S. Bureau of the Census). The
overall population for these states is projected to grow by 12% in the same
period. The Census projections through 2020 reflect the Hispanic population in
these states continuing to grow at approximately twice the rate of the total
population.
Purchasing
The Company purchases merchandise from domestic manufacturers, jobbers,
importers and other vendors. Payment terms are typically net 30 days. The 10
largest vendors supply approximately 12% of the Company's merchandise. The
Company continually adds new vendors and does not maintain long-term or
exclusive purchase commitments or agreements with any vendor. The Company has
generally not had difficulty locating and purchasing appropriate apparel for its
stores. Management believes that there are a substantial number of additional
sources of supply of first quality, off-price apparel goods and expects that it
will be able to meet its increased inventory needs as the Company grows. The
Company's general merchandise manager, merchandise managers and buyers, who
average over 10 years of apparel and home goods industries experience, seek to
purchase in-season goods and first-run and last-run merchandise at substantial
discounts to normal wholesale pricing.
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), the Company purchases
approximately 70% of its merchandise in-season.
5
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. Such merchandise is typically available
at prices below wholesale. Management believes that such in-season buying
practices are well suited to the Company's customers, who tend to make purchases
on an as-needed basis later into a season. The Company's in-season buying
practice is facilitated by its ability to process and ship merchandise through
its distribution center to its stores, usually within two or three days of
receipt from the vendor, and to process a large number of relatively small
purchase orders. Management believes that General Textiles and Factory 2-U are
desirable customers for vendors seeking to liquidate inventory because they can
take immediate delivery of large quantities of in-season goods. Furthermore, the
Company rarely requests markdown concessions, advertising allowances or special
shipping and packing procedures, insisting instead on the lowest possible price.
First-run and Last-run Merchandise. Approximately 10% of the Company's purchases
consist of "first-run" and "last-run" merchandise. To ensure product
consistency, manufacturers typically produce a preliminary or "first run" of an
item. Additionally, manufacturers will produce "last runs" of certain items to
fill out production schedules, maintain stock for potential customer reorders,
convert excess fabric to finished goods and keep machinery in use. Manufacturers
occasionally designate such first and last runs as "irregulars" to differentiate
such goods from full price merchandise or to indicate that such merchandise may
contain minor imperfections (which do not affect the wear-ability of the items),
and typically such merchandise may be purchased at prices below wholesale.
Manufacturers ship goods directly to the Company's San Diego distribution center
or, in the case of East Coast vendors, to the Company through its East Coast
freight consolidator. Goods received at the Company's warehouse are generally
shipped to its stores using independent trucking companies within two to three
days of their arrival. The Company generally does not store goods from season to
season at its warehouse.
Merchandising and Marketing
The Company's merchandise selection, pricing practices and store formats are
designed to reinforce the concept of value and maximize customer enjoyment of
the shopping experience. The Company's stores offer their customers a diverse
selection of primarily first quality, in-season merchandise at prices which
generally are lower than those of competing discount and regional off-price
stores in their local markets. Nearly all of their merchandise carries brand
name labels, including nationally recognized brands. The Company uses an
everyday low price strategy. For the Family Bargain Center chain, women's and
children's apparel each account for approximately 30% of sales, men's apparel
accounts for approximately 25% of sales, with the remainder, approximately 15%,
consisting of footwear, domestic items, home goods and toys. For the Factory 2-U
chain, men's, women's and children's apparel each account for approximately 20%
of sales, domestic items account for approximately 22% of sales, with the
remainder, approximately 18% of sales, consisting of footwear, home goods and
toys.
The Company delivers new merchandise to its stores at least once per week to
encourage frequent shopping trips by its customers and to maximize the rate of
inventory turn. As a result of its purchasing practices, store inventory may not
always include a full range of colors, sizes and styles in a particular item.
Management believes, however, that price, quality and product mix is more
important to the Company's customers than the availability of a specific item at
a given time.
The Company emphasizes inventory turn in its merchandising and marketing
strategy. Merchandise presentation, everyday low prices, frequent store
deliveries, staggered vendor shipments, promotional advertising, store-tailored
distribution and prompt price reductions on slow moving items all target rapid
inventory turn. The Company believes that the pace of its inventory turn leads
to increased profits, reduced inventory markdowns, efficient use of capital and
customer urgency to make purchase decisions.
6
The Company's administrative headquarters receives daily store sales and
inventory information from point-of-sale computers located at each of its
stores. This data is reported by stock keeping unit (or "SKU"), permitting
management to tailor purchasing and distribution decisions. A chain-wide
computer network also facilitates communications between the administrative
headquarters and stores, enabling management to provide store management with
immediate pricing and distribution information.
The Company's stores are characterized by easily accessible merchandise
displayed on bargain tables, hanger racks and open shelves, brightly colored
pennants and signs and the playing of locally popular music. Prices are clearly
marked, usually displayed in whole dollars. A comparative retail-selling price
is often noted on price tags. Many stores display signs in English and Spanish
and are staffed with bilingual store personnel. Stores have "gala" grand
openings and, on occasion, feature outdoor sidewalk promotions with live music
and other festive activities. The Company's major advertising vehicle is the use
of a full-color print tab showing actual photos of its merchandise. Print media
is delivered to the consumers in newspaper inserts and marriage-mail drops.
Other advertising programs include radio, television and outdoor promotional
activities.
The Company's stores emphasize customer satisfaction to develop customer loyalty
and generate repeat sales. If a customer is not completely satisfied with any
purchase, the Company's stores will make a full refund or exchange. Most sales
are for cash, although checks and credit cards are accepted. The Company does
not issue its own credit card, but does offer a layaway program. The layaway
program is an important means for the Company's customers, many of who do not
possess credit cards, to purchase goods over time.
Approximately 60% of the Company's sales occur in its third and fourth quarters,
during the back-to-school (August and September) and Christmas (November and
December) seasons. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Seasonality and Quarterly Fluctuations."
The Stores
As of April 4, 1998 the Company operated 162 stores located in seven western
states. Stores are primarily located in rural and lower income suburban
communities and, to a lesser extent, in metropolitan areas. Most stores are
located in strip shopping centers, where occupancy costs are most favorable. As
of January 31, 1998, the number of store locations was as follows:
Strip
State Center Downtown Other Total
- ----- ------ -------- ----- -----
California 71 15 6 92
Arizona 29 4 0 33
Washington 9 2 2 13
New Mexico 8 0 1 9
Nevada 7 0 0 7
Oregon 7 0 1 8
Texas 3 1 0 4
--- -- -- ---
134 22 10 166
=== == == ===
Family Bargain Centers range in size from 4,500 square feet to 34,846 square
feet, averaging 11,950 square feet. Factory 2-U stores range in size from 8,064
square feet to 40,567 square feet, averaging 17,357 square feet. Management
continually reviews the ability of stores to provide positive contributions to
the Company's operating results and may elect to close stores that do not meet
performance criteria. Costs associated with closing stores, consisting primarily
of the recognition of remaining lease obligations and provisions to re-value
assets to net realizable value, are charged to operations during the fiscal year
in which the commitment is made to close a store.
7
The Company's stores typically employ one store manager, two assistant store
managers, and seven to ten sales associates, most of whom are part-time
employees. New store managers are trained in all aspects of store operations
through a management-training program. Other store personnel are trained on
site. The Company often promotes experienced assistant store managers to fill
open manager positions.
The Company's store managers participate in a bonus plan in which they are
awarded bonuses upon achieving plan objectives. The Company believes that the
bonus program is an important incentive for its key employees, helps reduce
employee turnover and lowers costs.
Management believes store opening and operating costs are low compared to those
of similar retailers due to the selection of low rent store locations, a
self-service format, use of basic fixtures and use of part-time employees
whenever possible. The Company generally leases previously occupied sites on
terms that it believes are more favorable than those available for newly
constructed facilities. After signing a store lease, a store opening team
prepares the store for opening by installing fixtures, signs, bargain tables,
racks, dressing rooms, checkout counters, cash register systems and other items.
The district manager and store manager arrange the merchandise according to the
standard store layout and train new personnel before and after the store is
opened. The Company selects store sites based on demographic analysis of the
market area, sales potential, local competition, occupancy expense, operational
fit and proximity to existing store locations. Store opening preparations
generally take up to two weeks.
The Company, General Textiles and Factory 2-U maintain commercial liability,
fire, theft, business interruption and other insurance policies.
Competition
The Company operates in a highly competitive marketplace. The Company's stores
compete with large discount retail chains such as Wal-Mart, K-Mart, Target and
Mervyn's, and with regional off-price chains, such as MacFrugal's, some of which
have substantially greater resources than the Company. They 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 as the Company.
Management believes that the principal competitive factors in the Company's
markets are price, quality and site location and that the Company is well
positioned to compete on the basis of these factors.
Employees
As of April 4, 1998 the Company employed 3,023 people, of whom 2,773 were store
employees and store field management (1,760 of whom were part-time), 192 were
executives and administrative employees and 58 were warehouse employees. None of
the Company's employees is subject to any collective bargaining agreements and
management considers its relations with its employees to be good.
Trademarks
Except for the trade names "Family Bargain Center" and "Factory 2-U", which are
federally registered trademarks, the Company, General Textiles and Factory 2-U
do not use any other material trademarks.The Company is not aware of any
infringing uses that could materially impair the use of its trademarks.
Government Regulation
The Company's operations are subject to various federal, state and local laws,
regulations and administrative practices affecting its business, and the Company
must comply with provisions regulating various matters, including equal
employment and minimum wages. The Company believes it is in substantial
compliance with all material federal, state and local laws and regulations
governing its operations and has obtained all material licenses and permits
required for the operation of its business. The Company believes that the
compliance burdens and risks relating to such laws and regulations do not have a
material adverse effect on the Company.
8
Item 2. Properties
As of April 4, 1998 the Company operated 162 retail stores located in Arizona,
California, Nevada, New Mexico, Oregon, Texas and Washington, under various
operating leases with third parties. The leases are separately negotiated and
are generally not uniform. The store locations include strip centers, downtown
business districts, and stand alone sites. Typical lease terms are for five
years with renewal options in five year increments. Approximately two-thirds of
the leases are "triple net leases" under which the Company is required to
reimburse landlords for insurance, real estate taxes and common area maintenance
costs. Some leases require the Company to pay a minimum monthly rent and a
percentage of sales in excess of a certain sales level. The current estimated
annual rent expense for the 166 stores open at January 31, 1998 is approximately
$17.3 million.
The Company's headquarters are located in a 269,000 square foot facility at 4000
Ruffin Road, San Diego, California. This facility consists of 37,000 square feet
of office space, an 8,000 square foot retail store and a 224,000 square foot
warehouse and distribution center. This facility is leased for a term of 12
years expiring in September 2005. The lease provides for annual base rent at an
average of approximately $1.5 million over the lease term.
Item 3. Legal Proceedings
The Company is at all times subject to pending and threatened legal actions that
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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company during
the fourth quarter.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock and Series A Cumulative Convertible Preferred Stock
(the "Series A Preferred Stock") are quoted on the Nasdaq SmallCap Market. The
table below sets forth certain information with respect to the high and low
closing bid prices (rounded to the nearest hundredth) of the Company's Common
Stock and Series A Preferred Stock during the years ended January 31, 1998
(fiscal 1997) and February 1, 1997 (fiscal 1996), and the subsequent interim
period, as quoted by Nasdaq. These quotations represent inter-dealer prices
without retail markups, markdowns or commissions and may not be representative
of actual transactions.
SERIES A
COMMON STOCK PREFERRED STOCK
High Low High Low
Fiscal 1996
First Quarter $3.22 $1.56 $8.50 $5.63
Second Quarter $3.13 $1.75 $8.38 $6.88
Third Quarter $2.56 $1.38 $7.44 $6.75
Fourth Quarter $2.34 $1.31 $8.38 $6.13
Fiscal 1997
First Quarter $3.09 $2.00 $9.38 $7.75
Second Quarter $2.75 $1.63 $9.00 $8.00
Third Quarter $1.94 $0.50 $8.44 $6.69
Fourth Quarter $1.75 $1.00` $7.94 $6.25
Fiscal Year Ending January 30, 1999
First Quarter (through April 17 , 1998) $3.09 $1.28 $9.63 $7.13
The closing bid prices of the Common Stock and the Series A Preferred Stock on
April 17, 1998 as reported on the Nasdaq SmallCap Market were $3.09 per share
and $9.63 per share, respectively.
As of January 31, 1998, the number of record holders of Common Stock and Series
A Preferred Stock were approximately 341 and 88, respectively. These numbers do
not include an indeterminate number of stockholders whose shares are held by
financial institutions in "street name." The Company has estimated beneficial
holders of its Common Stock to be more than 3,000 and the beneficial holders of
its Series A Preferred Stock to be more than 350.
The Company paid quarterly dividends on its Series A Preferred Stock aggregating
$3.5 million for fiscal 1997. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. The declaration and payment of any cash dividends on
its Common Stock in the future will be determined by the Board of Directors in
light of conditions then existing, including the Company's earnings, financial
condition and cash requirements.
On February 20, and March 13, 1997, the Company issued 5,000 and 4,600 shares,
respectively, of its Series B Junior Convertible, Exchangeable Preferred Stock
(the "Series B Preferred Stock") for aggregate proceeds of $9.6 million. On
March 20, 1997 and June 16, 1997, the Company issued 1,865 and 250 shares,
respectively, of Series B Preferred Stock to certain members of management in
return for $2.1 million aggregate principal amount of full-recourse notes
collateralized by the stock. Each of the issuances was made in reliance on the
exemption from the registration requirement of the Securities Act of 1933, as
amended contained in Section 4(2) of that Act for a "transaction by an issuer
not involving any public offering."
10
Although the Series B Preferred Stock is entitled to participate in any
dividends paid to holders of the Company's common stock, it is not entitled to a
preferential dividend until January 2002. Beginning in 2002, the Company is
obligated to pay a dividend to holders of the Series B Preferred Stock in the
amount of $60 per share subject to increases of $20 per share every year
thereafter until 2005 up to a maximum of $120 per share. Annual cash dividends
may be required prior to 2002 or in amounts greater than otherwise required
prior to or after 2002 in the event the Company defaults on its revolving credit
facilities or declares a dividend on its common stock.
The Company recorded non-cash dividends on the Series B preferred stock using
the effective interest method to recognize the dividend ratably over the
estimated period in which the Series B preferred stock will be outstanding. For
fiscal 1997, such accreted dividends totaled approximately $2.7 million. See
Note 11 to Financial Statements.
11
Item 6. Selected Financial Data
Set forth below are selected financial data for the Company and its
subsidiaries. In January 1994, the Company changed its fiscal year end to the
Saturday closest to January 31 to conform its fiscal year end to that of General
Textiles. All of the selected financial data, except for Operating Data, are
derived from audited financial information. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Financial Statements and Supplementary
Data."
Fiscal Year Ended
----------------------------------------------------------------
January 31, February 1, January 27, January 28, January 29,
1998 1997(2) 1996 1995 1994(1)
(in thousands, except per share and operating data)
Statement of Operations Data
- ----------------------------
Net sales $ 300,592 $ 252,165 $ 179,820 $ 146,520 $ 96,496
Operating income (loss) 5,097 (27,939) 5,153 2,608 4,547
Income (loss) from continuing operations (129) (36,564) 1,478 (354) 1,113
Net income (loss) (129) (37,390) 978 2,656 1,882
Dividends on series A preferred stock 3,456 3,509 3,040 2,030 200
Dividends on series B preferred stock 2,661 - - - -
Net income (loss) applicable to (6,246) (40,899) (2,062) 626 1,682
common stock
Weighted average shares outstanding 4,901 4,507 4,006 4,008 3,070
Net income (loss) from continuing
operations applicable to common stock (1.27) (8.89) (0.39) (0.59) 0.30
Net income (loss) per common share(3) (1.27) (9.07) (0.51) 0.16 0.55
Diluted net income (loss)
per common share(3) (1.27) (9.07) (0.51) 0.07 0.47
Operating Data
- --------------
Number of stores 166 150 131 97 81
Total selling square footage 1,788,000 1,567,000 1,367,000 867,000 702,000
Sales per square foot 180 172 161 187 133
Comparable store sales growth 3.4% 5.3% 2.8% 0.9% 17.2%
Balance Sheet Data
- ------------------
Working capital (deficit) $ (2,749) $ 248 $ 4,314 $ 10,098 $ 5,731
Total assets 84,817 80,669 87,152 59,905 52,279
Long-term debt and revolving credit notes,
including current portion 29,076 37,894 30,120 17,267 30,491
Stockholders' equity 17,218 11,208 27,717 29,812 10,089
Notes to Selected Financial Data
(1) 39 weeks.
(2) 53 weeks.
(3) In December 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". The statement specifies the
computation, presentation, and disclosure requirements for earnings per share
(EPS) and diluted earnings per share (DEPS). The statement requires retroactive
adoption for all prior periods presented.
Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision and (c) revising the
contingent share provisions and the supplemental EPS data requirements.
The computation of diluted EPS is similar to the computation of basic EPS except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back (a) any convertible preferred
dividends and (b) the after-tax amount of interest recognized in the period
associated with any convertible debt.
12
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 two fiscal years, a number of events occurred which have had a
significant impact on the financial condition of the Company and its
subsidiaries. In January 1997, an investment group (the "TCR Investors") advised
by Three Cities Research, Inc. ("TCR") obtained a controlling equity interest,
approximately 79% after all Series B transactions, in the Company when the TCR
Investors acquired all of the Common and Series A Preferred Stock held by the
former chairman, vice chairman and chief executive officer of the Company (the
"Former Executives") and the Company issued 22,000 shares of newly authorized
Series B Preferred Stock to the TCR Investors (the "1997 Private Placement").
Subsequent to the close of fiscal 1996, the Company issued an additional 11,715
shares of the Series B Preferred stock to TCR Investors, directors and
management of the Company. The Series B Preferred Stock has voting rights
equivalent to the number of common shares into which it is convertible.
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 Company's Board. The person then serving as President and Chief
Executive Officer of General Textiles and Factory 2-U, who was a director of the
Company, was appointed President and Chief Executive Officer of the Company. In
February 1997, the Company's Board of Directors elected three new directors, one
of whom was elected Chairman of the Board of Directors. In August 1997, the
President and Chief Executive Officer of the Company entered into a separation
agreement and resigned from all positions with the Company (the "Former
President and CEO"). In March 1998 the Company appointed a new President and
Chief Executive Officer of General Textiles and Factory 2-U, and he was elected
a member of the Board of Directors of the Company.
During fiscal 1997, the Company shifted its focus from expanding its store base
to improving the operating performance of existing stores. The Company expects
to devote substantially all of fiscal 1998 to continuing to improve operating
results and upgrading its information systems.
13
Results of Operations
The Company defines its fiscal year by the calendar year in which most of the
activity occurs (e.g. the year ended January 31, 1998 is referred to as fiscal
1997). The following table sets forth selected statement of operations data
expressed as a percentage of net sales for the period indicated:
Fiscal year 1997 1996 1995
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 64.9 67.8 65.2
------------------------------------
Gross profit 35.1 32.2 34.8
Selling and administrative expenses 32.1 34.8 31.2
Amortization of intangibles 0.7 0.8 0.8
Unusual charges 0.6 3.6 -
Provision for goodwill impairment - 3.3 -
Write off of deferred offering costs - 0.8 -
-------------------------------------
Operating income (loss) 1.7 (11.1) 2.8
Interest expense 1.7 3.4 2.0
-------------------------------------
Income (loss) from continuing operations
before income taxes (0.0) (14.5) 0.8
Income taxes - - -
Discontinued operations,
net of income tax benefit - (0.3) (0.3)
- --------------------------------------------------------------------------------
Net income (loss) 0.0 (14.8) 0.5
Preferred dividends (2.1) (1.4) (1.7)
-------------------------------------
Net loss applicable to common stock (2.1%) (16.2%) (1.2%)
- --------------------------------------------------------------------------------
Fiscal 1997 Compared to Fiscal 1996
Fiscal 1997 was a 52 week year and fiscal 1996 was a 53 week year. For purposes
of determining comparable store sales, fiscal 1996 was adjusted to reflect a
comparable 52 week year. As of January 31, 1998, the Company operated 166 stores
compared to 150 as of February 1, 1997.
Net sales were $300.6 million for fiscal 1997 compared to $252.2 million for
fiscal 1996, an increase of $48.4 million. Comparable store sales increased $7.7
million, or 3.4%, in fiscal 1997, while new and noncomparable (open for less
than one year) stores generated $40.7 million of sales.
14
Gross profit was $105.6 million for fiscal 1997 compared to $81.3 million in
fiscal 1996, an increase of $24.3 million. The increase in gross profit was due
to the opening of new stores, an increase in comparable store sales and an
increase in gross profit as a percentage of sales. As a percentage of sales,
gross profit was 35.1% in fiscal 1997 compared to 32.2% in fiscal 1996. The
increase in gross profit as a percentage of sales was a result of a lower
inventory shrinkage and higher initial markups in fiscal 1997 compared to fiscal
1996.
Selling and administrative expenses were $96.5 million for fiscal 1997 compared
to $87.8 million for fiscal 1996, an increase of $8.7 million. As a percentage
of sales, selling and administrative expenses were 32.1% for fiscal 1997
compared to 34.8% in fiscal 1996. The decrease in selling and administrative
expenses as a percentage of sales was primarily attributable to moving the
Company's executive offices from New York City to San Diego and economies
associated with increased sales volume.
Amortization of intangibles consists of amortization of excess of cost over net
assets acquired and agreements not to compete. The noncompete agreements are the
result of two transactions discussed in the following paragraph.
In January 1997, the Former Executives entered into an agreement not to compete
with the Company until June 2000 in return for $1.8 million in secured
promissory notes that were paid in January 1998. In August 1997, the Former
President and CEO entered into an agreement not to compete with the Company
until January 2001 in return for payments totaling $970,000.
The Company recognized unusual charges to operations in the aggregate amount of
$1.8 million in fiscal 1997 and $9.2 million during fiscal 1996. The fiscal 1997
amount pertains to the separation from the Company of the Former President and
CEO, whereas the fiscal 1996 charges relate to terminating contracts with the
Former Executives, former directors and consultants and closure of the former
executive offices in New York City in connection with the change in control.
Interest expense was $5.2 million in fiscal 1997 compared to $8.6 million for
fiscal 1996, a decrease of $3.4 million. The decrease was attributable to
decreases in the amortization of debt discount related to the Bankruptcy Debt of
General Textiles (see Liquidity and Capital Resources - Bankruptcy Debt of
General Textiles).
There were no discontinued operations in fiscal 1997 compared to a loss from
discontinued operations of $0.8 million in fiscal 1996.
The net loss before dividends was $0.1 million in fiscal 1997 compared to a net
loss before dividends of $37.4 million in fiscal 1996. Total dividends were $6.1
million in fiscal 1997 and $3.5 million in fiscal 1996. In fiscal 1997 non-cash
dividends on the Series B preferred stock were $2.6 million, while there were no
Series B preferred stock dividends in fiscal 1996. The net loss applicable to
common stock was $6.2 million in fiscal 1997 compared to a net loss applicable
to common stock of $40.9 million in fiscal 1996.
Fiscal 1996 Compared to Fiscal 1995
Fiscal 1996 was a 53 week year and fiscal 1995 was a 52 week year. For purposes
of determining comparable store sales, fiscal 1996 was adjusted to reflect a
comparable 52 week year. As of February 1, 1997, the Company operated 150 stores
compared to 131 as of January 27, 1996.
Net sales were $252.2 million for fiscal 1996 compared to $179.8 million for
fiscal 1995, an increase of $72.4 million. Of the increase, $41.5 million was
attributable to the inclusion of Factory 2-U sales for a full year in fiscal
1996 compared to only 11 weeks in fiscal 1995, $7.7 million was due to increases
in comparable store sales, $3.3 million was attributable to a 53rd week in
fiscal 1996 and the remaining $19.9 million increase in sales was due to new and
noncomparable (open for less than one year) stores.
15
Gross profit was $81.3 million for fiscal 1996 compared to $62.6 million for
fiscal 1995, an increase of $18.7 million. Of the total increase, $15.4 million
was attributable to the inclusion of a full year of Factory 2-U sales for fiscal
1996 as compared to only 11 weeks for fiscal 1995. The remaining increase in
gross profit was due to the opening of new stores, an increase in comparable
store sales, the additional week in fiscal 1996, all net of a decrease in gross
profit as a percentage of sales. As a percentage of sales, gross profit was
32.2% in fiscal 1996 compared to 34.8% in fiscal 1995. The decrease in gross
profit as a percentage of sales was a result of increased markdown activity,
increased inventory shrinkage and the establishment of a markdown allowance
related to parking lot sale inventory to be liquidated in the first half of
fiscal 1996.
Selling and administrative expenses were $87.8 million for fiscal 1996 compared
to $56.1 million for fiscal 1995, an increase of $31.7 million. Of the total
increase, $14.4 million was attributable to the inclusion of a full year of
operations for Factory 2-U in fiscal 1996 compared to 11 weeks of activity in
fiscal 1995. As a percentage of sales, selling and administrative expenses were
34.8% in fiscal 1996 compared to 31.2% in fiscal 1995. The increase in selling
and administrative expenses as a percentage of sales was attributable to
increases in salaries and wages, an increase in store closing and opening
expenses and an increase in expenses of the former New York office. The increase
in salaries and wages was due to the increase in the minimum wage during the
latter part of fiscal 1996 and an increase in corporate wages as the Company
increased its staff to accommodate anticipated additional growth. The increase
in store closing and opening expenses arose from a $1.5 million charge taken at
the end of fiscal 1996 to provide an allowance for stores that were identified
for closing and to write-off $0.5 million in capitalized store preopening costs.
Expenses related to the former New York office were $3.6 million, exclusive of
unusual and closure charges, in fiscal 1996 compared to $1.8 million in fiscal
1995, an increase of $1.8 million. The Company closed the New York City office
in January 1997 when it moved its executive offices to San Diego, CA.
The Company recognized unusual charges to operations in the aggregate amount of
$9.2 million during fiscal 1996 related to the termination of employment and
benefit contracts of the Former Executives, the accrual of future lease payments
on its former executive offices in New York City and costs to cancel contracts
with consultants and former directors that were not expected to provide value to
the Company in the future.
The Company recognized a charge to operations in the amount of $8.4 million
during fiscal 1996 when it determined that the goodwill arising from its
acquisition of Factory 2-U was impaired.
The Company recognized a charge to operations in the amount of $1.9 million in
fiscal 1996 arising from the write-off of capitalized costs related to a public
offering of securities that was withdrawn. In lieu of the withdrawn offering,
the Company completed the private placement with the TCR Investors.
Interest expense was $8.6 million in fiscal 1996 compared to $3.7 million for
fiscal 1995, an increase of $4.9 million. Of the increase, $2.8 million was
attributable to increases in the amortization of debt discount related to the
Bankruptcy Debt (as defined below) of General Textiles. The remaining $2.1
million increase was attributable to increased debt arising from expansion of
the Company, including the financing of Factory 2-U for a full fiscal year as
compared to only two and one half months in the prior fiscal year.
Loss on disposal of discontinued operations was $0.8 million in fiscal 1996
compared to $0.5 million in fiscal 1995. In fiscal 1996, the Company determined
that a consulting contract arising from the settlement of a lawsuit had no
value. Accordingly, the Company charged all prepaid and future payments related
to the consulting contract to discontinued operations.
The net loss before dividends was $37.4 million in fiscal 1996 compared to net
income before dividends of $1.0 million in fiscal 1995. The net loss applicable
to common stock was $40.9 million in fiscal 1996 compared to a net loss
applicable to common stock of $2.1 million in fiscal 1995.
16
Liquidity and Capital Resources
The Company
General. The Company relies on payments from General Textiles and Factory 2-U to
service the required principal, interest and dividend payments related to its
debt and preferred stock and to pay operating costs and expenses. Such payments
from General Textiles include payments to the Company pursuant to a Tax Sharing
Agreement (defined below), debt service arising from certain subordinated debt
of General Textiles (which the Company owns pursuant to purchases from third
parties), and a Management Agreement (the "GT Management Agreement"), as
described below. General Textiles filed as part of its bankruptcy proceedings a
plan of reorganization ("The Reorganization Plan"). The U.S. Bankruptcy Court
confirmed it April 20, 1993. Debt securities issued under the Reorganization
Plan prohibit the payment of dividends and other distributions by General
Textiles to the Company. Payments by Factory 2-U to the Company are limited
under the Factory 2-U Revolving Credit Facility to payments pursuant to a
management agreement (the "Factory 2-U Management Agreement") and a debt
guaranty agreement ("the Guaranty Fee Agreement").
Pursuant to the Reorganization Plan, the Company and General Textiles entered
into the tax sharing agreement (the "Tax Sharing Agreement"). The Tax Sharing
Agreement requires General Textiles to pay to the Company or to its affiliates,
an amount equal to 80% of any federal income tax savings achieved by General
Textiles' sharing in net tax losses arising from General Textiles filing its
federal income tax return on a consolidated basis with the Company and its
affiliates as opposed to filing a federal income tax return on an unconsolidated
"stand-alone" basis. Likewise, the Tax Sharing Agreement also requires the
Company to pay to General Textiles 80% of any federal income tax savings
accruing to the Company that arise from the filing of a consolidated federal
income tax return. Payments or accruals to the Company or General Textiles under
the Tax Sharing Agreement are made annually based on the estimated tax savings,
if any. The payments or accruals under the Tax Sharing Agreement are
intercompany transactions that are eliminated in consolidation, and have no
effect on the consolidated financial position or results of operations. At
January 31, 1998, the Company has significant net operating loss carryforwards
("NOLs") that may benefit General Textiles in future periods and result in
General Textiles being required to make payments to the Company under the Tax
Sharing Agreement. General Textiles experienced a tax loss for federal purposes
in fiscal 1997 and therefore did not benefit from the Company's NOLs.
Furthermore, a significant portion of the Company's NOLs are of limited use in
the future because of Section 382 of the Internal Revenue Code, which limits the
offsetting of NOLs against current taxable income following a change in control.
Therefore, to the degree that General Textiles experiences tax losses in the
future or has its own NOLs available to offset future taxable income, or to the
degree there are limits on the availability of the Company's NOLs to offset
future taxable income of General Textiles, payments to the Company pursuant to
the Tax Sharing Agreement may be significantly limited.
At January 31, 1998, the Company owned an aggregate of $11.3 million face amount
of General Textiles subordinated notes acquired from third party note holders in
fiscal 1993 and 1994. General Textiles makes payments to the Company in
accordance with the terms of the notes and the Reorganization Plan as described
below.
The debt securities issued under the Reorganization Plan permit the payment of
management fees and bonuses by General Textiles to the Company pursuant to the
GT Management Agreement. Obligations for payments by General Textiles under the
GT Management Agreement are subordinated to General Textiles' obligations under
its revolving credit facility.
Management believes that the Company's sources of cash, including the cash
received under the Tax Sharing Agreement, the Trade Subordinated Notes (defined
below), the Company Subordinated Note (defined below), the GT Management
Agreement, the F2U Management Agreement, and the Guaranty Fee Agreement 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. The ability
of the Company to make dividend payments on the Series A Preferred Stock as they
come due will be dependent on the results of operations of the Company.
17
Obligations of the Company. As of January 31, 1998, the Company, exclusive of
General Textiles and Factory 2-U, had outstanding indebtedness in the principal
amount of $0.8 million.
The November 1995 acquisition of Factory 2-U was completed pursuant to a Stock
Purchase Agreement between the Company and the former shareholders of Factory
2-U. The acquisition was financed in part by the issuance of certain notes
payable. At January 31, 1998, the Company was obligated pursuant to two
promissory notes: a $0.6 million term note with principal and accrued interest
due in October 1998 and a $0.2 million installment note with principal and
interest payable in quarterly installments until October 1998 (collectively, the
"F2U Acquisition Notes"). The F2U Acquisition Notes bear interest at a rate of
8.75% per annum and are subject to penalties and adjustment in the event of
failure to pay amounts when due.
In January 1996, the Company settled a lawsuit commenced in 1993 by former
owners of Mandel-Kahn Industries, Inc. which was purchased by the Company in
1992. Under the settlement, the Company paid $1.2 million and entered into a
five-year consulting agreement requiring an aggregate of $0.8 million in cash
payments and issuance of 60,000 shares of Series A Preferred Stock. The Company
remains obligated at January 31, 1998 to pay an aggregate of $0.4 million in
monthly installments until January 2001.
Series A Preferred Stock. Dividends on the Series A Preferred Stock total $3.5
million per year based on the annual dividend rate of $0.95 per share and are
payable quarterly if, as, and when declared by the Board of Directors.
1997 Private Placements of Series B Preferred Stock. On February 20, and March
13, 1997, the Company issued 5,000 and 4,600 additional shares, respectively, of
its Series B Junior Convertible, Exchangeable Preferred Stock (the "Series B
Preferred Stock") for aggregate proceeds of $9.6 million. Then, on March 20,
1997 and June 16, 1997, the Company issued 1,865 and 250 shares, respectively,
of Series B Preferred Stock to certain members of management in return for $2.1
million in full-recourse notes collateralized by the stock. The Series B
Preferred Stock has an increasing rate dividend. Accordingly, dividends on
Series B Preferred Stock are recorded using the effective interest method to
recognize the dividends ratably over the estimated period in which the stock
will be outstanding. Although dividends are recorded for financial statement
purposes, the Series B Preferred Stock pays no cash dividends, except under
certain events of liquidity, until there is no longer any Series A Preferred
Stock outstanding. The net proceeds obtained from the private placements were
used by the Company to pay the costs to settle the existing employment and
benefit agreements of the Former Executives and to reduce outstanding
indebtedness under the Revolving Credit Facilities (defined below).
General Textiles
General. General Textiles finances its operations through credit provided by
vendors and other suppliers, its $35.0 million working capital facility (the "GT
Revolving Credit Facility"), $2.2 million in installment notes ("the GT
Installment Notes"), capital leases, trade credit and internally generated cash
flow. Credit terms provided by vendors and other suppliers are usually net 30
days. Amounts 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.
Upon and after emerging from bankruptcy in May 1993, General Textiles issued
non-interest bearing Subordinated Notes and Reorganization Securities
(collectively, the "Bankruptcy Debt") in satisfaction of the claims of its
creditors. Payments to holders of the Bankruptcy Debt are contingent upon the
annual earnings and cash flow levels of General Textiles. Interest expense and
carrying value of the Bankruptcy Debt is determined based on projections of the
earnings and cash flows of General Textiles, which in turn impact the projected
amounts and timing of payments to be made on debt principal. Due to the
18
contingent nature of the timing and amounts of future payments, the carrying
value and annual interest expense related to the Bankruptcy Debt can be
significantly impacted by changes in expected earnings and cash flows of General
Textiles. Likewise, actual earnings and cash flows, as well as minimum payment
provisions of the Reorganization Plan and the related notes, can result in
substantial principal payment requirements in future years. The inability of
General Textiles to make such payments can result in additional issuance of debt
or, ultimately, in the loss of control of General Textiles, as described more
completely below.
Management believes that General Textiles will have sufficient resources to
provide for capital expenditures, to finance its working capital needs and to
make expected payments required under the Bankruptcy Debt and other debt during
the next twelve months from credit supplied by the Company, its suppliers, its
working capital facility and internally generated cash flow.
GT Revolving Credit Facility. Under the GT Revolving Credit Facility, General
Textiles may borrow 65% of eligible inventory, as defined, subject to a maximum
of $35.0 million of revolving credit indebtedness outstanding at any time. As of
January 31, 1998, General Textiles owed $9.5 million under the GT Revolving
Credit Facility and there was $9.3 million available for additional borrowing
under the GT Revolving Credit Facility. Amounts borrowed under the GT Revolving
Credit Facility bear interest at the prime rate plus 0.75%, payable monthly. The
GT Revolving Credit Facility expires in November 1999 and is secured by a lien
on all of the assets and a pledge of all the capital stock of General Textiles.
GT Installment Notes. As of January 31, 1998, General Textiles owed $2.2 million
to the working capital lender under three installment notes used to finance
equipment purchases and general working capital needs. The GT Installment Notes
bear interest at rates ranging from prime plus 2% to prime plus 3% per annum.
Interest and principal are payable monthly and maturity dates range from April
1998 to July 2001.
Under the GT Revolving Credit Facility and the GT Installment Notes, General
Textiles is required to comply with certain covenants, including restrictions on
distributions and dividends, additional indebtedness, salary increases and
bonuses, changes in capital structure and business objectives, mergers,
consolidations and sales of all or substantially all of General Textiles'
assets. In addition, General Textiles is subject to certain financial covenants
and ratios including those covering working capital, limitations on capital
expenditures and payments of any money to affiliates, current ratios, minimum
net worth and debt-to-net-worth ratios. Breach of these covenants or the
occurrence of certain other events, including any material adverse change in the
business or financial condition of General Textiles, may result in an event of
default.
General Textiles was not in compliance with the current ratio covenant in the GT
Revolving Credit Facility as of January 31, 1998. The working capital lender has
waived that requirement at January 31, 1998. In March 1998, General Textiles and
its working capital lender agreed to amend certain terms and conditions of the
GT Revolving Credit Facility. As a result, General Textiles' covenants and
financial ratios will be reset to reflect the anticipated earnings, capital
expenditures and cash flow of General Textiles during fiscal 1998.
Bankruptcy Debt of General Textiles
Subordinated Notes. Under the Reorganization Plan, General Textiles issued
Subordinated Notes in the principal amount of $28.8 million in settlement of
unsecured claims of approximately $47.2 million. At January 31, 1998, $5.6
million of Subordinated Notes were held by creditors not affiliated with General
Textiles (the "Trade Subordinated Notes") and an additional $13.8 million
Subordinated Note, which had been purchased by the Company in 1994, was held by
it (the "Company Subordinated Note"). The Subordinated Notes do not bear
interest. Principal is payable out of excess cash flow. Beginning in fiscal
1996, 30% of General Textiles' excess cash flow must be applied to pay Trade
Subordinated Notes and the remaining 70% must be applied to pay the Company
Subordinated Note (prior to fiscal 1996, 70% of excess cash flow was used to pay
the Trade Subordinated Notes and 30% was used to pay the Company Subordinated
Note). The Subordinated Notes are subordinated to all indebtedness of General
Textiles other than that issued under the Reorganization plan. The Company
Subordinated Note is eliminated in consolidation and is therefore not reflected
on the Company's consolidated balance sheet.
19
If General Textiles failed to pay at least 60% of the original principal amount
of the Trade Subordinated Notes by 30 days after determination of its excess
cash flow for fiscal 1996, it would be required to issue additional Subordinated
Notes equal to 29% of those which had originally been issued. However,
sufficient principal payments have been made to avoid this requirement. There
will be a similar requirement if 80% of the original principal amount of the
Trade Subordinated Notes is not paid within 30 days after the determination of
the excess cash flow for fiscal 1999. Unless all the Trade Subordinated Notes
are repaid within 30 days after the determination of the excess cash flow for
fiscal 2002, the holder of the Company Subordinated Note and the Creditor's
Committee from the Reorganization Proceeding will have the right to elect all
General Textile's directors in proportion to the outstanding principal amounts
of the Company Subordinated Note and of the Trade Subordinated Notes. In
addition, if specified percentages of all the original Subordinated Notes are
not repaid within 39 days after determination of the excess cash flow for
specified fiscal years (43.4% with regard to fiscal 1997, 53.5% with regard to
fiscal 1998 and 70% with regard to fiscal 1999), the holders of the Trade
Subordinated Notes and the Company Subordinated Note will have the right to
elect a minority of General Textiles' directors, with the holders of the Trade
Subordinated Notes and the Company Subordinated Note each being entitled to
elect one half of the minority directors or, if there is an odd number of
minority directors, the holders of the Company Subordinated Note being entitled
to elect one more director than the holders of the Trade Subordinated Notes. The
Subordinated Notes contain covenants, including limitations on executive
compensation, limitations on dividends and mandatory prepayment under certain
change in control events.
Reorganization Securities. Pursuant to the Reorganization Plan, pre-petition
subordinated lenders received $4.9 million principal amount of Subordinated
Reorganization Notes and $17.3 million principal amount of Junior Subordination
Reorganization Notes (collectively, the "Reorganization Securities").
The Subordinated Reorganization Notes are non-interest bearing and are not
entitled to any cash payments until all of the Subordinated Notes are paid in
full. However, the principal amount payable under the Subordinated
Reorganization Notes increases annually on the anniversary of the notes as
required under the Reorganization Plan and the terms of the notes. Under the
terms of the Subordinated Reorganization Notes, General Textiles is subject to
certain covenants, including limitations on executive compensation and
dividends.
The Junior Subordinated Reorganization Notes are currently non-interest bearing.
During any fiscal year that General Textiles' adjusted earnings ("EBITDA" as
defined in such notes) exceeds $10.0 million, the Junior Subordinated
Reorganization Notes will accrue interest at the lesser of (i) 6% per annum, or
(ii) 80% of General Textiles' EBITDA in excess of $10.0 million (the "Contingent
Payments"). No interest or principal payments are payable on the Junior
Subordinated Reorganization Notes until all of the Subordinated Notes are paid
in full. In the event of a qualifying event of liquidity, as defined in the
Reorganization Plan, which includes a public offering of General Textiles'
securities, the Junior Subordinated Reorganization Notes could be exchanged, at
the option of General Textiles, for 19% of the remainder of the market equity
value of General Textiles, as defined, less $3.0 million payable at the option
of the Company either in cash or in stock of General Textiles. Under the terms
of the Junior Subordinated Reorganization Notes, General Textiles must devote a
substantial portion of the Annual Payments to the repayment of the Subordinated
Notes and is subject to certain covenants including limitations on executive
compensation and dividends.
Annual Payments are allocated to the Reorganization Securities commencing 30
days after the Subordinated Notes are paid in full. Annual Payments allocated to
the Reorganization Securities are applied first to any accrued Contingent
Payments, then to the Subordinated Reorganization Notes and lastly to the Junior
Subordinated Reorganization Notes.
20
Factory 2-U
General. Factory 2-U finances its operations through credit provided by its
affiliates and suppliers, its $15.0 million working capital facility and
internally generated cash flow. Amounts available under the working capital
facility are based on a percentage of eligible inventory, as defined,
outstanding from time to time, as more fully described below. General Textiles
provides administrative services to Factory 2-U and charges Factory 2-U a
management fee for such services. These services include merchandising, finance,
accounting, distribution, advertising and executive administrative support.
General Textiles also serves as the purchasing agent for all merchandise shipped
to Factory 2-U. Factory 2-U generally pays General Textiles for merchandise
purchased by General Textiles within 30 days of receipt of goods by General
Textiles.
Management believes that Factory 2-U will have sufficient working capital to
meet its needs during the next twelve months from credit terms supplied by its
affiliates and suppliers, its working capital facility and internally generated
cash flow.
F2U Revolving Credit Facility. Factory 2-U has a $15.0 million revolving credit
facility with a lender (the "F2U Revolving Credit Facility", and collectively
with the GT Revolving Credit Facility, the "Revolving Credit Facilities")
secured by a lien on all of the assets of Factory 2-U, a Guaranty of the
Company, and a pledge of certain other assets owned by the Company. Under the
F2U Revolving Credit Facility, Factory 2-U may borrow up to 65% of eligible
inventory, as defined, subject to a maximum of $15.0 million of amounts
outstanding at any time. This rate was increased to 65% from 60% effective April
28, 1997. As of January 31, 1998 there was $3.2 million outstanding and $4.9
million available for additional borrowing under the F2U Revolving Credit
Facility. Amounts borrowed under the F2U Revolving Credit Facility bear interest
at an annual rate equal to prime plus 0.75%, payable monthly. The F2U Revolving
Credit Facility expires in November 1999 and is secured by a lien on all of the
assets of Factory 2-U. In addition, the Company is a guarantor under the F2U
Revolving Credit Facility.
MetLife Obligations. In connection with the Company's acquisition of Factory
2-U, Factory 2-U entered into a Consent and Restructure Agreement dated as of
November 30, 1995 between Factory 2-U and MetLife Capital Corporation, which
restructured indebtedness under a 1992 aircraft lease (the "MetLife Agreement").
Under the MetLife Agreement, Factory 2-U is obligated to repay the $0.4 million
principal balance outstanding at January 31, 1998 plus interest at 8% per annum,
in monthly payments through November 1998 and a balloon payment of $0.3 million
in December 1998. The Company is a guarantor of this obligation.
Capital Expenditures
The Company anticipates spending approximately $6.0 million on capital
expenditures in fiscal 1998 which includes costs to open new stores, to renovate
and/or relocate existing stores and to upgrade information systems. Management
believes that future expenditures will be financed from internal cash flow, the
GT Revolving Credit Facility and the F2U Revolving Credit 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.
21
Minimum Wage Increases and Welfare Reform
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 this wage increase, the Company has instituted policies to maintain
its ratio of wages to gross margins by controlling aggregate wage increases
through an enhanced wage control and monitoring system and increased initial
mark-ons to its retail prices. Management believes that these measures will be
adequate to control the impact of hourly wage increases on the overall
profitability of its operations.
A significant number of the Company's customers are believed to come from
low-income families whose incomes have historically been subsidized by
government and other forms of assistance. Management believes that action by the
federal and certain state governments to reform income subsidies may have an
impact on its operating performance. However, management also believes it is too
early to tell whether the impact will be materially adverse to the Company.
Although management expects demand for off-price apparel and low-priced home
goods to continue to grow in the markets its serves despite governmental
reforms, management recognizes that there can be no assurance that demand will
grow at all or as fast as it has historically. The Company has made substantial
investments and financial commitments towards serving low-income customers, and
any adverse impact on the income of such customers may adversely impact the
operating results of the Company.
Seasonality and Quarterly Fluctuations
The Company historically has realized its highest level of sales and income
during the third and fourth quarters of 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. If the Company's sales were
substantially below seasonal expectations during the third and fourth quarters,
the Company's annual results would be adversely affected.
The Company historically has realized lower sales in its first two quarters
(February through July), which often has resulted in the Company incurring
losses during those quarters. The Company incurred a net loss and net losses
applicable to common stock in both of the first two quarters of fiscal 1997.
Based on these historical results, management believes that it may, during the
first two quarters of fiscal 1998, experience operating results that are
substantially below those expected for the third and fourth quarters of fiscal
1998.
Year 2000 Issue
The Company uses various computer programs that would fail to perform accurately
if not replaced before the year 2000 affects any transactions. The Company has
reviewed new integrated software packages to support future growth and which are
capable of addressing the issues associated with the year 2000. As part of its
capital expenditure plans previously discussed, the Company plans to install new
software commencing in 1998 at a cost of approximately $2 million to $3 million
and does not anticipate that conversion issues will materially influence
operations or operating results.
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 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. These
forward-looking statements involve risks and uncertainties which are more fully
described in Part I, Item 1 of this Form 10-K.
22
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FAMILY BARGAIN CORPORATION
Reports of Independent Public Accountants F-1
Family Bargain Corporation and Subsidiaries Consolidated Balance Sheets
as of January 31, 1998 and February 1, 1997 F-3
Family Bargain Corporation and Subsidiaries Consolidated Statements of
Operations for fiscal years ended January 31, 1998, February 1, 1997
and January 27, 1996 F-5
Family Bargain Corporation and Subsidiaries Consolidated Statements of
Stockholders' Equity for fiscal years ended January 31, 1998,
February 1, 1997 and January 27, 1996 F-6
Family Bargain Corporation and Subsidiaries Consolidated Statements of
Cash Flows for fiscal years ended January 31, 1998,
February 1, 1997 and January 27, 1996 F-7
Family Bargain Corporation and Subsidiaries Notes to
Consolidated Financial Statements F-9
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
consolidated financial statements and notes thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Family Bargain Corporation:
We have audited the accompanying consolidated balance sheet of Family Bargain
Corporation (a Delaware corporation) and subsidiaries as of January 31, 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. 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 audit. The consolidated
financial statements of Family Bargain Corporation and subsidiaries as of
February 1, 1997 and January 27, 1996 were audited by other auditors whose
report dated April 11, 1997 expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Family Bargain
Corporation and subsidiaries as of January 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
March 18, 1998
F-1
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Family Bargain Corporation:
We have audited the accompanying consolidated balance sheet of Family Bargain
Corporation and subsidiaries as of February 1, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended February 1, 1997 and January 27, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Family Bargain
Corporation and subsidiaries as of February 1, 1997, and the results of their
operations and their cash flows for the years ended February 1, 1997 and January
27, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
April 11, 1997
F-2
F-3
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
January 31, February 1,
1998 1997
ASSETS
Current assets:
Cash $ 3,167 $ 3,261
Merchandise inventory 29,820 29,118
Prepaid expenses and other 727 939
-----------------------------
Total current assets 33,714 33,318
Leasehold improvements and equipment, at cost,
net of accumulated depreciation and
amortization (Note 5) 15,066 10,714
Other assets (Note 6) 3,326 2,323
Excess of cost over net assets acquired, less
accumulated amortization of $6,935 and
$5,332 at January 31, 1998 an
February 1, 1997, respectively (Note 2) 32,711 34,314
-----------------------------
Total assets $ 84,817 $ 80,669
=============================
(continued)
F-3
F-4
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
January 31, February 1,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital leases (Notes 8 and 10) $ 4,873 $ 5,748
Accounts payable 19,003 17,491
Accrued expenses (Note 7) 12,587 9,831
------------------------------
Total current liabilities 36,463 33,070
Revolving credit notes (Note 8) 12,657 17,887
Long-term debt (Note 8) 12,922 14,422
Capital lease and other long-term
obligations (Note 10) 3,306 1,984
Deferred rent (Note 10) 2,251 2,098
------------------------------
Total liabilities 67,599 69,461
------------------------------
Commitments and contingencies
(Notes 4, 8, 10, 11 and 15)
Stockholders' equity (Notes 11 and 12):
Series A convertible preferred stock, $0.01 par
value, 4,500,000 shares authorized, 3,638,690
and 3,727,415 shares issued and outstanding
(aggregate liquidation preference of $36,387 and
$37,274) at January 31, 1998 and February 1, 1997,
respectively 36 37
Series B junior convertible, exchangeable
preferred stock, $0.01 par value, 40,000 shares
authorized, 33,714 and 22,000 shares issued and
outstanding (aggregate liquidation preference of
$33,714 and $22,000) at January 31, 1998 and
February 1, 1997, respectively - -
Common stock, $0.01 par value, 80,000,000 shares
authorized, 4,929,122 shares and 4,693,337 shares
issued and outstanding at January 31, 1998 and
February 1, 1997, respectively 49 47
Additional paid-in capital 83,312 71,057
Accumulated deficit (66,179) (59,933)
-------------------------------
Total stockholders' equity 17,218 11,208
Total liabilities and stockholders' equity $ 84,817 $ 80,669
===============================
The accompanying notes are an integral part to these consolidated financial
statements.
F-4
F-5
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
Fiscal Year Ended
January 31, February 1, January 27,
1998 1997 1996
Net sales $ 300,592 $ 252,165 $ 179,820
Cost of sales 195,010 170,857 117,188
-------------------------------------
Gross profit 105,582 81,308 62,632
Selling and administrative expenses 96,497 87,806 56,097
Amortization of intangibles 2,238 1,966 1,382
Unusual charges (Note 3) 1,750 9,172 -
Provision for goodwill impairment (Note 2) - 8,380 -
Write off of deferred offering costs (Note 3) - 1,923 -
--------------------------------------
Operating income (loss) 5,097 (27,939) 5,153
Interest expense (Note 8) 5,226 8,625 3,675
--------------------------------------
Income (loss) from continuing operations
before income taxes (129) (36,564) 1,478
Income taxes (Note 9) - - -
Discontinued operations (Notes 4 and 15):
Loss on disposal, net of income tax benefit - (826) (500)
--------------------------------------
Net income (loss) (129) (37,390) 978
Preferred stock dividends:
Series A (Note 11) (3,456) (3,509) (3,040)
Series B (Note 11) (2,661) - -
======================================
Net loss applicable to common stock $ (6,246) $ (40,899) $ (2,062)
======================================
Loss per common share (basic and diluted):
Loss from continuing operations $ (1.27) $ (8.89) $ (0.39)
Net loss applicable to common stock (1.27) (9.07) (0.51)
Weighted average common shares outstanding
(basic and diluted) 4,901 4,507 4,006
The accompanying notes are an integral part to these consolidated financial
statements.
F-5
F-6
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Preferred Stock
----------------------------------
Series A Series B Common Stock Additional
----------------- -------------- ----------------- paid-in Accumulated
Shares Amount Shares Amount Shares Amount capital deficit Total
--------- ------ ------ ------ --------- ------ --------- ----------- ---------
Balance at January 28, 1995 3,200,000 $ 32 - $ - 4,506,981 $ 45 $ 46,707 $ (16,972) $ 29,812
Series A Preferred
stock dividends (Note 11) - - - - - - - (3,040) (3,040)
Purchase of treasury shares - - - - (22,916) - (33) - (33)
Cancellation of incentive shares - - - - (498,672) (5) 5 - -
Net income - - - - - - - 978 978
---------------------------------------------------------------------------------------------
Balance at January 27, 1996 3,200,000 $ 32 - $ - 3,985,393 $ 40 $ 46,679 $ (19,034) $ 27,717
=============================================================================================
Series A Preferred
stock dividends (Note 11) - - - - - - - (3,509) (3,509)
Issuance of preferred stock in
settlement of lawsuit
(Notes 4 and 11) 60,000 1 - - - - 359 - 360
Issuance of preferred stock in a
private placement (Note 11) 726,000 7 - - - - 2,849 - 2,856
Conversion of preferred stock
to common stock (258,585) (3) - - 710,644 7 (4) - -
Issuance of preferred stock in a
private placement (Note 11) - - 22,000 - - - 21,174 - 21,174
Correction of unsplit units - - - - (2,700) - - - -
Net loss - - - - - - - (37,390) (37,390)
------------------------------------------------------------------------------------------------
Balance at February 1, 1997 3,727,415 $ 37 22,000 $ - 4,693,337 $ 47 $ 71,057 $ (59,933) $ 11,208
================================================================================================
Series A preferred
stock dividends (Note 11) - - - - - - - (3,456) (3,456)
Series B preferred stock dividend
accretion (Note 11) - - - - - - 2,661 (2,661) -
Conversion of preferred
stock to common stock (88,725) (1) - - 235,785 2 (1) - -
Issuance of preferred stock in a
private placement (Note 11) - - 9,599 - - - 9,600 - 9,600
Issuance of preferred stock to
management for notes (Note 11) - - 2,115 - - - - - -
Common stock rights redemption - - - - - - (5) - (5)
Net loss - - - - - - - (129) (129)
------------------------------------------------------------------------------------------------
Balance at January 31, 1998 3,638,690 $ 36 33,714 $ - 4,929,122 $ 49 $ 83,312 $ (66,179) $ 17,218
================================================================================================
The accompanying notes are an integral part to these consolidated financial
statements.
F-6
F-7
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended
-------------------------------------
January 31, February 1, January 27,
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations $ (129) $ (36,564) $ 1,478
Adjustments to reconcile income (loss)
to net cash provided by (used in)
continuing operations:
Depreciation 3,505 2,253 1,603
Amortization of intangibles 2,238 1,966 1,382
Amortization of debt discount 2,168 4,376 1,555
Provision for goodwill impairment - 8,380 -
Gain on revaluation of subordinated notes - - (822)
(Increase) decrease in assets:
Merchandise inventory (702) (3,244) 124
Prepaid expenses and other (1,359) 924 (7,647)
Increase (decrease) in liabilities:
Accounts payable 1,512 (1,269) 5,365
Accrued expenses 3,655 2,282 946
Other 587 1,827 292
------------------------------------
Net cash provided by (used in)
continuing operations 11,475 (19,069) 4,276
------------------------------------
Discontinued operations:
Loss from discontinued operations - (826) (500)
Decrease in net liabilities - (581) (287)
------------------------------------
Net cash used in discontinued operations - (1,407) (787)
------------------------------------
Cash flows from investing activities:
Purchase of leasehold improvements
and equipment (5,865) (4,635) (3,889)
Investment in Factory 2-U, net of cash
acquired - (230) (520)
Proceeds from sale of real property
and equipment - 4,570 -
-----------------------------------
Net cash used in investing activities (5,865) (295) (4,409)
-----------------------------------
(continued)
F-7
F-8
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended
-------------------------------------
January 31, February 1, January 27,
1998 1997 1996
----------- ----------- -----------
Cash flows from financing activities:
Borrowings on revolving credit notes 335,053 315,156 210,613
Payments on revolving credit notes (340,283) (312,428) (207,022)
Payments of long-term debt and
capital lease obligations (6,218) (3,945) (1,565)
Cash payments of preferred stock dividends (3,456) (3,509) (3,040)
Proceeds from issuance of Series B
Preferred Stock 9,595 - -
Proceeds from issuance of preferred
stock, net - 24,030 -
Proceeds from issuance of notes payable - 3,100 1,500
Payment of deferred debt issuance costs (320) (330) (40)
Purchase of subordinated notes, stock
and warrants (75) - (90)
------------------------------------
Net cash (used in) provided by financing
activities (5,704) 22,074 356
------------------------------------
Net increase (decrease) in cash (94) 1,303 (564)
Cash at the beginning of the period 3,261 1,958 2,522
------------------------------------
Cash at the end of the period $ 3,167 $ 3,261 $ 1,958
====================================
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 2,948 $ 3,299 $ 1,783
Income taxes $ - $ - $ -
Supplemental disclosures of non-cash
investing and financing activities:
Acquisition of equipment financed by
capital leases (Note 10) $ 2,173 $ 125 $ 123
Issuance of Series B preferred stock
for notes $ 2,115 $ - $ -
Series B preferred stock dividend
accretion $ 2,661 $ - $ -
Issuance of notes payable for non-compete
agreement (Note 3) $ - $ 1,750 $ -
Issuance of preferred stock in return for
consulting agreement (Notes 4 and 11) $ - $ 360 $ -
Issuance of and adjustments to notes
payable to former stockholders of
Factory 2-U (Notes 2 and 8) $ - $ 600 $ 625
Issuance of note payable for Mandel-Kahn
settlement (Notes 4, 8 and 15) $ - $ - $ 1,000
The accompanying notes are an integral part to these consolidated financial
statements.
F-8
F-9
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Family Bargain Corporation and subsidiaries ("the Company") operates off-price
retail apparel and home goods stores in the western United States. At January
31, 1998, the Company operated 166 stores in seven states under the names Family
Bargain and Factory 2-U.
Principles of Consolidation
The consolidated financial statements include the accounts of Family Bargain
Corporation and its wholly-owned subsidiaries, General Textiles and Factory 2-U,
Inc. All significant intercompany accounts have been eliminated in
consolidation.
Fiscal Year
The Company's fiscal year is based on a 52/53 week year ending on the Saturday
nearest January 31. Fiscal years ended January 31, 1998 and January 27, 1996
included 52 weeks and the fiscal year ended February 1, 1997 included 53 weeks.
The Company defines its fiscal year by the calendar year in which most of the
activity occurs (e.g. the year ended January 31, 1998 is referred to as fiscal
1997).
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 flow assumption. In
addition, consistent with industry practice, the Company capitalizes certain
buying, warehousing, storage and transportation costs. At January 31, 1998 and
February 1, 1997, such costs included in inventory were approximately $1,300,000
and $1,353,000, respectively.
Leasehold Improvements and Equipment
Leasehold improvements and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments at the date of
acquisition. Depreciation and amortization are calculated using the
straight-line method over the shorter of the estimated useful lives of the
related asset or the lease term, generally five to seven years.
Other Assets
Other assets consist principally of rental deposits on leased stores, deferred
debt issuance costs and a covenant not to compete. Deferred debt issuance costs
are amortized using the effective interest method over the terms of the related
debt. Noncompete agreements are amortized ratably over the life of the
agreement.
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired (goodwill) is amortized on a
straight-line basis over the expected periods to be benefited, generally 25
years. The Company assesses the recoverability of this intangible asset by
determining whether the goodwill balance can be recovered from undiscounted
future operating cash flows. The impairment if any is measured based on
estimated fair values. Goodwill recovery may be impacted if estimated future
operating cash flows are not achieved (Note 2).
F-10
Asset Impairment
Effective March 3, 1996, the Company adopted Statement of Financial Accounting
Standards 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 assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets (Note 2).
Fair Value of Financial Instruments
The carrying amounts of all receivables, payables and accrued balances
approximate fair value due to the short-term nature of such instruments. The
carrying amount of the revolving credit notes approximates fair value due to the
floating rate on such instruments. The carrying value of long-term debt with
fixed payment terms approximates fair value. Long-term debt subject to
contingent principal payments is evaluated each year based on expected debt
repayment (Note 8). It is not practicable to estimate the fair value of such
instruments due to the potential volatility in repayment amounts
Leases
Rent expense is recorded on a straight-line basis over the life of the lease.
Deferred rent represents the difference between base rentals paid under
operating lease agreements and rent expense recognized (Note 10).
Store Preopening and Closing Costs
In fiscal 1996, the Company changed its method of accounting for preopening
costs (costs of opening new stores including grand opening promotions, training,
store set-up and other direct incremental store opening costs) to charging such
costs to expense as incurred. Prior to fiscal 1996, the Company capitalized and
amortized preopening costs using the straight-line method over the first twelve
months of operation. The impact of the change was not material to the Company's
consolidated financial statements.
Costs associated with closing stores, consisting primarily of lease obligations
and provisions to reduce assets to net realizable value, are charged to
operations upon the commitment to close a store.
Income Taxes
Income taxes are accounted for under the asset and liability method. 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 9).
F-11
Stock Based Compensation
Prior to January 28, 1996, the Company accounted for stock options issued to
directors and employees in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. As such, compensation expense would be recorded
under the intrinsic value method. Under the intrinsic value method, 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. On January 28, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation,
which permits entities to measure compensation expense related to stock options
using either the intrinsic value method or a fair value method. 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. The Company has elected to apply the intrinsic value method of
measuring stock based compensation and provide the pro forma disclosure
requirements of SFAS No. 123 (Note 12).
The Company has only issued options with exercise prices above or equivalent to
market price on the grant date. Accordingly, the Company has recognized no
compensation expense related to stock options in the accompanying consolidated
financial statements.
Earnings (Loss) per Common Share
In December 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". The statement specifies the
computation, presentation, and disclosure requirements for earnings per share
(EPS) and diluted earnings per share (DEPS). The statement requires retroactive
adoption for all prior periods presented.
Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision and (c) revising the
contingent share provisions and the supplemental EPS data requirements.
The computation of diluted EPS is similar to the computation of basic EPS except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back (a) any convertible preferred
dividends and (b) the after-tax amount of interest recognized in the period
associated with any convertible debt.
For fiscal years 1997, 1996 and 1995 potential dilutive securities include stock
options, warrants, and convertible preferred stock and had such potential common
shares been outstnading, the effect on earnings per share would have been
anti-dilutive. Therefore, the exercise or conversion of such securities is not
assumed for purposes of calculating diluted earnings per share. Basic and
diluted are equal in each period presented.
Dividend Accretion
The Company's Series B preferred stock has an increasing rate dividend feature
(Note 11). Accordingly, dividends on Series B preferred stock are recorded using
the effective interest method to recognize the dividends ratably over the
estimated period in which the stock will be outstanding.
Use of Estimates
Management of the Company 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 consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
F-12
Reclassifications
Certain prior period amounts have been reclassified to conform their
presentation to fiscal 1997 consolidated financial statements.
New Accounting Pronouncements
In December 1997, the Company adopted SFAS No. 129, "Disclosure of Information
about Capital Structure". This Statement establishes standards for disclosing
information about an entity's capital structure. This Statement is effective for
financial statements for periods ending after December 15, 1997. The adoption of
SFAS No. 129, in fiscal 1997 did not have a material effect on the Company's
financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 131 requires reporting certain
information about operating segments in condensed financial statements of
interim periods issued to shareholders. Both standards are required to be
adopted during fiscal 1998. Management does not expect the adoption of these
standards to have a material effect on the Company's financial position or
results of operations.
2. ACQUISITION OF FACTORY 2-U
On November 13, 1995, the Company acquired all of the common stock of Capin
Mercantile Corporation, an off-price clothing and home goods retailer operating
in the southwestern United States, for $1,675,000 in cash (including acquisition
expenses) and $1,225,000 in notes payable to former stockholders (Note 8).
Immediately following the acquisition, the name of Capin Mercantile Corporation
was changed to Factory 2-U, Inc. (Factory 2-U).
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Factory 2-U have been included in
these consolidated financial statements from November 11, 1995, the end of the
accounting period closest to the acquisition date.
All acquired assets and liabilities of Factory 2-U have been recorded at
estimated fair market values on November 10, 1995, with the purchase price of
$2,900,000 and the net tangible book deficit of $13,676,000 allocated to
acquired goodwill of $16,576,000. In 1997, additional goodwill in the amount of
$1,906,000 was recorded pursuant to the resolution of contingencies.
The following table sets forth the Company's pro forma unaudited consolidated
statement of operations for fiscal year ended January 27, 1996. The pro forma
consolidated statement of operations gives effect to the consolidation of
Factory 2-U, elimination of sales and cost of sales related to Factory 2-U
stores no longer in operation, elimination of Factory 2-U general and
administrative expenses, the adjustment of interest expense and financing fees
to reflect the debt structure of the consolidated entity, and the recognition of
the amortization of the excess of cost over the fair value of assets acquired
with all transactions treated as though the acquisition had occurred at January
29, 1995.
Pro forma
IN THOUSANDS EXCEPT PER SHARE DATA 1995
----------
Net sales $ 220,084
Net loss $ (4,020)
Loss applicable to common stock $ (7,060)
Loss per common share (basic and diluted) $ (1.76)
F-13
In connection with the Factory 2-U acquisition, the Company acquired certain
real property. The Company sold this property to a third party at no gain or
loss in July 1996 for net proceeds of $4,500,000.
In January 1997, the Company reviewed the historical results of Factory 2-U's
operations and revised its projection of cash flows as the basis for determining
whether goodwill was impaired. Based on the revised projection, the Company
determined that the goodwill arising from the Factory 2-U acquisition was
impaired and recorded a charge to operations in the amount of $8,380,000 to
adjust goodwill to its estimated fair value.
3. UNUSUAL CHARGES
In August 1997, the Company recorded unusual charges to operations in the amount
of $1,750,000 pertaining to the separation from the Company of the former
President and CEO.
In connection with the sale of a controlling interest in the Company to a new
investor group in January 1997 (Note 11), the Company moved its executive
offices from New York City to San Diego, CA and entered into a separation
agreement with three former executives (the Former Executives). As a result of
these actions, the Company recognized unusual charges in the amount of
$9,172,000 in fiscal 1996. The unusual charges included $7,081,000 to settle the
existing employment and benefit agreements of the Former Executives and
$2,091,000 to cancel certain contracts and expenses related to the separation of
the Former Executives and closure of the New York office.
The Company withdrew a securities offering in January 1997. In conjunction with
this withdrawal, the Company wrote-off $1,923,000 in deferred offering costs.
4. DISCONTINUED OPERATIONS
The Company divested its distribution business (the Former Distribution
Business), which was comprised of the operations of MKI Acquisition,
Mandel-Kahn, CB/Camelot and CB/Murray, prior to April 30, 1993. The estimation
and settlement of the residual net liabilities of the Former Distribution
Business have been accounted for as discontinued operations in these
consolidated financial statements.
In January 1996, the Company settled the remaining claims related to the Former
Distribution Business by agreeing to pay the former owners of Mandel-Kahn
Industries, Inc. a combination of $230,000 in cash, an interest bearing
installment note of $1,000,000 and a consulting arrangement consisting of
aggregate cash payments of $750,000 and 60,000 shares of Series A Preferred
Stock (Note 11). In 1997, the Company determined that it did not intend to
employ the services required of the consultant under the settlement and
accordingly charged all remaining prepayments and future payments related to the
consulting agreement to loss on disposal of discontinued operations. The Company
recognized a loss, net of taxes, on disposal of discontinued operations in the
amount of $826,000 and $500,000 in fiscal 1996 and 1995, respectively, to
reflect the costs to litigate and settle claims and the cost of consulting
services that it does not intend to use. The Company does not anticipate any
future expenses related to the Former Distribution Business.
F-14
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of the following:
January 31, February 1,
IN THOUSANDS 1998 1997
----------------------------
Furniture, fixtures and equipment $ 15,272 $ 10,740
Leasehold improvements 4,797 3,492
Transportation and equipment 114 174
Equipment under capital leases 2,883 741
Construction in progress - 330
----------------------------
23,066 15,477
Less accumulated depreciation and amortization (8,000) (4,763)
----------------------------
$ 15,066 $ 10,714
============================
6. OTHER ASSETS
Other assets consist of the following:
January 31, February 1,
IN THOUSANDS 1998 1997
----------------------------
Deferred debt issuance costs $ 257 $ 189
Rent and other deposits 989 533
Noncompete agreements 2,756 1,800
----------------------------
4,002 2,522
Less accumulated amortization (676) (199)
----------------------------
$ 3,326 $ 2,323
============================
In August 1997, the former President and CEO entered into an agreement not to
compete with the Company until January 2001 in return for payments totaling
$970,000. In January 1997, the Company entered into an agreement not to compete
with the Former Executives in favor of the Company until June 2000 in return for
$1.8 million in secured promissory notes that were paid in January 1998.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
January 31, February 1,
IN THOUSANDS 1998 1997
----------------------------
Accrued compensation and related costs $ 3,153 $ 2,924
Sales tax payable 3,432 1,035
Other accrued expenses 6,002 5,872
----------------------------
$ 12,587 $ 9,831
============================
F-15
8. LONG-TERM DEBT AND REVOLVING CREDIT NOTES
Long-term debt and revolving credit notes at January 31, 1998 and February 1,
1997 consists of the following:
January 31, February 1,
IN THOUSANDS 1998 1997
------------------------
Revolving credit note, interest at prime plus 2.0%
till June 1997 then prime plus 0.75% (9.25% at
January 31, 1998 and 10.25% at February 1,
1997) payable monthly, principal due in November 1999 $ 9,473 $ 12,967
Revolving credit note, interest at prime plus 2%
till June 1997 then prime plus 0.75% (9.25% at January
31, 1998 and 10.25% at February 1, 1997) payable monthly,
principal due in November 1999 3,184 4,920
Installment note payable to a finance company, interest
at prime plus 2%(10.5% at January 31, 1998 and 10.25%
at February 1, 1997) payable monthly, principal payable
in monthly in installments of $37,750, final balloon
payment of $216,500 due in April 1998 292 745
Installment note payable to a finance company, interest
at prime plus 2%(10.5% at January 31, 1998 and 10.25%
at February 1, 1997) payable monthly, principal payable
monthly in installments of $30,556, final payment due
in May 1999. 489 856
Installment note payable to a finance company, interest
at prime plus 3%(11.5% at January 31, 1998 and 11.25%
at February 1, 1997) payable monthly, principal payable
monthly in installments of $33,333, final payment du
in July 2001. 1,400 1,800
Subordinated notes, non-interest bearing, discounted
at rates ranging from 6.0% to 25%, principal
payments based on excess cash flow, as defined 13,042 13,158
Installment note payable to a finance company, interest
at 8%, principal and interest payable in installments
of $13,648, final balloon payment of $304,000 due in
December 1998 414 549
Installment note payable to former stockholders of
Factory 2-U, interest at 8.75%, principal payments of
$45,455 plus accrued interest payable quarterly beginning
in May 1996, final payment due in October 1998 (Note 4) 182 364
Note payable to former stockholders of Factory 2-U,
interest at 8.75%, principal and accrued interest
due in October 1998 (Note 4) 600 600
F-16
January 31, February 1,
IN THOUSANDS 1998 1997
-------------------------
Installment note payable to the Commerce and
Economic Development Commission of Arizona,
interest at 6%, principal and interest payable in
monthly installment of $4,232. Note paid in full
in fiscal 1997. - 136
Installment note payable to the Economic Development
Administration of Arizona, interest at 5%, principal
and interest payable in monthly installments of
$1,992. Note paid in full in fiscal 1997. - 49
Secured promissory notes payable to Former Executives,
interest at 5.6%, principal and accrued interest due
January 1998 (Note 2). Note paid in full in fiscal 1997. - 1,750
--------------------------
Total long-term debt 29,076 37,894
Less current maturities (3,497) (5,585)
--------------------------
Long-term debt and revolving credit notes,
net of current maturities $ 25,579 $ 32,309
==========================
Revolving Credit Notes
At January 31, 1998 the Company may borrow up to $50,000,000 under its revolving
credit facilities (the Facilities) at the prime rate plus 0.75%. Advances under
the Facilities are subject to limitations based on inventory levels, as defined.
The Facilities expire in November 1999 but are subject to one year automatic
renewal periods, unless terminated by the Company or its lender. The balances
owed under the Facilities fluctuate based on working capital requirements. The
Company pays fees ranging from .25% to .50% on the unused portions of the
Facilities.
The installment notes payable in the amounts of $2,181,000 and $3,401,000 at
January 31, 1998 and February 1, 1997, respectively, and the Facilities are
secured by substantially all the assets of General Textiles and Factory 2-U and
the common stock of General Textiles.
The Company was not in compliance with the current ratio covenant in the
Facilities as of January 31, 1998. The lender has waived that requirement at
January 31, 1998. In March 1998, the Company and its lender agreed to amend
certain terms and conditions of the Facilities. As a result, the Company's
covenants and financial ratios will be reset to reflect anticipated earnings,
capital expenditures and cash flow of the Company during fiscal 1998.
Subordinated Notes
At January 31, 1998 and February 1, 1997, the Company owed $22,945,000 and
$25,269,000, respectively, face value of subordinated notes (the Sub Notes)
issued in settlement of certain pre-bankruptcy claims of General Textiles. The
Sub Notes are comprised, in order of seniority, of New Subordinated Notes (due
no later than April 2003), Subordinated Reorganization Notes (due no later than
November 2003) and Junior Subordinated Reorganization Notes (due no later than
May 2005). The Sub Notes are non-interest bearing, except for certain contingent
interest payments (described below), and are subject to minimum principal
payment requirements based on the annual excess cash flows (Excess Cash Flows)
F-17
of General Textiles as defined in the Plan of Reorganization (the Plan) under
which General Textiles has operated since emerging from bankruptcy in May 1993.
Accordingly, the Sub Notes have been discounted to carrying values reflected on
the accompanying consolidated balance sheets based on estimated future cash
flows of General Textiles at discount rates ranging from 6% to 25%.
The discount rates applied in determining the carrying values of the Sub Notes
were established when General Textiles emerged from bankruptcy in May 1993 and,
under generally accepted accounting principles, may not be adjusted to reflect
changes in market rates of debt with similar characteristics. Accordingly, the
fair values of the Sub Notes may differ substantially from the carrying values
reflected in the accompanying consolidated balance sheets. The Company does not
consider estimation of the fair values of the Sub Notes to be practicable given
the uncertainty regarding the timing and amounts of future payments.
The aggregate unamortized discount related to the Sub Notes was $9,903,000 and
$12,111,000 at January 31, 1998 and February 1, 1997, respectively. The discount
is amortized to interest expense as a non-cash charge until the notes are paid
in full. The impact of changes in estimates of future Excess Cash Flows on
expected amounts and timing of payments are reflected in current earnings as an
adjustment to interest expense. To the degree General Textiles experiences
actual Excess Cash Flows that differ in amounts or timing from those currently
projected, or to the degree General Textiles changes its projections of Excess
Cash Flows in future periods, the Company may experience significant adjustments
to interest expense to reflect such changes.
The Junior Subordinated Reorganization Notes are subject to interest payments
contingent upon the annual adjusted earnings (EBITDA) of General Textiles as
defined in the Plan (Contingent Payments). A Contingent Payment accrues when the
EBITDA of General Textiles exceeds $10 million in a given year and is payable
when Excess Cash Flows are available. Contingent Payments, if accrued, must be
made prior to any other payments in respect of the Subordinated Reorganization
Notes or the Junior Subordinated Reorganization Notes but rank junior to the New
Subordinated Notes and certain debt of General Textiles held by Family Bargain
Corporation. The contingent payment obligation may not exceed 6% of the
outstanding face amount of the notes. The face amount of the Junior Subordinated
Reorganization Notes at January 31, 1998 and February 1, 1997 was $17,335,000.
No Contingent Payments have been accrued or disbursed to date.
The Subordinated Reorganization Notes are subject to a schedule of annual
increases in principal payment requirements. As such, adjustments to interest
expense can occur when the timing of projected payments changes from period to
period.
The future maturities of long-term debt include estimated principal payments on
the Sub Notes based on management's estimates of projected Excess Cash Flows of
General Textiles. The future maturities at January 31, 1998 are as follows:
IN THOUSANDS Fiscal year ending:
January 30, 1999 $ 3,497
January 29, 2000 1,040
February 3, 2001 6,926
February 2, 2002 13,920
February 1, 2003 939
Thereafter -
---------
26,322
Less portion representing interest (9,903)
---------
16,419
Less current maturities (3,497)
---------
$ 12,922
=========
F-18
9. INCOME TAXES
The principal temporary differences that give rise to significant portions of
the consolidated deferred tax assets and liabilities are presented below:
January 31, February 1,
IN THOUSANDS 1998 1997
-------------------------------
Deferred tax assets
Net operating loss carryforwards $ 7,562 $ 9,454
Compensated absences and bonuses 1,184 1,376
Deferred rent 1,118 1,049
Closed store accrual 1,158 671
Excess of tax over book inventory 341 544
Restructuring costs 121 325
Other 497 826
Discontinued operations accruals 48 52
-------------------------------
Total gross deferred tax assets 12,029 14,297
Less valuation allowance (9,901) (11,452)
-------------------------------
Net deferred tax assets 2,128 2,845
-------------------------------
Deferred tax liabilities
Subordinated notes 481 1,363
Inventory reserves and prepaid expenses 151 164
Leasehold improvements and equipment,
principally due to differences in
depreciation recognized on fixed assets 598 607
Other 898 711
-------------------------------
Deferred tax liabilities 2,128 2,845
-------------------------------
Net deferred taxes $ - $ -
===============================
The Company has established a valuation allowance due to lack of historical
earnings and annual limitations on the usage of net operating loss
carryforwards.
F-19
The difference between the expected income tax expense (benefit) computed by
applying the U.S. federal income tax rate of 34% to net income from continuing
operations for fiscal 1997, 1996 and 1995 and actual expense is a result of the
following:
January 31, February 1, January 27,
IN THOUSANDS 1998 1997 1996
-------------------------------------
Computed "expected" tax expense
(benefit) $ (44) $ (12,432) $ 503
Amortization of goodwill 638 668 470
Change in valuation allowance (1,551) 5,950 64
Provision for goodwill impairment - 2,849 -
Impact of purchase accounting
adjustments - - (603)
Debt forgiveness permanent
difference - - (279)
State income taxes, net of federal
income tax benefit - - -
Limitation of net losses due to
change in control - 2,988 -
Other, net 957 (23) (155)
-------------------------------------
$ - $ - $ -
=====================================
At January 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $24.6 million that expire between
2006 and 2012.
10. LEASE COMMITMENTS
The Company operates retail stores, warehouse facilities and administrative
offices under various operating leases. Total rent expense was $17,313,000,
$14,987,000 and $10,128,000, including contingent rent expense of $128,000,
$89,000 and $63,000, for fiscal years ended January 31, 1998, February 1, 1997
and January 27, 1996, respectively.
For financial statement purposes, rent expense is recorded on a straight-line
basis over the life of the lease. Generally, lease payments are lower in the
early years of the lease term and, as a result, financial statement expense is
greater than the cash payments. For fiscal 1997, 1996 and 1995, rent expense
charged to operations exceeded cash payment requirements by $153,000, $452,000
and $202,000, respectively, and resulted in an increase to the deferred rent
liability for the same amount.
The Company is also obligated under various capital leases for leasehold
improvements and equipment that expire at various dates during the next three
years. Leasehold improvements and equipment and related accumulated amortization
recorded under capital leases are as follows:
January 31, February 1,
IN THOUSANDS 1998 1997
------------------------------
Leasehold improvements $ 340 $ 291
Equipment 2,543 450
------------------------------
2,883 741
Less accumulated amortization (531) (255)
------------------------------
$ 2,352 $ 486
==============================
F-20
At January 31, 1998, the future minimum lease payments under capital leases and
operating leases with remaining noncancelable terms and are as follows:
Capital Operating
IN THOUSANDS leases leases
------------------------
Fiscal year ending:
January 30, 1999 $ 1,445 $ 13,348
January 29, 2000 267 11,746
February 3, 2001 214 8,813
February 2, 2002 171 7,161
February 1, 2003 20 4,811
Thereafter - 9,233
------------------------
Total minimum lease payments 2,117 $ 55,112
=========
Less amount representing interest (rates ranging
from 9.0% to 14.8%) (144)
---------
Present value of capital lease obligation 1,973
Less current maturities (1,377)
Long-term capital lease obligation $ 596
=========
11. STOCKHOLDERS' EQUITY
The Company has 7,500,000 shares of preferred stock authorized, of which
4,500,000 have been allocated to Series A 9-1/2% Cumulative Convertible
Preferred Stock (the Series A Preferred Stock) and 40,000 have been allocated to
Series B Junior Convertible, Exchangeable Preferred Stock (the Series B
Preferred Stock).
Series A Preferred Stock
The Series A Preferred Stock ranks senior to the Series B Preferred Stock and
the common stock with respect to the payment of dividends and distribution of
net assets upon liquidation, dissolution or winding up. Cumulative dividends are
payable quarterly at the rate of $.95 per year on April 30, July 31, October 31,
and the last Friday in January if, as and when declared by the Board of
Directors.
Series A Preferred Stock is convertible, prior to redemption, at the option of
the holder, into shares of common stock at a conversion price subject to
adjustment under certain circumstances pursuant to anti-dilution provisions. If
the Company fails to declare and pay dividends on the Series A Preferred Stock
within 90 days after a quarterly divided date, the conversion price is reduced
by $.50 per share in each instance but not below the par value of the stock.
In March 1996, the Company issued 726,000 shares of its Series A Preferred Stock
in a private placement to foreign investors under Regulation S of the Securities
Act of 1933. The Company received aggregate proceeds, before commissions and
expenses of the private placement, of $3,539,000. Net proceeds from this
offering were $2,856,000 after payment of $319,000 in placement agent
commissions and $364,000 in offering expenses. As additional compensation in
connection with the private placement, the Company issued to the placement agent
and its designees warrants to purchase up to an aggregate of 181,500 shares of
the Company's common stock at an exercise price of $1.88 per share (Note 12).
In March 1996, the Company issued 60,000 shares of Series A Preferred Stock
valued at the then market value of $360,000 in partial settlement of a lawsuit
(Note 4).
At January 31, 1998, warrants to purchase 320,000 shares of Series A Preferred
Stock were outstanding with an exercise price of $16.50 per share and an
expiration date of July 1999.
F-21
Series B Preferred Stock
On January 10, 1997, the Company issued 22,000 shares of Series B Preferred
Stock in a private placement to an investor group. The Company received
aggregate proceeds of $22,000,000 and recognized a charge to additional paid-in
capital of $826,000 for expenses of the private placement. The net proceeds of
the private placement were used to pay costs related to the Unusual Charges
(Note 3) and for general working capital purposes.
During fiscal 1997, the Company placed an additional 11,715 shares of its Series
B Preferred Stock for aggregate cash proceeds of $9,600,000 with private
investors and notes receivable in the amount of $2,115,000 from management of
the Company (the Management Group Notes). The Management Group Notes are due in
March 2002, accrue interest at 8% per annum and require annual principal
payments equivalent to 16.25% of the annual bonus of each purchaser and a
balloon payment of the unpaid principal and accrued interest at maturity. The
notes are full-recourse notes secured by the Series B Preferred Stock issued in
return for the notes.
In April 1997, concurrent with the Series B issuance, the Company effectively
redeemed all rights outstanding under its Shareholders' Rights Agreement. The
Company paid each holder of common stock $0.001 per share totaling $4,930.
The Series B Preferred Stock ranks junior to the Series A Preferred Stock and
senior to the common stock with respect to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up. The Series B
Preferred Stock is convertible, at the option of the holder, only after all the
Series A Preferred Stock is converted or redeemed. The conversion price per
share is subject to adjustment under certain circumstances pursuant to
anti-dilution provisions. Each share of Series B Preferred Stock is entitled to
voting rights equivalent to the number of common shares into which it is
convertible.
The Series B Preferred Stock pays no dividend until January 2002. Beginning in
2002, the Company is obligated to pay a dividend to holders of the Series B
Preferred Stock in the amount of $60 per share subject to increases of $20 per
share every year thereafter until 2005 up to a maximum of $120 per share. In
recognition of the increasing rate feature of Series B preferred stock, the
Company accreted non-cash dividends of $2,661,000 in fiscal 1997. Annual cash
dividends may be required prior to 2002 or in amounts greater than otherwise
required prior to or after 2002 in the event the Company defaults on its
revolving credit facilities or declares a dividend on its common stock.
12. STOCK OPTIONS AND WARRANTS
At January 31, 1998, warrants to purchase 331,106 common shares were
outstanding. Of these warrants, 15,000 are exercisable at the common stock
market price and expire by December 1998, 150,941 have exercise prices ranging
from $9.00 to $10.50 and expiration dates ranging from August 1998 to December
1998 and 165,165 have an exercise price of $1.88 and expire in March 2001 (the
$1.88 Warrants). The $1.88 Warrants were issued in March 1996 in connection with
a private placement of Series A Preferred Stock (Note 11). Had the Company
measured the estimated fair value of the warrants issued in March 1996, there
would have been no impact on the consolidated financial statements due their
being treated as an expense of the private placement.
F-22
The Company's Board of Directors has granted stock options to members of the
Board and to Company management. The following table summarizes common stock
option plan activity:
Number of Weighted average
shares of exercise prices
Outstanding at January 29, 1995 558,333 12.49
Granted 560,833 1.38
Canceled (including repriced options) (264,582) 12.48
----------
Outstanding at January 27, 1996 854,584 2.14
Granted 37,417 1.38
Canceled (502,834) 1.38
----------
Outstanding February 1, 1997 389,167 3.05
Granted 3,016,450 2.15
Canceled (317,917) 3.43
----------
Outstanding January 31, 1998 3,087,700 2.13
Exercisable at January 31, 1998 1,476,206 2.09
Exercisable at February 1, 1997 385,834 3.07
In fiscal 1995, the Board of Directors repriced 235,417 options formerly granted
at an exercise price of $12.48 to an exercise price of $1.38. All options have
been granted or repriced at the closing market price of the underlying stock at
the date of grant or the date of repricing. Options outstanding at January 31,
1998 had exercise prices ranging from $1.38 to $2.34 and a weighted average
remaining contractual life of 4.3 years.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" under which no compensation cost has
been recognized. If the Company had elected to recognize compensation costs
based on the fair value on the date of grant for awards in fiscal years 1997 and
1996, consistent with the provisions of SFAS No. 123, net loss and net loss per
share would have been increased to the following amounts:
IN THOUSANDS, EXCEPT PER SHARE DATA 1997 1996 1995
---- ---- ----
Pro forma net loss ($7,114) ($40,933) ($2,278)
Pro forma net loss per share (basic and diluted) ($ 1.45) ($ 9.08) ($0.56)
The pro forma effect on net loss for fiscal years 1997 and 1996 may not be
representative of the pro forma effect on net loss of future years because the
SFAS No. 123 method of accounting for pro forma compensation expense has not
been applied to options granted prior to fiscal 1996.
The weighted-average fair values at date of grant for options granted during
fiscal 1997 and 1996 were between $0.90 and $1.85 and were estimated using the
Black-Scholes option pricing model. The following assumptions were applied: (i)
expected dividend yield of 0%, (ii) expected volatility rates of 1.388 and 0.83
for fiscal years 1997 and 1996, respectively, (iii) expected life of three to
five years for fiscal 1997 and eight years for fiscal 1996, (iv) risk free
interest rates ranging from 5.45% to 6.88%.
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 the Company's 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, the Company believes that the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of awards from
those plans.
F-23
13. EMPLOYEE BENEFITS
The Company sponsors 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. The Company makes 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. The
Company contributed $132,000, $111,000 and $116,000 in fiscal 1997, 1996 and
1995, respectively.
14. RELATED PARTY TRANSACTIONS
During fiscal 1996, the Company paid $1,100,000 in fees and expense
reimbursements related to its withdrawn securities offering and advisory fees
related to the private placement of Series B Preferred Stock to an investment
banking firm for which a director of the Company serves as a managing director
(Notes 3 and 11). This same director was appointed to the Board of Directors
following the successful completion of the initial public offering of Series A
Preferred Stock in July 1994.
The Company also paid a $250,000 finder's fee to a newly appointed director in
respect of advisory services rendered to the Company in connection with the
private placements of Series B Preferred Stock (Note 11).
In January 1997, the Company paid $96,000 to former directors of the Company
pursuant to the cancellation of their stock options and warrants.
In March 1996, a director of the Company was a managing director of the
investment-banking firm that served as the placement agent for the Company's
private placement of 726,000 shares of Series A Preferred Stock (Note 11).
At January 27, 1996, an accounts receivable balance of approximately $170,000
was outstanding from an affiliate of the Former Executives. This receivable was
forgiven in connection with the settlements with the Former Executives and is
included in the unusual charges recorded in fiscal 1996 (Note 3).
15. COMMITMENTS AND CONTINGENCIES
The Company is at all times subject to pending and threatened legal actions that
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.
23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Registrant filed a Form 8-K dated May 14, 1997. A Form 8-K/A-1 filed May 23,
1997 amended it in its entirety. The reports on Form 8K and 8K/A-1 reported on a
change in certifying accountants filed pursuant to Section 13 of the Securities
Act of 1934.
24
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated by reference to the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A in connection with the 1998 Annual Meeting of Shareholders
(the "Proxy Statement") under the headings "Proposal 1 -- "Election of
Directors" and "Executive Officers."
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Registrant's Proxy Statement under the heading "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Registrant's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Registrant's Proxy Statement under the heading "Certain Relationships and
Related Transactions."
25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
The following is an index of the financial statements and exhibits included in
this report or incorporated herein by reference.
1) Financial Statements; the financial statements filed as part of this report
are listed in the index to financial statements on page 22.
2) Exhibits:
Exhibit
No. Description
- -------
2.1 Joint Plan of Reorganization Under Chapter 11 of the United States
Bankruptcy Code of FBS Holdings, Inc. and General Textiles, d/b/a Family
Bargain Centers ("Family Bargain") included in First Amended Disclosure
Statement (2-Exhibit 2.1)
2.3 Stock Purchase Agreement, dated June 10, 1993, by and between
Diversified Retail Services, Inc. ("Retail") and MKI Holding Corp.
(4-Exhibit 2)
2.4 Securities Purchase Agreement dated December 30, 1996 among Family
Bargain Corporation and the Purchasers (11-Exhibit 2.4)
3.1 Restated Certificate of Incorporation of the Registrant (1-Exhibit 3.1)
3.2 Amendments to the Restated Certificate of Incorporation of the
Registrant (6-Exhibit 3.2)
3.3 Amended and Restated By-Laws of the Registrant (6-Exhibit 3.4)
4.1 Form of Certificate of Designation of Series A 9% Cumulative Preferred
Stock (6-Exhibit 4.1)
4.2 Special Series A 9% Cumulative Convertible Preferred Stock
(6-Exhibit 4.3)
4.3 Specimen Common Stock Certificate (1-Exhibit 4.2)
4.4 Specimen Class C Redeemable Common Stock Purchase Warrant Certificate
(1-Exhibit 4.3)
4.5 Specimen Class D Redeemable Common Stock Purchase Warrant Certificate
(1-Exhibit 4.4)
4.6 Certificate of Designations of the Series C Convertible Preferred Stock
(6-Exhibit 4.8(a))
4.7 Certificate of Correction of the Certificate of Designations of the
Series C Convertible Preferred Stock (6-Exhibit 4.8(b))
4.8 Certificate of Designations of the Series D Convertible Preferred Stock
(6-Exhibit 4.9(a))
4.9 Certificate of Correction of the Certificate of Designations of the
Series D Convertible Preferred Stock (6-Exhibit 4.9(b))
26
4.10 Indenture, dated as of May 1993, between General Textiles and IBJ
Schroder Bank & Trust Company (included in Exhibit 2.1 above)
4.11 General Textiles Subordinated Notes Due 2003 (included in Exhibit 2.1
above)
4.12 Subordinated Reorganization Note Agreement, dated as of May 28,
1993, among General Textiles, Berkeley Atlantic Income Limited,
Govett American Endeavor Fund Limited and London Pacific Life &
Annuity Company (included in Exhibit 2.1 above)
4.13 Junior Subordinated Reorganization Note Agreement, dated as of May
1993, among General Textiles, Berkeley Atlantic Income Limited,
Govett American Endeavor Fund Limited and London Pacific Life &
Annuity Company (included in Exhibit 2.1 above)
4.14 Rights Agreement dated as of November 27, 1995 between the Registrant
and Corporate Stock Transfer, Inc.(8-Exhibit 1)
4.15 Certificate of Designations of the Series A Junior Participating
Preferred Stock (included in Exhibit 4.14 above)
4.16 Certificate of Designations of Series B Junior Convertible, Exchangeable
Preferred Stock. (11-Exhibit 4.16)
10.1 Agreement, dated March 31, 1994, among Registrant, Bastian Holdings,
Inc., Kabushi Investments Limited and Michael A. Gibbs (6-Exhibit 10.1)
10.2 Agreement, dated as of March 16, 1994, among Registrant, DRS Apparel,
Inc., L'Ancresse Holdings, Ltd., Kabushi Investments Ltd. and Bastian
Holdings, Inc. (6-Exhibit 10.2)
10.3(a) Stock Purchase Agreement, dated as of December 13, 1991, between the
Hanover Partnership and the Registrant, incorporated by reference to
Exhibit 1 of the Statement on Schedule 13D, filed on January 13,
1992 by Bastian Holdings, Kabushi et al. with respect to the Common
Stock of the Registrant (the "Bastian Holdings 13D")
10.3(b) Assignment, dated as of January 2, 1992, by the Hanover Partnership
in favor of Bastian Holdings and Kabushi, incorporated by reference
to Exhibit 5 to the Bastian Holdings 13D
10.3(c) Amendment, dated as of March 8, 1992, between the Hanover
Partnership and the Registrant, incorporated by reference to Exhibit
1 to Amendment No. 1 to the Bastian Holdings 13D, filed on March 18,
1992
10.3(d) Amendment No. 2 to Stock Purchase Agreement, dated as of April 20, 1992,
among the Hanover Partnership, Bastian Holdings, Kabushi, Michael A.
Gibbs and the Registrant (3-Exhibit 10.5(d))
10.3(e) Amendment No. 3 to Stock Purchase Agreement, dated June 30, 1992, among
the Hanover Partnership, Bastian Holdings, Kabushi, Michael A. Gibbs and
the Registrant (1-Exhibit 10.5(e))
10.3(f) Assignment, dated as of January 3, 1992, by the Registrant in favor of
DRE (1-Exhibit 10.5(f))
10.4(a) Employment Agreement, dated as of April 24, 1992, among the Registrant,
C-B/Murray and Benson A. Selzer (1-Exhibit 10.6(a))
10.4(b) Amendment to Employment Agreement, dated as of June 16, 1992, among
the Registrant, C-B/Murray, Mandel-Kahn and Benson A. Selzer
(1-Exhibit 10.6(b))
27
10.5(a) Employment Agreement, dated as of April 24, 1992, among the
Registrant, C-B/Murray and Joseph Eiger (1-Exhibit 10.7(a))
10.5(b) Amendment to Employment Agreement, dated as of June 16, 1992, among
the Registrant, C-B/Murray, Mandel-Kahn and Joseph Eiger (1-Exhibit
10.7(b))
10.6 Consulting Agreement, dated January 1, 1996, between Joel Mandel and
General Textiles (10-Exhibit 10.6)
10.7 Employment Agreement, dated as of August 1, 1995, between General
Textiles and William Mowbray (10-Exhibit 10.7)
10.7(a) Separation Agreement, dated as of August 1, 1997, between General
Textiles and William Mowbray (13-Exhibit 10.4)
10.8 Employment Agreement, dated as of August 21, 1995, between General
Textiles and Kevin P. Frabotta (10-Exhibit 10.8)
10.8(a) Advisory Agreement dated as of November 1, 1995 between the Registrant
and H. Jurgen Schlichting (10-Exhibit 10.8(a))
10.9(a) Management Agreement, dated May 28, 1993, among DRS Apparel, Inc.,
General Textiles and Transnational Capital Ventures, Inc.
(6-Exhibit 10.9 (a))
10.9(b) Assignment (of Management Agreement), dated January 28, 1994, among DRS
Apparel, Inc., General Textiles and Transnational Capital Ventures, Inc.
(6-Exhibit 10.9(b))
10.10(a)Amended and Restated Loan and Security Agreement, dated as of October
14, 1993, between General Textiles and Guilford Investments, Inc.
(6-Exhibit 10.10(a))
10.10(b)First Amendment to Amended and Restated Loan and Security Agreement
(6-Exhibit 10.10(b))
10.11 Option Agreement, dated January 28, 1994, between Registrant and
Guilford Investments, Inc. (6-Exhibit 10.11)
10.12 Agreement, dated January 28, 1994, between Registrant and Guilford
Investments, Inc. (6-Exhibit 10.12)
10.13 Federal Income Tax Allocation Agreement, dated May 28, 1993, between
Registrant and General Textiles (6-Exhibit 10.13)
10.14 Amended and Restated Loan and Security Agreement, dated as of October
14, 1993 Westinghouse Electric Corporation and General Textiles
(6-Exhibit 10.14)
10.15 Loan and Security Agreement, dated as of October 14, 1993, between
General Textiles and Greyhound Financial Capital Corporation
(6-Exhibit 10.15)
10.15(a)Amendment No. 1 to Loan and Security Agreement, dated as of July 14,
between General Textiles and Greyhound Financial Capital Corporation
(7-10.15(3))
10.15(b)Amendment No. 5 to Loan and Security Agreement, dated April 18, between
General Textiles and Finova Capital Corporation (10-10.15(b))
10.15(c)Amendment No. 6 to Loan and Security Agreement, dated July 10, 1996,
between General Textiles and Finova Capital Corporation
(11-Exhibit 10.15(c))
28
10.15(d)Amendment No. 7 to Loan and Security Agreement, dated December 31, 1996,
between General Textiles and Finova Capital Corporation
(11-Exhibit 10.15(d))
10.15(e)Amendment No. 8 to Loan and Security Agreement, dated April 23, 1997,
between General Textiles and Finova Capital Corporation
(12-Exhibit 10.2(a))
10.15(f)Amendment No. 9 to Loan and Security Agreement, dated May 30, 1997,
between General Textiles and Finova Capital Corporation
(12-Exhibit 10.2(b))
10.15(g)Amendment No. 10 to Loan and Security Agreement, dated September 24,
1997, between General Textiles and Finova Capital Corporation
(13-Exhibit 10.2)
10.16 Second Amended and Restated Senior Secured Term Note (6-Exhibit 10.16)
10.17 Amended and Restated Revolving Credit Note, dated October 14, 1993 from
General Textiles in favor of Westinghouse Electric Corporation
(6-Exhibit 10.17)
10.18 Intercreditor, Standstill and Subordination Agreement, dated as of
October 14, 1993, among Greyhound Financial Capital Corporation,
Westinghouse Electric Corporation, Guilford Investments Inc. and General
Textiles (6-Exhibit 10.18)
10.19 Stock Pledge Agreement, dated as of October 14, 1993, between DRS
Apparel, Inc. and Greyhound Financial Corporation (6-Exhibit 10.19)
10.20 Purchase and Sale Agreement, dated as of December 28, 1993, between
Guilford Investments, Inc. and Westinghouse Electric Corporation
(6-Exhibit 10.20)
10.21 Assignment and Assumption Agreement, dated December 29, 1993, between
Guilford Investments, Inc. and Westinghouse Electric Corporation
(6-Exhibit 10.21)
10.22(a)Stock Option Agreement, dated September 20, 1991, among Transnational
Capital Ventures, Inc. ("TCV"), the Selzer Group, Inc. ("TSG") and the
stockholders of Mandel-Kahn (3-Exhibit 10.14(a))
10.22(b)Consent, dated as of December 11, 1991, among TCV, TSG and the
stockholders of Mandel-Kahn (3-Exhibit 10.14(b))
10.22(c)First Amendment to Stock Option Agreement, effective as of January
7,1992, among TCV, TSG and the stockholders of Mandel-Kahn
(3-Exhibit 10.14(c))
10.22(d)Assignment of Contract, dated June 15, 1992, from TCV and TSG to MKI
Acquisition (5-Exhibit 4)
10.22(e)Amendment No. 2 to Stock Option Agreement, dated as of June 16,
1992, among TCV, TSG, Mandel-Kahn and the stockholders of
Mandel-Kahn (5-Exhibit 5)
10.22(f)Notice of Exercise, dated June 16, 1992, from MKI Acquisition to the
stockholders of Mandel-Kahn (5-Exhibit 6)
10.23 Stock Purchase Agreement, dated June 10, 1993, between Registrant and
MKI Holding Corp. (6-Exhibit 10.23)
10.24 Agreement and Plan of Merger, dated as of February 25, 1993, among
Batra, Inc., L'Ancresse Holdings, Ltd., Kabushi Investments, Ltd.,
Bastian Holdings, Inc., Registrant and DRS Apparel, Inc. (6-Exhibit
10.24)
10.25(a)Agreement, dated April 10, 1992, by and among Myrtle Services (Overseas)
Limited, Harold Chaffe and DRE (3-Exhibit 10.16(a))
10.25(b)Pledge Agreement, dated April 10, 1992, between DRE and the Trustees of
the Erin Settlement (3-Exhibit 10.16(b))
10.25(c)Promissory Note, dated April 10, 1992, by DRE to the Trustees of the
Erin Settlement (3-Exhibit 10.16(c))
29
10.25(d)Amendment to Pledge Agreement, dated as of July 22, 1992, between DRE
and the Trustees of the Erin Settlement (1-Exhibit 10.16(d))
10.26(a)Sale Agreement, dated as of March 1, 1993, between DRE and the Trustee
(2-Exhibit 10.23(a))
10.26(b)Pledge Agreement, dated as of March 1, 1993, between DRE and the
Trustees (2-Exhibit 10.23(b))
10.27(a)Stock Purchase Agreement, dated as of August 29, 1995, among the
Registrant, certain shareholders of Capin Mercantile Corporation and
Sellers Agent ("F2U Sellers") (8-Exhibit 10.1)
10.27(b)Amendment to Stock Purchase Agreement, dated November 10, 1995,
between the Registrant and F2U Sellers (8-Exhibit 10.2)
10.30(a)Loan and Security Agreement dated November 13, 1995 between Factory 2-U
and Finova Capital Corporation (10-Exhibit 10.30(a))
10.30(b)Amendment No. 1 to Loan and Security Agreement, dated April 18, 1996,
between Factory 2-U, Inc. and Finova Capital Corporation
(10-Exhibit 10.30(b))
10.30(c)Amendment No. 2 to Loan and Security Agreement, dated April 22, 1996
between Factory 2-U and Finova Capital Corporation (11-Exhibit 10.3(c))
10.30(d)Amendment No. 3 to Loan and Security Agreement, dated July 10, 1996
between Factory 2-U and Finova Capital Corporation (11-Exhibit 10.3(d))
10.30(e)Amendment No. 4 to Loan and Security Agreement, dated December 31, 1996
between Factory 2-U and Finova Capital Corporation (11-Exhibit 10.3(e))
10.30(f)Amendment No. 5 to Loan and Security Agreement, dated April 23, 1997
between Factory 2-U and Finova Capital Corporation (12-Exhibit 10.1(a))
10.30(e)Amendment No. 6 to Loan and Security Agreement, dated May 30, 1997
between Factory 2-U and Finova Capital Corporation (12-Exhibit 10.1(b))
10.30(f)Amendment No. 7 to Loan and Security Agreement, dated May 30, 1997
between Factory 2-U and Finova Capital Corporation (13-Exhibit 10.1)
10.30(g)Modifications to Loan and Security Agreement, dated August 28, 1997
between Finova Capital Corporation and both General Textiles and
Factory 2-U (12-Exhibit 10.6)
10.33 Acknowledgement and Reaffirmation (Re: Affiliate Debt, Management Fees,
Intercreditor Agreement) dated as of April 23, 1997, between Family
Bargain Corporation and Finova Capital Corporation (12-Exhibit 10.3(a))
10.33(a)Acknowledgement and Reaffirmation (Re: Affiliate Debt, Management Fees,
Intercreditor Agreement) dated as of May 30, 1997, between Family
Bargain Corporation and Finova Capital Corporation (12-Exhibit 10.3(b))
10.33(b)Acknowledgement and Reaffirmation (Re: Affiliate Debt, Management Fees,
Intercreditor Agreement) dated as of September 24, 1997, between Family
Bargain Corporation and Finova Capital Corporation (13-Exhibit 10.3)
10.40 Subordination and Standill Agreement (Re: $6.35 MM Debt), dated as of
May 30, 1997, between Family Bargain Corporation and Finova Capital
Corporation (12-Exhibit 10.4)
30
10.50 Subordinated Promissory Note ($6.35 MM), dated as of April 30, 1997
between General Textiles and Family Bargain Corporation(12-Exhibit 10.5)
11.1 Computation of per share loss
21 List of the Registrant's Subsidiaries (10-Exhibit 21)
27 Financial Data Schedule
31
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, No. 33-47645 filed with the Commission on September 16, 1992.
(2) Incorporated by reference to the Registrant's Form 10-K for fiscal year
ended April 30, 1993.
(3) Incorporated by reference to the Registrant's Form 10-K for fiscal year
ended December 31, 1991.
(4) Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on June 23, 1993.
(5) Incorporated by reference to the Registrant's Form 8-K filed with the
Commission in July 1992.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, No. 33-77488 filed with the Commission on April 7, 1994.
(7) Incorporated by reference to General Textiles' Registration Statement on
Form S-4, No. 33-92176 filed with the Commission on May 11, 1995.
(8) Incorporated by reference to the Registrant's Form 8-K and 8-K/A dated
November 28, 1995.
(9) Incorporated by reference to the Registrant's Form 8-K dated November 27,
1995.
(10) Incorporated by reference to the Registrant's Form 10-K/A for fiscal year
ended January 27, 1996.
(11) Incorporated by reference to the Registrant's Form 10-K for fiscal year
ended February 1, 1997.
(12) Incorporated by reference to the Registrant's Form 10-Q for the
13 weeks ended August 2, 1997 (2nd Quarter).
(13) Incorporated by reference to the Registrant's Form 10-Q for the 13 weeks
ended November 1, 1997 (3rd Quarter).
(b) Reports on Form 8-K.
The Registrant filed a Form 8-K dated May 14, 1997. A Form 8-K/A-1 filed May 23,
1997 amended it in its entirety. The reports on Form 8K and 8K/A-1 reported on a
change in certifying accountants filed pursuant to Section 13 of the Securities
Act of 1934.
32
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.
FAMILY BARGAIN CORPORATION
By: /s/ James D. Somerville
James D. Somerville
Chairman
Dated: April 29, 1998
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/ James D. Somerville Chairman and Director April 29, 1998
- ----------------------- (Principal Executive Officer)
James D. Somerville
/s/ Jonathan W. Spatz Executive Vice President, April 29, 1998
- ----------------------- Chief Financial Officer
Jonathan W. Spatz (Principal Financial
and Accounting Officer)
/s/ Michael M. Searles Director April 29, 1998
- -----------------------
Michael M. Searles
/s/ Thomas G. Weld Director April 29, 1998
- -----------------------
Thomas G. Weld
/s/ H. Whitney Wagner Director April 29, 1998
- -----------------------
H. Whitney Wagner
/s/ J. William Uhrig Director April 29, 1998
- -----------------------
J. William Uhrig
/s/ Ronald Rashkow Director April 29, 1998
- -----------------------
Ronald Rashkow
/s/ John J. Borer III Director April 29, 1998
- -----------------------
John J. Borer III
/s/ Peter V. Handal Director April 29, 1998
- -----------------------
Peter V. Handal
33
EXHIBIT INDEX
Exhibit
Number Description Page
11.1 Computation of per share loss 34
27 Financial Data Schedule (submitted for SEC use only) 35