<PAGE> 1
THIS DOCUMENT IS A COPY OF THE FORM 10-K DATED JANUARY 27, 1996 FILED ON APRIL
29, 1996 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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 (FEE REQUIRED)
For the fiscal period ended January 27, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
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)
315 East 62nd Street
New York, New York 10021
(Address of Principal Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 980-9670
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value Chicago Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
Series A 9 1/2% Cumulative Convertible Preferred Stock, $.01 par value
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Redeemable Class D Common Stock Purchase Warrants
(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 22, 1996 the aggregate market value of the voting stock of the
Registrant held by non-affiliates was approximately $5,784,170.
At April 22, 1996 the Registrant had outstanding 4,111,635 shares of
Common Stock, $.01 par value per share.
<PAGE> 2
FORM 10-K INDEX
PART I
<TABLE>
<S> <C>
Item 1. Business........................................................................................... 3
Item 2. Properties......................................................................................... 9
Item 3. Legal Proceedings.................................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders................................................ 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 11
Item 6. Selected Financial Data............................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ............ 15
Item 8. Financial Statements and Supplementary Data........................................................ 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 26
PART III
Item 10. Directors and Executive Officers of the Registrant................................................ 28
Item 11. Executive Compensation............................................................................ 32
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 35
Item 13. Certain Relationships and Related Transactions.................................................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 42
</TABLE>
Documents incorporated by reference: Registration Statement of the
Registrant on Form S-1, No. 33-47645, filed with the Securities and Exchange
Commission on September 16, 1992; Registration Statement of the Registrant on
Form S-1, No. 33-77488, filed with the Commission on April 7, 1994 and
Amendments No. 1, 2, 3 and 4 thereof; Registration Statement of General Textiles
on Form S-4, No. 33-92176, filed with the Commission on May 11, 1995;
Registration Statement of the Registrant on Form S-1, No. 33-77760, filed with
the Commission on April 14, 1994, and Amendments No. 1, 2, 3 and 4 thereof; and
each of the Registrant's Forms 10-K for the periods ended April 30, 1993,
January 29, 1994, and January 28, 1995, and the Registrant's Form 10-K/A for the
period ended January 28, 1995.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Family Bargain Corporation (the "Company"), through its subsidiaries, General
Textiles ("General Textiles") and Factory 2-U, Inc. ("Factory 2-U") operates 135
off-price retail apparel and housewares stores located in California, Arizona,
Washington, New Mexico, Oregon, Nevada and Texas. General Textiles' 106 stores
operate under the name "Family Bargain Center" and Factory 2-U's 29 stores
operate under the name "Factory 2-U." The Company purchased Factory 2-U in
November 1995.
The Company's stores sell primarily first quality, in-season clothing for
men, women and children and housewares at retail prices which generally are
lower than the prices of competing discount and regional off-price stores. The
average selling price per item is approximately $6.00 and the price of the most
expensive item rarely exceeds $35.00. 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 at low markups which pass along the savings to its 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.
Merchandise is comprised primarily of first quality goods, including
nationally recognized brand name products. General Textiles stores, which
average 11,000 square feet, and Factory 2-U stores, which average 16,000 square
feet, are designed in a self-service format that afford 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. Store atmosphere is enhanced
by the playing of locally popular music, the use of brightly colored pennants
and occasional festive outdoor promotions. OPERATIONS
OPERATING STRATEGY
The Company seeks to be the leading off-price apparel and housewares 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 at low markups which pass along
the savings to their customers.
Target Underserved Market Segments, including the Hispanic Market: The
Company's stores target customers who are underserved in many markets. Their
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 and purchasing and marketing programs are 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.
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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 overall focus on
cost controls.
EXPANSION PLANS
Opening of New Stores: The Company plans to open new stores in the seven
western states in which General Textiles and Factory 2-U currently operate, as
well as in other western states. New stores are to be opened in underserved
markets with proper demographic and competitive characteristics. During the 1996
fiscal year, General Textiles opened eight new Family Bargain stores. The
completion of the Company's acquisition of Factory 2-U resulted in an additional
29 stores. In fiscal year 1997, the Company plans to open up to 19 new stores,
of which four have been opened as of April 22, 1996. Average store opening
expenses for fixtures, leasehold improvements and grand opening costs are
approximately $75,000. Initial inventory for an average new store is
approximately $225,000. 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: Management plans to continue its store
renovation and relocation program under which it expects to renovate and/or
relocate existing stores as superior sites become available in their markets.
Store renovations generally include installing new fixtures, redesigning layouts
and refurbishing floors and walls. The average expenditure per store renovation
or relocation is $50,000. During the 1996 fiscal year, the Company renovated 21
stores and relocated one store. In the fiscal year 1997, the Company plans to
renovate and/or relocate up to five stores.
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 are of Hispanic
origin or members of other ethnic groups including African-Americans, Asians and
Native Americans. The Company estimates, based on an in-store customer survey
conducted by store personnel in 1992, 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
(California, Oregon, Washington, Arizona, New Mexico, Nevada, and Texas) 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 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 approximately 1,000 domestic
manufacturers, jobbers, importers and other vendors. Payment terms are typically
net 30 days. The 10 largest vendors supply approximately 13% 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's chains expand.
The Company's two merchandise managers and twelve buyers, who average over 10
years of apparel and housewares 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. In-season purchases generally
represent close-outs 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
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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 customers 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 wearability 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 with an average selling price per item of
approximately $6.00. The price of the most expensive goods rarely exceeds
$35.00. For the General Textiles chain, men's, women's and children's apparel
each account for approximately 30% of sales, with the remainder, approximately
10%, consisting of footwear and domestic items. 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, housewares 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 are more
important to the Company 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 slower 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.
General Textiles' and Factory 2-U's administrative headquarters receives
daily store sales and inventory information from point-of-sale computers located
at each of its 135 stores. This data is reported by 52 product groups 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 signage 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. Most stores display signs in Spanish and
English and are staffed with bilingual store personnel. Stores have "gala" grand
openings and, on occasion, feature outdoor sidewalk promotions with live music
and
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other festive activities. To reach potential customers, management initiated a
major shift in its advertising program from use of extensive radio to the
development of full-color insert tabs showing actual photos of its merchandise.
These tabs, which are delivered to the consumer as newspaper inserts and
marriage-mail drops, have attracted a new and broader base of customers into the
stores. Other advertising programs include 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 unconditionally make a full refund
or exchange. Virtually all sales are for cash, although checks and credit cards
are accepted. The Company does not issue its own credit card, but does offer a
no-cost, full-refund layaway program. Upon the acquisition of Factory 2-U, the
Company discontinued the Factory 2-U credit card. During the fiscal year 1997
management intends to implement the layaway program in the Factory 2-U stores.
The layaway program is an important means for the Company's customers, many of
whom do not possess credit cards, to purchase goods over time. Layaways account
for approximately 10% of the Company's sales.
Approximately 59% 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
The Company currently operates 135 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 April 22,
1996, store locations were as follows:
<TABLE>
<CAPTION>
Strip
State Center Downtown Other Total
----- ------ -------- ----- -----
<S> <C> <C> <C> <C>
California 51 14 8 73
Arizona 28 4 0 32
Washington 2 3 2 7
New Mexico 6 0 1 7
Nevada 6 0 0 6
Oregon 7 0 1 8
Texas 2 0 0 2
--- -- -- ---
102 21 12 135
=== == == ===
</TABLE>
General Textiles stores range in size from approximately 2,650 square
feet to approximately 35,000 square feet, with the average being approximately
11,000 square feet. Factory 2-U stores range in size from approximately 11,000
square feet to 41,000 square feet, averaging approximately 16,000 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
which do not meet performance criteria. Costs associated with closing stores,
consisting primarily of the recognition of remaining lease obligations and
provisions to reduce assets to net realizable value, are charged to operations
during the fiscal year in which the determination is made to close a store.
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 either at the Company's San Diego training
center or on location at stores. The average compensation for store managers is
approximately $25,000, including a bonus of $2,000. The Company often promotes
experienced assistant store managers to fill open manager positions. Other store
personnel are trained on site. Training films and seminars are also utilized
periodically to cover various topics, including merchandising, loss prevention
and customer relations.
The Company's store employees participate in an employee bonus pool
under which they are awarded bonuses upon achieving productivity and efficiency
objectives. For the twelve months ended January 27, 1996, approximately 1,168
eligible employees earned an aggregate of approximately $803,000 under the bonus
program. The Company believes that the employee bonus program is an important
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incentive for its employees, helps reduce employee turnover and lowers costs.
Employees become eligible to participate in the bonus pool after 90 days of
employment.
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 which 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. Typical new store opening expenses for fixtures,
leasehold improvements and grand opening are approximately $75,000. Initial
inventory investment for an average new store is approximately $225,000.
The Company has an ongoing program to renovate and relocate stores. A
store is renovated when management believes that an improvement to the store's
physical appearance will enhance sales. Store renovations include installing new
fixtures, redesigning layout and refurbishing floors and walls. Renovated stores
have historically experienced increased sales, enabling the Company to rapidly
recover renovation costs. A store is considered for relocation when a superior
location becomes available in its market area. The average expenditure for a
store renovation or relocation is typically $50,000.
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 50-Off Stores
and 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. In
addition, management believes that the Company's ability to tailor its
merchandising, marketing and advertising programs and store service to Hispanics
and other ethnic groups provides the Company with an important competitive
advantage. Of the Company's 135 stores, 124 are located within five miles of a
Wal-Mart, K-Mart and/or Target store. Management believes that this competition
draws increased consumer traffic to these areas and that a portion of this
additional consumer traffic comparative shops and finds the Company's pricing,
merchandise and operating philosophy appealing.
EMPLOYEES
As of January 27, 1996, General Textiles and Factory 2-U employed 2,951
persons, of whom 2,772 were store employees and store field management (2,018 of
whom are part-time), 126 were executives and administrative employees and 53
were warehouse employees. The Company also employs 13 people in its New York
executive offices who provide strategic and financial planning for the Company
and corporate oversight of General Textiles and Factory 2-U.
None of the Company's employees is subject to any collective bargaining
agreements and management considers its relations with its employees to be good.
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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 utilize any other material trademarks in their business. The
Company is not aware of any infringing uses which 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
materially adversely affect the Company.
DISCONTINUED OPERATIONS
The Company was originally formed in 1987 and until December 1991 was
engaged in the development, construction, marketing and management of continuing
care communities for the elderly. By the end of 1991, the Company had no
remaining active involvement in any such projects and did not intend to pursue
any new retirement community projects.
The Company discontinued its retirement community business and wrote
off its remaining investment as of April 30, 1993. The Company has no remaining
involvement in the retirement community business, but may receive funds from the
collection of receivables in the future which would be used to repay debt with
recourse only to such receivables. See "Certain Relationships and Related
Transactions."
In January 1992, the Company purchased C-B/Murray Corporation, Inc.
("C-B/Murray") and Mandel-Kahn Industries, Inc. ("Mandel-Kahn"), both wholesale
distribution companies from Bastian Holdings, Inc. ("Bastian Holdings") and
Kabushi Investments Limited ("Kabushi") in exchange for a controlling interest
in the Company. Bastian Holdings was then owned by Benson A. Selzer, Chairman
and a Director of the Company and Kabushi is owned by a trust whose
beneficiaries include the children of Joseph Eiger, Executive Vice President and
a Director of the Company. As a result of unexpected losses, in November 1992,
C-B/Murray filed for Chapter 11 Reorganization and was liquidated. Mandel-Kahn
was sold to an affiliate in June 1993 and was liquidated. The Company has no
remaining involvement in the distribution business.
From April 1992 until March 1993, the Company, through its wholly-owned
subsidiary, DRS Real Estate, Inc. ("DRE"), was engaged in real estate
development. The Company has no remaining involvement in the real estate
business.
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ITEM 2. PROPERTIES
The Company operates 135 retail stores located in California, Arizona,
Washington, New Mexico, Oregon, Nevada and Texas, under various operating leases
with third parties. The leases are separately negotiated and are not uniform.
The store locations include strip centers, downtown business districts, and
stand alone sites. General Textiles' store sizes range from approximately 2,650
square feet to approximately 35,000 square feet, averaging 11,000 square feet
while Factory 2-U's store sizes range from approximately 11,000 square feet to
approximately 41,000, averaging 16,000 square feet. Typical lease terms are for
five years with renewal options. Approximately two-thirds of the leases are
"triple net leases" under which the Company is required to pay insurance, real
estate taxes and maintenance costs. Most stores have a fixed rent, although
certain leases require the Company to pay a minimum monthly rent and a
percentage of sales in excess of a certain sales level. The current annual rent
expense for the 135 stores is approximately $9.3 million.
The headquarters of General Textiles and Factory 2-U is located in a
168,000 square foot facility at 4000 Ruffin Road, San Diego, California. This
facility consists of 11,500 square feet of office space, a 6,500 square foot
retail store and a 150,000 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 $606,000 over the lease term. The
168,000 square feet currently leased includes approximately 59,000 square feet
added during March 1996 and incorporated into the original lease on the same
terms and conditions as the former lease.
Factory 2-U owns its former corporate office and distribution center
facility and surrounding real property located in Nogales, Arizona (the "Nogales
Property"). The Nogales Property consists of 45,000 square feet of office space
and a 181,000 square foot warehouse and distribution center. Factory 2-U is the
borrower under a $2.3 million loan secured by a mortgage on the Nogales
Property. The Nogales Property is currently for sale. See "Management's
Discussion and Analysis of Financial Condition - Liquidity and Capital Resources
- - Factory 2-U."
The executive offices of the Company are located at 315 East 62nd
Street, New York, New York in space leased by the Company pursuant to a lease
which expires December 31, 1998. The annual base rent under that lease is
approximately $184,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is at all times subject to pending and threatened legal
actions which arise out of the normal course of business. In the opinion of
management, based in part on the advice of legal counsel, the ultimate
disposition of these matters will not have a material adverse affect on the
financial position or results of operations of the Company.
Mandel-Kahn
In January 1996, the Company entered into a settlement of an action
which had been brought against certain of its affiliates, and certain members of
its management in September 1993 in the District Court of Harris County, Texas
by former stockholders of Mandel-Kahn arising out of the acquisition of
Mandel-Kahn and its subsequent curtailment of operations and liquidation. See
"Management's Discussion And Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Former General Textiles Stockholders
In October 1995, an action commenced by General Textiles, as plaintiff
in the U.S. Bankruptcy Court in the Southern District of New York against
certain former stockholders who sold their stock in the 1989 Leveraged Buyout
was settled and dismissed. Pursuant to the settlement, General Textiles was paid
$1.3 million. Pursuant to the GT Reorganization Plan, the net amount (after
$326,000 of litigation expenses) of $974,000 was distributed by General Textiles
as follows: 82.55%, or $804,000, of this amount to various pre-bankruptcy
creditors of General Textiles and the balance of $170,000 to the Company.
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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 of the fiscal year ended January 27, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Series A Convertible Preferred Stock is
traded over-the-counter and is listed on the NASDAQ SmallCap Market. The Common
Stock is also listed on the Chicago Stock Exchange. 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 Convertible
Preferred Stock during the twelve months ended January 28, 1995, the twelve
months ended January 27, 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 represent actual transactions. They are
also adjusted for a reverse stock split of the Common Stock which occurred in
fiscal 1995.
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED
COMMON STOCK STOCK
High Low High Low
---- --- ---- ---
Year Ended January 28, 1995
- ---------------------------
<S> <C> <C> <C> <C>
First Quarter $7.69 $4.13 n/a n/a
Second Quarter $5.63 $3.38 $10.50 $10.00
Third Quarter $3.69 $2.25 $10.50 $8.25
Fourth Quarter $3.50 $1.31 $9.62 $5.50
Year Ended January 27, 1996
- ---------------------------
First Quarter $1.81 $1.13 $6.75 $5.25
Second Quarter $1.25 $0.63 $6.25 $3.37
Third Quarter $1.63 $0.88 $6.62 $4.50
Fourth Quarter $2.06 $0.75 $6.62 $5.50
Year Ended January 25, 1997
- ---------------------------
First Quarter (through April 22, 1996) $3.18 $1.62 $8.50 $6.00
</TABLE>
The closing bid prices of the Common Stock and the Series A Convertible
Preferred Stock on April 22, 1996 as reported on the NASDAQ SmallCap Market were
$3 3/16 per share and $8 1/2 per share, respectively.
The Series A Cumulative Convertible Preferred Stock began trading on
the NASDAQ National Market on July 14, 1994 and on the NASDAQ SmallCap Market in
August 1995.
Other than the Common Stock and the Series A Convertible Preferred
Stock, none of the Company's issued and outstanding securities is publicly
traded on any established securities market.
As of March 31, 1996, the number of record holders of Common Stock and
Series A Convertible Preferred Stock were approximately 336 and 92,
respectively. These numbers do not include an indeterminate number of
stockholders of theses securities whose shares are held by financial
institutions in "street name." The Company believes there are substantially in
excess of 336 beneficial holders of its Common Stock and 92 beneficial holders
of its Series A Convertible Preferred Stock.
11
<PAGE> 12
The Company's Class D Warrants began trading on the NASDAQ SmallCap
market on February 3, 1993 and on the pink sheets in August 1995. From February
3, 1993 until April 22, 1996, the high and low closing bid prices of the Class D
Warrants were $3.78 and $0.03, respectively.
The Company paid $3.0 million in quarterly dividends on its Series A
Convertible Preferred Stock for the fiscal year ended January 27, 1996. 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 and its financial condition and
requirements.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for the Company for each of
the twelve months ended December 31, 1991, the four months ended April 30, 1992,
the twelve months ended April 30, 1993, the nine months ended January 29, 1994
and the twelve months ended January 28, 1995 and January 27, 1996. The selected
financial data includes the Company for all periods and includes General
Textiles commencing May 30, 1993, following the effectiveness of the
Reorganization Plan (on such date, the Company began to include General Textiles
in its consolidated results since its ownership was no longer subject to
completion of the Reorganization Plan). The financial condition and results of
operations of Factory 2-U are included as of January 27, 1996 and for the period
from November 11, 1995 to January 27, 1996, respectively. The selected financial
data for each of the twelve months ended December 31, 1991, the four months
ended April 30, 1992, and the twelve months ended April 30, 1993 reflect the
restatement of the Company's financial statements to reflect discontinuance of
all prior operations. The financial data for 1991 reflects a December 31 fiscal
year end, and the financial data for the 1992 period and 1993 periods reflect an
April 30 fiscal year end, respectively. 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 are derived
from audited financial information. The audited financial information for the
nine months ended January 29, 1994 and the twelve months ended January 28, 1995
and January 27, 1996 is included elsewhere in this Form 10-K. The selected
historical 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."
12
<PAGE> 13
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS FOUR MONTHS ENDED TWELVE MONTHS
ENDED DECEMBER 31, APRIL 30, ENDED APRIL 30,
1991 1992 1993
---- ---- ----
Income Statement Data (in thousands, except share data)
<S> <C> <C> <C>
Net Sales $ -- $ -- $ --
Gross Profit -- -- --
Operating Income (Loss) -- (55) (2,139)
Income (Loss) from Continuing Operations -- (111) (3,239)
Net Income (Loss) (294) 131 (19,386)
Dividends on Preferred Stock -- -- 25
Net Income (Loss) Available to Common Stock (294) 131 (19,411)
Weighted Average Shares Outstanding: 557,756 949,237 1,607,946
Primary 557,756 949,237 1,607,946
Fully Diluted
Net Income (Loss) from Continuing -- (0.12) (2.03)
Operations Available to Common Stock per
Common Share
Net Income (Loss) Per Common Share:(2) (0.53) 0.14 (12.07)
Primary (0.53) 0.14 (12.07)
Fully Diluted
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS TWELVE MONTHS
JANUARY 29, ENDED JANUARY 28, ENDED JANUARY 27,
1994(1) 1995 1996(1)
------- ---- -------
Income Statement Data (in thousands, except share data)
<S> <C> <C> <C>
Net Sales $ 96,496 $ 146,520 179,820
Gross Profit 32,582 49,435 62,632
Operating Income (Loss) 4,547 2,608 5,153
Income (Loss) from Continuing Operations 1,113 (354) 1,478
Net Income (Loss) 1,882 2,656 978
Dividends on Preferred Stock 200 2,030 3,040
Net Income (Loss) Available to Common Stock 1,682 626 (2,062)
Weighted Average Shares Outstanding: 3,067,464 4,008,311 4,006,420
Primary 3,069,885 4,008,311 4,006,420
Fully Diluted
Net Income (Loss) from Continuing 0.30 (0.59) (0.39)
Operations Available to Common Stock per
Common Share
Net Income (Loss) Per Common Share:(2) 0.55 0.16 (0.51)
Primary 0.55 0.16 (0.51)
Fully Diluted
</TABLE>
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 27,
1995 1996
---- ----
Balance Sheet Data
- ------------------
<S> <C> <C>
Working Capital (Deficit) $10,098 (186)
Total Assets 59,905 87,152
Long-Term Debt, Less Current Portion 14,155 25,023
Preferred Stock 26,981 26,981
Stockholders' Equity 29,812 27,717
</TABLE>
13
<PAGE> 14
NOTES TO SELECTED FINANCIAL DATA
(1) The results of operations of General Textiles have been
consolidated with the Company's results of operations
beginning May 30, 1993 when General Textiles emerged from
Chapter 11 Reorganization and the Company gained control of
General Textiles. Therefore, the Company's consolidated
results of operations for the nine months ended January 29,
1994 include General Textiles' results of operations for the
eight months ended January 29, 1994. The results of
operations of Factory 2-U have been consolidated with the
Company's results of operations beginning November 11, 1995,
when Factory 2-U was acquired. Therefore, the Company's
consolidated results of operations for the twelve months
ended January 27, 1996 include Factory 2-U's results of
operations for the 2.5 months ended January 27, 1996.
(2) Net income (loss) per common share on both a primary and
fully diluted basis is calculated by dividing net income
(loss) available to Common Stock by the weighted average
number of shares outstanding for each respective period, and
gives retroactive effect to a one-for-six reverse stock split
approved by the Board of Directors on March 25, 1994 and
effective on May 1, 1994. See also Note 1 to the Notes to the
"Consolidated Financial Statements."
14
<PAGE> 15
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 three fiscal years, a number of events occurred which
had a significant impact on the financial condition of the Company. On November
13, 1995, the Company acquired all of the outstanding shares of common stock of
Factory 2-U pursuant to a stock purchase agreement (the "Stock Purchase
Agreement"). Commencing November 11, 1995 (the closest period end), the assets,
liabilities and results of operations of Factory 2-U have been consolidated with
those of the Company.
On July 21, 1994, the Company completed an offering of Series A
Convertible Preferred Stock, pursuant to which the Company received
approximately $27.0 million in net proceeds (the "1994 Offering"). The proceeds
of the 1994 Offering were used among other things, to redeem all of the then
outstanding shares of Series C Preferred Stock and Series D Preferred Stock of
the Company, to exercise an option to purchase indebtedness of General Textiles
at a substantial discount, and to finance an accelerated store expansion
program.
During fiscal year 1994, General Textiles' Reorganization Plan was
declared effective and, in connection therewith, General Textiles settled
pre-bankruptcy claims by issuing a series of new debt instruments, certain of
which have been subsequently refinanced. Prior to the effectiveness of the
Reorganization Plan, the Company owned approximately 79% of the common stock of
General Textiles; accordingly General Textiles' assets, liabilities and results
of operations were not consolidated with those of the Company. Upon
effectiveness of the Reorganization Plan, the Company's equity ownership of
General Textiles increased to 100% and, as a result of General Textiles'
emergence from Chapter 11 Reorganization, commencing May 30, 1993, the assets,
liabilities and results of operations of General Textiles have been consolidated
with those of the Company.
In January 1994, the Company changed its fiscal year end to the
Saturday closest to January 31, which conforms to General Textiles' fiscal year
end.
The Liquidity and Capital Resources section below provides a discussion
of transactions completed by the Company.
15
<PAGE> 16
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JANUARY 27, 1996
COMPARED TO THE TWELVE MONTHS ENDED JANUARY 28, 1995
The table below sets forth for the periods presented certain results of
operations of the Company, including General Textiles for the twelve months
ended January 28, 1995 and January 27, 1996, and Factory 2-U results of
operations for the period commencing November 11, 1995 to January 27, 1996.
<TABLE>
<CAPTION>
Twelve Twelve
Months Ended Months Ended
January 28, 1995 January 27, 1996
---------------- ----------------
(in thousands)
<S> <C> <C>
Net Sales $ 146,520 $ 179,820
Costs of Sales 97,085 117,188
--------- ---------
Gross Profit 49,435 62,632
Gross Profit Percentage 33.7% 34.8%
Selling and Administrative Expenses 46,827 57,479
--------- ---------
Operating Income (Loss) 2,608 5,153
Interest Expense and Financing Fees 2,813 3,675
--------- ---------
Loss from Continuing Operations (205) 1,478
Income Taxes (149) --
Loss from Discontinued Operations (2,241) (500)
--------- ---------
Income (Loss) before Extraordinary Credit (2,595) 978
Extraordinary Gain 5,251 --
--------- ---------
Net Income (Loss) $ 2,656 $ 978
========= =========
</TABLE>
Net sales (gross sales less sales tax and sales returns) were $179.8
million for the twelve months ended January 27, 1996 compared to $146.5 million
for the twelve months ended January 28, 1995, an increase of $33.3 million. Of
the total increase, $13.3 million was attributable to Factory 2-U, $3.6 million
was due to a 2.8% increase in comparable General Textiles store sales (sales at
stores open throughout both periods), and the remaining $16.4 million increase
in sales was due to the opening of new General Textiles stores and
non-comparable stores. As of January 27, 1996, General Textiles operated 102
stores compared to 97 stores as of January 28, 1995, and Factory 2-U operated 29
stores as of January 27, 1996.
Gross profit was $62.6 million for the twelve months ended January 27,
1996 compared to $49.4 million for the twelve months ended January 28, 1995, an
increase of $13.2 million. Of the total increase, $4.6 million was attributable
to Factory 2-U. The remaining one million increase in gross profit was due to
the opening of new General Textiles stores, an increase on comparable General
Textiles store sales and improved gross profit as a percentage of sales. As a
percentage of sales, the gross profit was 34.8% for the twelve months ended
January 27, 1996 compared to 33.7% for the twelve months ended January 28, 1995.
Selling and administrative expenses were $57.5 million for the twelve
months ended January 27, 1996 compared to $46.8 million for the twelve months
ended January 28, 1995, an increase of $10.7 million. Of the total increase,
$4.4 million was attributable to Factory 2-U. As a percentage of sales, selling
and administrative expenses were 32.0% for the twelve months ended January 27,
1996 and January 28, 1995.
16
<PAGE> 17
Interest expense and financing fees were $3.7 million for the twelve
months ended January 27, 1996 compared to $2.8 million for the twelve months
ended January 28, 1995, an increase of $0.9 million. Of the total increase, $0.1
million was attributable to Factory 2-U. $0.5 million of the remaining increase
was due to an adjustment to amortization of debt discount associated with the
subordinated notes issued in connection with the Reorganization Plan, which
resulted from the settlement of additional claims and further acceleration of
excess cash flow payments, as defined, during the twelve months ended January
27, 1996.
Loss from disposal of discontinued operations was $0.5 million for the
twelve months ended January 27, 1996 compared to $2.2 million for the twelve
months ended January 28, 1995 (see "Legal Proceedings -- Mandel-Kahn").
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
OBLIGATIONS OF THE COMPANY. As of January 27, 1996, the Company had
outstanding indebtedness, excluding indebtedness of General Textiles and Factory
2-U, in the principal amount of $1.8 million.
Indebtedness of $250,000 is owed to Texas Commerce Bank ("TCB")
pursuant to an unsecured promissory note which bears interest at 8.5% per year
payable quarterly (the "TCB Note"). The balance of the TCB Note is payable on
April 30, 1996. Indebtedness of $0.5 million is owed to the former shareholders
of Factory 2-U pursuant to the F2U Acquisition Notes, as discussed below.
Indebtedness of $1.0 million is owed in connection with the Mandel-Kahn lawsuit
settlement (the "Mandel-Kahn Note") and bears interest at 10% per year. (see
"Legal Proceedings -- Mandel-Kahn"). Principal payments are payable monthly
beginning July 1996, and ending December 1996, and interest payments are payable
monthly beginning February 1996 and ending December 1996.
Dividend payments on the Series A Convertible Preferred Stock total
$3.0 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. As of
April 22, 1996, the dividend obligations of the Company had increased to $3.7
million. See "1996 Offering."
The Company's operating subsidiaries are General Textiles and Factory
2-U and the Company does not, itself, operate any businesses. Accordingly, the
Company relies on its cash reserves and payments from General Textiles and
Factory 2-U to finance its ongoing operating expenses and pay its outstanding
indebtedness and dividends on the Series A Convertible Preferred Stock. Such
payments from General Textiles include payments to the Company pursuant to the
Tax Sharing Agreement, certain subordinated debt, the Secured Term Note of
General Textiles (which the Company owns), and a Management Agreement (the "GT
Management Agreement"), as described below. The Reorganization Plan prohibits
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 the F2U Management
Agreement and the Guaranty Fee Agreement.
Pursuant to the Reorganization Plan, the Company and General Textiles
entered into the Tax Sharing Agreement. The Tax Sharing Agreement requires
General Textiles to pay to the Company an amount equal to 80% of the reduction
in General Textiles' federal income tax liability, if any, caused by General
Textiles filing its federal income tax return on a consolidated basis with the
Company as opposed to filing its federal income tax return separately from the
Company. The Tax Sharing Agreement also requires the Company to pay to General
Textiles 80% of the reduction in the Company's federal income tax liability, if
any, caused by the Company filing its federal income tax return on a
consolidated basis with General Textiles as opposed to filing its federal income
tax return separately from General Textiles. Payments to the Company or General
Textiles under the Tax Sharing Agreement are made monthly with respect to the
estimated reduction, if any, in such respective tax liability. After offsetting
net operating loss carryforwards ("NOLs") against income earned for the fiscal
year ended January 29, 1994, General Textiles has no NOLs remaining and the
Company has approximately $17.9 million of NOLs remaining for federal income tax
purposes as of January 27, 1996. If the Company uses its NOLs in full or enters
into transactions which would reduce or eliminate the NOLs, the Company's tax
payments would increase, its earnings would be reduced correspondingly and
payments by General Textiles under the Tax Sharing Agreement would be reduced.
The extent to which the Company can use its NOLs, on an annual basis, is limited
under Section 382 of the Internal Revenue Code and payments under the Tax
Sharing Agreement are limited accordingly.
17
<PAGE> 18
Pursuant to an option acquired in January 1994 by the Company from the
holder of a Secured Term Note of General Textiles, the Company purchased the
note in the face amount of $5.2 million in July 1994. General Textiles makes
payments of principal and interest to the Company in accordance with the terms
of the Secured Term Note as described below.
The Company owns $2.2 million face amount of Subordinated Notes that
the Company purchased at a discount in January 1994 for $462,000 in cash and
99,868 shares of Common Stock. General Textiles makes payments to the Company in
accordance with the terms of the Subordinated Notes as described below.
The Reorganization Plan permits the payment of management fees and
bonuses by General Textiles to an affiliate of Joseph Eiger and Benson A. Selzer
pursuant to the GT Management Agreement. During the 1995 fiscal year, the
affiliate assigned its rights under the GT Management Agreement to the Company.
Payments by General Textiles under the GT Management Agreement are subordinate
to General Textiles' obligations under the Secured Term Note and the Revolving
Credit Facility. See "Management -- Employment Agreements and Other
Compensation."
Mandel-Kahn Settlement
In January 1996, the Company settled a lawsuit commenced in 1993 by
former owners of Mandel-Kahn Industries, Inc. ("Mandel-Kahn"), which was
purchased by the Company in 1992. Under the settlement (the "Mandel-Kahn
Settlement"), the Company made a payment of $230,000, entered into a five-year
consulting agreement with Joel Mandel and is obligated under a secured note to
pay $1.0 million plus interest during 1996. The $1.0 million is payable through
monthly principal payments of $41,667 from July 1996 to September 1996, $83,333
from October 1996 to November 1996 with a balloon payment of $708,000 in
December 1996 and monthly interest payments from February 1996 to December 1996.
The $1.0 million obligation was secured by the issuance of 153,846 shares of
Series A Convertible Preferred Stock which are being held in escrow. The Company
has the obligation to register these shares with the Commission and may sell
such shares, with the proceeds of any such sale being used to reduce such
indebtedness.
Management believes that the Company's sources of cash, including the
funds received under the Tax Sharing Agreement, the Secured Term Note, the
Subordinated Notes, the GT Management Agreement, the F2U Management Agreement,
the Guaranty Fee Agreement, and available cash reserves, 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 Convertible Preferred Stock as they
come due will be dependent on the results of operations of the Company.
RESTRUCTURE OF DEBT AND EQUITY. Since November 1992, the Company has
issued various debt and equity securities in a series of private placements, the
proceeds of which were used for equity investments in General Textiles,
C-B/Murray and Mandel-Kahn, for repayment of outstanding indebtedness and for
general working capital purposes. Certain of the securities issued were
purchased by certain of the Selzer/Eiger entities. See "Certain Relationships
and Related Transactions." As of September 1, 1993, following completion of a
private placement of investment units (see "--Investment Units," below), the
Company had outstanding debt securities issued through the private placements in
the aggregate principal amount of $12.8 million. As of January 28, 1995, the
Company had satisfied $11.6 million of such indebtedness through the repayment
of $3.2 million principal amount thereof and the exchange of $8.7 million
principal amount for shares of Series D Convertible Preferred Stock, which was
redeemed by the Company in July 1994 in connection with its 1994 public offering
of Series A Convertible Preferred Stock (the "1994 Offering").
Investment Units. Between May and September 1993, the Company sold an
aggregate of $7.3 million of investment units, of which approximately $4.0
million were purchased for cash and approximately $3.3 million were purchased
through the exchange of outstanding indebtedness and equity securities.
Approximately $6.8 million was raised through the issuance of investment units
(the "15% Units") comprised of: (i) $500,000 principal amount of 15% Notes
bearing interest at 15% per year, and (ii) warrants to purchase 62,500 shares of
Common Stock (the "Unit Warrants"). Principal and interest on the 15% Notes was
payable in full at maturity on November 30, 1993, except that, in accordance
with the terms thereof, the Company extended the maturity of $233,000 principal
amount thereof to June 30, 1994. The $233,000 was paid by the Company in July
1994. During this period, the Company also raised $500,000 (included in the $7.3
million above) by issuing $500,000 of promissory notes bearing interest at 10%
per year (the "10% Notes") together with 13,333 shares of Common Stock
(collectively the "10% Unit"). The 10% Notes were secured by certain assets of
the Company and a guarantee of Benson A. Selzer and Joseph Eiger.
18
<PAGE> 19
Of the $4.0 million of cash proceeds received from the sale of
Investment Units, $3.0 million was invested in General Textiles in connection
with the Reorganization Plan and $1.0 million was used for general working
capital purposes.
As of January 28, 1995, all of the 15% Notes and 10% Notes had been
repaid or exchanged into Series D Convertible Preferred Stock which was redeemed
by the Company in July 1994. In addition, during the period from October to
December 1993, the Company purchased 699,467 Unit Warrants for an aggregate
purchase price of $294,000 ($0.42 per Unit Warrant) and repurchased the 13,333
shares of Common Stock included in the 10% Unit for $150,000 ($11.25 per share).
During 1995 the Company repurchased 125,000 Unit Warrants from a related party
for $53,000. As of January 27, 1996, 91,781 Unit Warrants remained outstanding.
The Company is not obligated to repurchase any of the outstanding Unit Warrants.
During 1995, the Company repurchased 125,000 Unit Warrants from a related party
for $53,000.
Factory 2-U Acquisition Obligations. The November 1995 acquisition of
Factory 2-U was completed pursuant to the Stock Purchase Agreement, dated August
29, 1995, by and between the Company and the former shareholders of Factory 2-U.
The Company paid $1.3 million in total consideration for acquiring all of the
common stock of Factory 2-U and a promissory note (the "Purchased Debt") payable
to certain former shareholders and other creditors of Factory 2-U. Of the $1.3
million in consideration, $625,000 was paid upon the closing of the acquisition
of Factory 2-U, and the balance was payable pursuant to three Promissory Notes
of the Company, a $125,000 note (the "Downpayment Note"), a $600,000 contingent
note, with a carrying value of $0 (the "Contingent Note"), and a $500,000 note
(the "Absolute Note") (collectively, the "F2U Acquisition Notes"). Principal and
interest on the Downpayment Note was paid in full on December 31, 1995. The
amount payable under the Contingent Note is subject to adjustment, as described
in the Stock Purchase Agreement, based upon the net proceeds from the sale, or
appraised value at a future date, of the Nogales Property. Principal and
interest under the Absolute Note are payable in eleven quarterly installments
commencing May 15, 1996 and ending on October 30, 1998. All of the above notes
bear interest at a rate of 8.75% per year, subject to penalties and adjustment
in the event of failure to pay amounts when due.
TCB Liability. Pursuant to a guaranty and indemnification, the Company
was liable for $3.5 million to TCB, Mandel-Kahn's senior lender. In December
1993, the Company refinanced its obligation to TCB through the issuance of $2.5
million liquidation value of Series C Convertible Preferred Stock, which was
redeemed by the Company in July 1994 and the $1.0 million TCB Note (which bears
interest at 8.5% per year). As of January 28, 1995, the principal amount owing
was $250,000 and is payable on April 30, 1996.
GENERAL TEXTILES
GENERAL. General Textiles finances its operations through credit
provided by vendors and other suppliers, borrowings under its $20.0 million
working capital facility, $2.7 million in equipment facilities and internally
generated cash flow. Credit terms provided by vendors and other suppliers are
usually net 30 days. Borrowings 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. Under the terms of the Subordinated Notes and the
Reorganization Securities, General Textiles is required to use a substantial
percentage of excess cash flow, as defined, to repay indebtedness payable under
the Subordinated Notes and the Secured Term Note. Management believes that
General Textiles will have sufficient working capital to meet its needs during
the next twelve months from credit terms supplied by its vendors and other
suppliers, its working capital facility, its equipment facilities and internally
generated cash flow. However, should the Company decide to expand more rapidly
than is currently anticipated, it may require additional financing. There can be
no assurance that such financing will be available.
In connection with the General Textiles Chapter 11 Reorganization,
pre-petition secured claims of approximately $18.6 million were settled at 100%
by the issuance of a new $8.0 million senior secured term note and a new
revolving credit note in the amount of $10.6 million (under a $19.0 million
facility), both of which were subsequently refinanced. Pre-petition unsecured
claims of approximately $47.2 million were settled at 49% by the issuance of the
Subordinated Notes with an aggregate face value of $23.1 million. In addition,
pre-petition subordinated lenders received $4.9 million face value of
Subordinated Reorganization Notes and $17.3 million face value of Junior
Subordinated Reorganization Notes.
The table below sets forth the outstanding aggregate face value of such
indebtedness as of January 27, 1996 and the carrying value thereof for financial
reporting purposes. Face value reflects the full principal amount of the
obligations payable by General Textiles. The carrying value reflects, in the
case of the Subordinated Notes and the Reorganization Securities, discounts,
since such obligations are non-interest bearing. Such discounts are amortized
over the life of the obligations as a non-cash charge recorded as interest
expense. In the case of the Secured Term Note, the carrying value is greater
than the face value as a result of accounting rules concerning cancellation of
indebtedness (see below). Such carrying value premium results in a non-cash
credit to interest expense over the life of the obligation.
19
<PAGE> 20
<TABLE>
<CAPTION>
AS OF JANUARY 27, 1996
----------------------
Carrying Value Face Value Face Value Owned by Company (in
-------------- ---------- -------------------------------
(in thousands) (thousands)
<S> <C> <C> <C>
Working Capital Facility $ 9,948 $ 9,948 $ --
Equipment Facilities 1,198 1,198 --
Secured Term Note 4,816 3,600 3,600
Subordinated Notes 14,825 19,072 14,988
Subordinated Reorganization Notes 3,311 4,900 --
Junior Subordinated Reorganization Notes 1,940 17,335 --
------- ------- -------
$36,038 $56,053 $18,588
======= ======= =======
</TABLE>
REVOLVING CREDIT AND EQUIPMENT FACILITIES AND TERM LOAN. In connection
with the Reorganization Plan, General Textiles entered into a loan and security
agreement with a commercial lender (the "Original Lender"), pursuant to which
such lender extended a $15.0 million revolving credit facility and an $8.0
million secured term loan (the "Original Term Note"). In October 1993, the
revolving credit facility was refinanced and restructured and later amended as a
result of which General Textiles currently has available to it a $20.0 million
working capital facility (the "GT Revolving Credit Facility"). Under the
restructured GT Revolving Credit Facility, the Original Lender extended a $2.0
million working capital line of credit (the "$2 Million Facility") and a second
commercial lender (the "Working Capital Lender") extended a new $12.0 million
working capital line of credit which has been amended from time to time. In
addition, in October 1993, the Original Lender sold the Original Term Note and
its beneficial interest in the $2 Million Facility to a third party (the "Term
Lender") together with a $13.8 million face value Subordinated Note which the
Original Lender owned. In July 1994, the Original Term Note was purchased by the
Company from the third party and in November 1995 was pledged to secure Factory
2-U's indebtedness under the F2U Revolving Credit Facility. In March 1995, the
$2 Million Facility was retired. In addition, in March 1995, the Working Capital
Lender extended an equipment facility of up to $1.6 million (the "$1.6 Million
Equipment Facility") which General Textiles used for the purchase of
point-of-sale equipment. In April 1996, the Working Capital Lender extended an
additional equipment facility of up to $1.1 million (the "$1.1 Million Equipment
Facility") also to be used for the purchase of point-of-sale equipment. The
following is a summary of terms of the GT Revolving Credit Facility, the $1.6
million Equipment Facility,the $1.1 Million Equipment Facility (collectively the
"Equipment Facilities") and the Secured Term Note.
GT Revolving Credit Facility. Under the GT Revolving Credit Facility,
General Textiles may borrow up to 50%, 55% or 60%, based upon seasonality, of
eligible inventory, as defined, plus a special purchase overadvance of up to
$1.0 million, subject to a maximum of $20.0 million of borrowings outstanding at
any time. As of January 27, 1996 and April 17, 1996, there was $9.9 million and
$17.9 million outstanding, respectively. There was $1.5 million and $2.1 million
available for additional borrowings under the GT Revolving Credit Facility as of
January 27, 1996 and April 17, 1996, respectively. Borrowings under the GT
Revolving Credit Facility based on eligible inventory bear interest at an annual
rate equal to prime plus 2%, payable monthly. Borrowings under the GT Revolving
Credit Facility overadvance for special purchases bear interest at an annual
rate equal to prime plus 3%, payable monthly. The GT Revolving Credit Facility
expires in November 1998 and is secured by a lien on all of the assets of
General Textiles and pledge of all the capital stock of General Textiles.
Equipment Facilities. As of January 27, 1996 and April 22, 1996, there
was $1.2 million and $1.1 million outstanding, respectively, under the $1.6
Million Equipment Facility which bears interest an annual rate equal to prime
plus 2%, payable monthly. Principal payments of $37,750 are payable monthly with
a balloon payment of $216,500 due in April, 1998. As of April 24, 1996, there
was $0.8 million amount outstanding under the $1.1 Million Facility which bears
interest at an annual rate equal to prime plus 2%, payable monthly. Principal
payments will be payable monthly with final payment due in May 1999. The
Equipment Facilities are secured by a lien on all of the assets of General
Textiles.
Term Loan. Under the Secured Term Note, which is owned by the Company,
the entire principal amount thereof, together with any accrued but unpaid
interest, is due and payable on demand, and bears interest at an annual rate
equal to prime plus 2% payable monthly. General Textiles is required to make
quarterly principal payments according to the following schedule: $200,000 per
quarter for the four
20
<PAGE> 21
quarters ending May 30, 1994 (which has been paid), (ii) $200,000 per quarter
for the following four quarters (which have been paid), (iii) $300,000 per
quarter for the following four quarters (of which the first three payments have
been made), (iv) $400,000 per quarter for the following two quarters, and (v) a
final payment of $2.2 million in January 1997. The Secured Term Note is secured
by a lien on substantially all of the assets of General Textiles which is
subordinated to the liens securing the GT Revolving Credit Facility.
In January 1994, the Company, General Textiles and the Term Lender
entered into an agreement pursuant to which: (i) in exchange for a payment of
$600,000 by General Textiles to the Term Lender made on January 28, 1994 and
General Textiles' agreement to change the maturity date of the Secured Term Note
from May 1999 to January 1997, the Term Lender agreed to reduce the principal
amount of the Secured Term Note from $7.8 million dollars to $5.2 million
dollars, and (ii) in exchange for payment by the Company to the Term Lender of
$400,000 on January 28, 1994 and the issuance to the Term Lender of 66,667
shares of Common Stock, the Term Lender granted the Company an option,
exercisable until September 30, 1994, to purchase the Secured Term Note and
$13.8 million face amount of Subordinated Notes owned by the Term Lender for an
aggregate purchase price of $9.0 million. In July 1994, the Company exercised
the option and purchased the Subordinated Note and the Secured Term Note from
the Term Lender.
Under the GT Revolving Credit Facility and the Secured Term Note,
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 under the GT Revolving Credit Facility and Secured Term Note.
The lender under the GT Revolving Credit Facility and the F2U Revolving
Credit Facility and the holder of General Textiles' Secured Term Note (currently
pledged to such lender) have been granted a security interest in all of the
assets of General Textiles and Factory 2-U to secure General Textiles' and
Factory 2-U's obligations thereunder.
SUBORDINATED NOTES. Pursuant to the Reorganization Plan, pre-bankruptcy
unsecured claims of approximately $47.2 million were settled at an average rate
of 49% by the issuance of the Subordinated Notes with an aggregate principal
amount of $23.1 million. An aggregate of $9.2 million face value ($6.8 million
carrying value) of Subordinated Notes were issued to trade creditors and other
unsecured creditors of General Textiles pursuant to an Indenture dated May 29,
1993 (the "Indenture") between General Textiles and IBJ Schroder Bank and Trust
Company, as Trustee (the "Trade Subordinated Notes"). An additional $13.8
million face value ($8.3 million carrying value) of Subordinated Notes was
issued to the Original Lender (the "Original Lender Subordinated Notes"). The
Subordinated Notes mature in 2003. The Subordinated Notes pay no cash interest
and are amortized through annual contingent payments based on a percentage of
excess cash flow (the "Annual Payments"), as defined in the Indenture. The Trade
Subordinated Notes provide that General Textiles must redeem notes with an
aggregate principal amount equal to 70% of the Annual Payments in the fiscal
years ending January 1994 through 1997 and 30% of the Annual Payments in the
fiscal years ending January 1998 through 2003. The Original Lender Subordinated
Notes provide for payments of 30% of the Annual Payments in the fiscal years
ending January 1994 through 1997 and 70% of the Annual Payments in the fiscal
years ending January 1998 through 2003. Payment of the Annual Payments in any
year is due within 30 days of the determination of the Annual Payments for such
year, except that the Annual Payments for fiscal 1994 on the Original Lender
Subordinated Notes is payable October 20, 1995. If the Original Lender
Subordinated Notes are paid in full, the Annual Payments otherwise payable to
the holders thereof will be used to redeem Trade Subordinated Notes. Since no
cash interest is paid, the Subordinated Notes are carried on the balance sheet
of General Textiles at a carrying value of $14.9 million, which reflects a
discount to their face value of $23.1 million. Such discount is amortized over
the life of the Subordinated Notes and is recorded as a non-cash charge to
interest expense. The Subordinated Notes are subordinated to all indebtedness of
General Textiles other than the Reorganization Securities.
The Subordinated Notes and the Reorganization Plan provide that if 60%
of the original principal amount of the Trade Subordinated Notes are not
redeemed within 30 days after the determination of the amount of the Annual
Payments for fiscal year 1997, each holder of Subordinated Notes will receive
additional Subordinated Notes equal to 20% of the principal amount of
Subordinated Notes originally issued to such holder ("Additional Notes"). If 80%
of the principal amount of the Trade Subordinated Notes plus 100% of the
Additional Notes issued to holders of the Trade Subordinated Notes are not
redeemed within 30 days after the determination of the amount of the Annual
Payments for fiscal year 2000, each holder of Subordinated Notes will receive
Additional Notes equal to 20% of the principal amount of Subordinated Notes
originally issued to such holder. Furthermore, if 100% of the principal amount
of Additional Notes issued to holders of Trade Subordinated
21
<PAGE> 22
Notes in 1997 are not redeemed within 30 days of the determination of the Annual
Payments for the fiscal year ending in January 2000 or 100% of the principal
amount of all Trade Subordinated Notes are not redeemed within 30 days of the
determination of the Annual Payments for the fiscal year ending January 2003,
then notwithstanding the rights of the Company, the holder of the Original
Lender Subordinated Notes and the Creditors Committee will have the right to
replace through election all of General Textiles' existing directors. The ratio
of the number of directors to be elected by the holders of the Original Lender
Subordinated Notes and the number of directors to be elected by the Creditors
Committee (rounded to the nearest whole number) will approximate the ratio of
the then outstanding principal amount of Original Lender Subordinated Notes to
the then outstanding principal amount of the Trade Subordinated Notes. In
addition, if specified percentages of all outstanding Subordinated Notes issued
upon effectiveness of the Reorganization Plan are not repaid within 30 days of
the determination of the Annual Payments for specified fiscal years (30% in
1997, 43.4% in 1998, 53.5% in 1999 and 70% in 2000), then the holders of the
Trade Subordinated Notes and the Original Lender Subordinated Notes will have a
right to elect a minority of General Textiles' directors based on a formula set
forth in the Reorganization Plan. The holders of the Trade Subordinated Notes
and the Original Lender Subordinated Notes will each elect one-half of the
directors entitled to be elected; provided, however, that if the number of
directors to be elected is an odd number, the holders of the Original Lender
Subordinated Notes will elect one more director than the holders of the Trade
Subordinated Notes. Under the Subordinated Notes, General Textiles must comply
with certain covenants, including limitations on executive compensation,
limitations on dividends, and mandatory prepayment under certain change of
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 "Subordinated
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. The Subordinated Reorganization Notes
mature in 2003 and may be prepaid at a substantial discount. The Subordinated
Reorganization Notes are carried on the financial statements, of General
Textiles as of January 27, 1996, at $3.3 million, representing a discount from
the face value of $4.9 million. 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 and mature in 2005. During any fiscal year that General Textiles' 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. No interest or
principal payments are payable on the Junior Subordination Reorganization Notes
until all of the Subordinated Notes and the Secured Term Note 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. The Junior
Subordinated Reorganization Notes are carried on the financial statements of
General Textiles as of January 27, 1996 at $1.9 million reflecting a discount to
the face value of $17.3 million. 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 the Secured Term
Note, and is subject to certain covenants including limitations on executive
compensation and dividends.
General Textiles receives a monthly overhead fee from Factory 2-U
allocated based on the relative number of stores between General Textiles and
Factory 2-U.
FACTORY 2-U
GENERAL. Factory 2-U finances its operations through credit provided by
suppliers, borrowings under its $10.0 million working capital facility and
internally generated cash flow. Credit terms provided by vendors and other
suppliers are usually net 30 days. Borrowings 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.
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 vendors and other suppliers, its working capital facility, and
internally generated cash flow. However, should the Company decide to expand
more rapidly than is currently anticipated, it may require additional financing.
There can be no assurance that such financing will be available.
22
<PAGE> 23
F2U Revolving Credit Facility. Upon consummation of the acquisition of
Factory 2-U, Factory 2-U entered into a $10.0 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 50% of eligible inventory, as defined,
subject to a maximum of $10.0 million of borrowings outstanding at any time.
This rate may be revised to match the rate under the GT Revolving Credit
Facility, at the lender's discretion, following the installation of
point-of-sale equipment and a valuation of Factory 2-U's inventory. Upon
consummation of the acquisition, Factory 2-U's former revolving line of credit
in the amount of approximately $3.6 million was paid in full with proceeds from
the F2U Revolving Credit Facility. In April 1996, the facility was amended to
provide for an adjusted advance rate and to require that General Textiles
acquire Factory 2-U or merge with Factory 2-U by December 31, 1996. As of
January 27, 1996 and April 17, 1996, there was $5.2 million and $6.0 million
outstanding, respectively, and $0.7 million available for additional borrowings
under the F2U Revolving Credit Facility. Borrowings under the F2U Revolving
Credit Facility bear interest at an annual rate equal to prime plus 2%, payable
monthly. The F2U Revolving Credit Facility expires in November 1998 and is
secured by a lien on all of the assets of F2U. 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 $0.7 million principal
balance, plus interest at 8% per year, through monthly payments of $13,648
through November 1998. The Company is a guarantor of this obligation. The
balance remaining on January 27, 1996 was $0.7 million.
State of Arizona
In connection with the Company's acquisition of Factory 2-U, in
November 1995 Factory 2-U entered into two Modification Agreements with
departments of the State of Arizona in connection with loans made by such
departments to Factory 2-U in the original principal amounts of $97,329 (the
"EDA Loan") and $250,000 (the "CEDC Loan"), respectively. Interest accrues under
the EDA Loan at 5% per year, and under the CEDC Loan at 6% per year. Pursuant to
the EDA Loan, Factory 2-U is obligated to make monthly principal and interest
payments of $1,992 through March 1999. Pursuant to the CEDC Loan, Factory 2-U is
obligated to make monthly principal and interest payments of $4,232 through
December 1999. The outstanding principal balances under the CEDC Loan and the
EDA Loan on January 27, 1996 were $177,000 and $70,000 respectively. The Company
is a guarantor of both of these obligations.
Nogales Mortgage
Factory 2-U is the borrower under a $2.3 million loan secured by a
mortgage on the Nogales Property (the "Nogales Mortgage"). See "Properties." The
principal balance under the Nogales Mortgage, as extended, is due on May 31,
1996. The Company is the guarantor under the Nogales Mortgage. Factory 2-U
intends to refinance this obligation in the event that the Nogales Property is
not sold or IN ESCROW prior to the maturity date. Management believes that it
can refinance such mortgage or sell the Nogales Property, which is currently for
sale. However, there is no assurance that the Company will be able to refinance
this obligation, and the failure to consummate a refinancing could have an
adverse impact on the Company's financial position.
Rescheduled Accounts Payable
In connection with the acquisition of Factory 2-U, non-affiliate
creditors of Factory 2-U, representing over 80% of the trade accounts payable
with invoice dates prior to September 1, 1995, agreed to reschedule the payment
of their receivables from Factory 2-U over a 24 month period in 24 equal
installments. Factory 2-U commenced making monthly payments on the obligations
in November 1995. As of January 27, 1996, Factory 2-U was obligated for the
payment of approximately $4.0 million, net of approximately $0.4 million
representing a discount of the future payments computed using an 11.5% implicit
interest rate.
23
<PAGE> 24
1996 OFFERING
In March, 1996, the Company completed an offering of 726,000 shares of
Series A Convertible Preferred Stock to non-U.S. purchasers pursuant to
Regulation S under the Securities Act (the "1996 Offering"). The Company
received net proceeds from the 1996 Offering of $3.2 million (after deducting
the placement agent's commissions and expenses). The net proceeds were used for
working capital and general corporate purposes, including increased working
capital requirements created by the addition of 29 stores through the
acquisition of Factory 2-U.
The issuance of shares of Series A Convertible Preferred Stock in the
1996 Offering increased the Company's annual dividend obligations by $0.7
million to $3.7 million.
CAPITAL EXPENDITURES
The Company's planned future capital expenditures include costs to open
new General Textiles and Factory 2-U stores, to renovate and/or relocate
existing stores, and to purchase electronic point-of-sale computer systems for
its stores. Management believes that future expenditures will be financed from
internal cash flow, the Revolving Credit Facilities and the Equipment
Facilities. As of January 27, 1996, the Company had $1.2 million outstanding
under the Equipment Facilities for capital expenditures related to the
acquisition of the point-of-sale systems.
INFLATION
In general, the Company believes that it will be able to offset the
effects of inflation by increasing operating efficiency, by monitoring and
controlling expenses and by increasing prices to the extent permitted by
competitive factors.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company historically has realized its highest level of sales and
income during the third and fourth quarters of the 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 net losses in the
first two quarters of the twelve months ended January 27, 1996. Management
believes that the Company will incur a net loss during the first quarter and may
incur net losses during the second quarter of the twelve months ending January
25, 1997 due to the Company's historical results during those seasonal periods.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
<TABLE>
<CAPTION>
Page
----
FAMILY BARGAIN CORPORATION
- --------------------------
<S> <C>
Independent Auditors' Report to the Board of Directors and Stockholders of
Family Bargain Corporation F-1
Family Bargain Corporation and Subsidiaries Consolidated Balance Sheets
as of January 28, 1995 and January 27, 1996 F-2
Family Bargain Corporation and Subsidiaries Consolidated Statements of
Operations for the nine months ended January 29, 1994 and the twelve
months ended January 28, 1995 and January 27, 1996 F-4
Family Bargain Corporation and Subsidiaries Consolidated Statements of
Stockholders' Equity (Deficit) for the nine months ended January 29,
1994 and the twelve months ended January 28, 1995 and January 27, 1996 F-6
Family Bargain Corporation and Subsidiaries Consolidated Statements of Cash
Flows for the nine months ended January 29, 1994 and the twelve months
ended January 28, 1995 and January 27, 1996 F-9
Family Bargain Corporation and Subsidiaries Notes to Consolidated Financial
Statements F-12
</TABLE>
All other schedules are omitted because of the absence of conditions under which
they are required or because the required information is set forth in the
financial statements and notes thereto.
25
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Family Bargain Corporation:
We have audited the accompanying consolidated balance sheets of Family Bargain
Corporation and subsidiaries as of January 28, 1995 and January 27, 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the nine months ended January 29, 1994 and the
twelve months ended January 28, 1995 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 provide 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 28, 1995 and January 27, 1996, and
the results of their operations and their cash flows for the nine months ended
January 29, 1994 and the twelve months ended January 28, 1995 and January 27,
1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
April 23, 1996
F-1
<PAGE> 27
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
January 28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
----------- ----------
<S> <C> <C>
Current assets:
Cash $ 2,522,000 1,958,000
Accounts receivable - non-trade 742,000 887,000
Layaway receivables 411,000 695,000
Merchandise inventories (note 11) 19,541,000 25,874,000
Prepaid expenses 1,124,000 776,000
----------- ----------
Total current assets 24,340,000 30,190,000
Real property held for sale (notes 8 and 11) -- 4,500,000
Leasehold improvements and equipment, net (notes 7 and 12) 4,922,000 9,001,000
Deferred debt issuance costs, less accumulated amortization
of $291,000 in 1995 and $592,000 in 1996 450,000 190,000
Other assets 728,000 518,000
Excess of cost over net assets acquired (goodwill), less
accumulated amortization of $1,984,000 in 1995 and
$3,366,000 in 1996 (notes 2 and 3) 29,465,000 42,753,000
----------- ----------
$59,905,000 87,152,000
=========== ==========
</TABLE>
F-2 (Continued)
<PAGE> 28
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
January 28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT 1995 1996
---- ----
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt and capital leases
(notes 11 and 12) $ 1,112,000 5,238,000
Current portion of revolving credit note (note 11) 2,000,000 --
Accounts payable 5,544,000 17,866,000
Accrued salaries, wages and bonuses 2,169,000 1,758,000
Other accrued expenses (note 9) 3,417,000 5,514,000
------------ -----------
Total current liabilities 14,242,000 30,376,000
Revolving credit notes, less current maturities (note 11) 5,943,000 15,159,000
Long-term debt, less current portion (note 11) 8,212,000 9,864,000
Deferred rent 1,444,000 1,646,000
Capital lease and other long-term obligations (notes 3 and 12) 252,000 2,390,000
------------ -----------
Total liabilities 30,093,000 59,435,000
------------ -----------
Stockholders' equity (notes 13, 14, 15, 17 and 18):
Series A convertible preferred stock, $.01 par value, 4,500,000 shares
authorized, 3,200,000 shares issued and outstanding, aggregate
liquidation preference of $32,000,000 26,981,000 26,981,000
Common stock, $.01 par value, 80,000,000 shares authorized, 4,506,981
shares and 3,985,393 shares issued and outstanding
in 1995 and 1996, respectively 7,000 7,000
Additional paid-in capital 19,796,000 19,763,000
Accumulated deficit (16,972,000) (19,034,000)
------------ -----------
Net stockholders' equity 29,812,000 27,717,000
------------ -----------
Commitments, contingencies and subsequent events
(notes 2, 3, 4, 5, 6, 11, 12, 18 and 21)
Total liabilities and stockholders' equity $ 59,905,000 87,152,000
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 29
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the nine months ended January 29, 1994
and the twelve months ended January 28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 96,496,000 146,520,000 179,820,000
Cost of sales 63,914,000 97,085,000 117,188,000
------------ ------------ ------------
Gross profit 32,582,000 49,435,000 62,632,000
General and administrative expenses 26,974,000 45,510,000 56,097,000
Amortization of excess of cost over net assets acquired
(goodwill) (notes 2 and 3) 796,000 1,188,000 1,382,000
Management fees to affiliate (note 19) 265,000 129,000 --
------------ ------------ ------------
Operating income 4,547,000 2,608,000 5,153,000
Interest expense and financing fees (note 11) (3,113,000) (2,813,000) (3,675,000)
Interest expense and financing fees - related parties
(note 11) (320,000) -- --
Other expenses, net (1,000) -- --
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes, discontinued
operations and extraordinary gain 1,113,000 (205,000) 1,478,000
Income taxes (note 10) -- (149,000) --
------------ ------------ ------------
Income (loss) from continuing operations
before discontinued operations and
extraordinary gain 1,113,000 (354,000) 1,478,000
Discontinued operations (notes 4, 5 and 6):
Income (loss) on disposal, net of income
tax benefit 87,000 (2,241,000) (500,000)
------------ ------------ ------------
Income (loss) before extraordinary gain 1,200,000 (2,595,000) 978,000
Extraordinary gain, net of income taxes (note 11) 682,000 5,251,000 --
------------ ------------ ------------
Net income 1,882,000 2,656,000 978,000
Preferred stock dividends (note 14) (200,000) (2,030,000) (3,040,000)
------------ ------------ ------------
Net income (loss) applicable to
common stock $ 1,682,000 626,000 (2,062,000)
============ ============ ============
</TABLE>
F-4 (Continued)
<PAGE> 30
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
For the nine months ended January 29, 1994
and the twelve months ended January 28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Income (loss) applicable to common stock per common share and common stock
equivalents:
Income (loss) from continuing operations $ 0.30 (0.59) (0.39)
Income (loss) before extraordinary gain 0.33 (1.15) (0.51)
Net income (loss) applicable to common stock 0.55 0.16 (0.51)
Income (loss) applicable to common stock per common share assuming full
dilution:
Income (loss) from continuing operations 0.30 (0.59) (0.39)
Income (loss) before extraordinary gain 0.33 (1.15) (0.51)
Net income (loss) applicable to common stock 0.55 0.16 (0.51)
Weighted average shares outstanding:
Primary 3,067,464 4,008,311 4,006,420
Fully diluted 3,069,885 4,008,311 4,006,420
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 31
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the nine months ended January 29, 1994 and the twelve months ended January
28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------------------
SERIES C SERIES D
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Balance at April 30, 1993 -- $ -- -- $ --
Conversion of notes and
accrued interest to
common stock -- -- -- --
Common stock issued in
connection with private
placement debt -- -- -- --
Repurchase of common stock -- -- -- --
Accrued preferred stock
dividends -- -- -- --
Issuance of common stock,
net -- -- -- --
Conversion of MKI guarantee to
preferred stock (note 4) 25,000 2,500,000 -- --
Conversion of notes to
preferred stock, net -- -- 64,987 6,406,000
Common stock issued for
consulting services (note 15) -- -- -- --
Common stock issued in
exchange for option to
purchase debt (note 11) -- -- -- --
Common stock issued in
connection with purchase of
subordinated notes (note 11) -- -- -- --
Other -- -- -- --
Net income for the nine months
ended January 29, 1994 -- -- -- --
------ ---------- ------ ----------
Balance at January 29, 1994 25,000 $2,500,000 64,987 $6,406,000
------ ---------- ------ ----------
</TABLE>
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON STOCK PAID-IN (ACCUMULATED
--------------------------
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------------ ---------- ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1993 2,939,452 $5,000 $ 9,987,000 $(19,280,000) $ (9,288,000)
Conversion of notes and
accrued interest to
common stock 28,857 -- 324,000 -- 324,000
Common stock issued in
connection with private
placement debt 13,333 -- 80,000 -- 80,000
Repurchase of common stock (13,333) -- (80,000) -- (80,000)
Accrued preferred stock
dividends -- -- -- (8,000) (8,000)
Issuance of common stock,
net 1,100,995 2,000 6,874,000 -- 6,876,000
Conversion of MKI guarantee to
preferred stock (note 4) -- -- -- -- 2,500,000
Conversion of notes to
preferred stock, net -- -- -- -- 6,406,000
Common stock issued for
consulting services (note 15) 17,833 -- 107,000 -- 107,000
Common stock issued in
exchange for option to
purchase debt (note 11) 66,667 -- 400,000 -- 400,000
Common stock issued in
connection with purchase of
subordinated notes (note 11) 125,632 -- 971,000 -- 971,000
Other -- -- (81,000) -- (81,000)
Net income for the nine months
ended January 29, 1994 -- -- -- 1,882,000 1,882,000
---------- ------ ------------ ------------ ------------
Balance at January 29, 1994 4,279,436 $7,000 $ 18,582,000 $(17,406,000) $ 10,089,000
---------- ------ ------------ ------------ ------------
</TABLE>
F-6 (Continued)
<PAGE> 32
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit), Continued
For the nine months ended January 29, 1994 and
the twelve months ended January 28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------------------------------------------------
SERIES A SERIES C SERIES D
--------------------------- ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------ ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 29, 1994 -- $ -- 25,000 $ 2,500,000 64,987 $ 6,406,000
Redemption of
preferred stock
(note 14) -- -- (25,000) (2,500,000) (64,987) (6,406,000)
Preferred stock
dividends (note 14) -- -- -- -- -- --
Issuance of pre-
ferred stock,
net (note 14) 3,200,000 26,981,000 -- -- -- --
Cancellation of
incentive
shares (note 2) -- -- -- -- -- --
Issuance of shares
in lieu of
earnout shares
related to the
acquisition of
General
Textiles (note 2) -- -- -- -- -- --
Repurchase of
warrants (note 18) -- -- -- -- -- --
Adjustment to
common stock
issued in
connection with
purchase of
subordinated
notes (note 11) -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ----------- ------- ----------- -------- -----------
Balance at
January 28, 1995 3,200,000 $26,981,000 -- $ -- -- $ --
---------- ----------- ------- ----------- -------- -----------
</TABLE>
<TABLE>
<CAPTION>
RETAINED
EARNINGS
(ACCUM-
COMMON STOCK PAID-IN ULATED
---------------------------
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
----------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at
January 29, 1994 4,279,436 $ 7,000 $ 18,582,000 $ (17,406,000) $ 10,089,000
Redemption of
preferred stock
(note 14) -- -- -- -- (8,906,000)
Preferred stock
dividends (note 14) -- -- -- (2,222,000) (2,222,000)
Issuance of pre-
ferred stock,
net (note 14) -- -- -- -- 26,981,000
Cancellation of
incentive
shares (note 2) (249,335) -- -- -- --
Issuance of shares
in lieu of
earnout shares
related to the
acquisition of
General
Textiles (note 2) 500,000 -- 1,750,000 -- 1,750,000
Repurchase of
warrants (note 18) -- -- (53,000) -- (53,000)
Adjustment to
common stock
issued in
connection with
purchase of
subordinated
notes (note 11) (23,120) -- (483,000) -- (483,000)
Net income -- -- -- 2,656,000 2,656,000
----------- ----------- ------------ ------------ ------------
Balance at
January 28, 1995 4,506,981 $ 7,000 $ 19,796,000 $(16,972,000) $ 29,812,000
----------- ----------- ------------ ------------ ------------
</TABLE>
F-7 (Continued)
<PAGE> 33
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit), Continued
For the nine months ended January 29, 1994 and the twelve
months ended January 28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------
SERIES A COMMON STOCK
----------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at January 28,
1995 3,200,000 $26,981,000 4,506,981 $7,000
Preferred stock
dividends (note 14) -- -- -- --
Purchase of treasury
shares -- -- (22,916) --
Cancellation of
incentive shares
(notes 2 and 13) -- -- (498,672) --
Net income -- -- -- --
--------- ----------- ---------- ------
Balance at
January 27, 1996 3,200,000 $26,981,000 3,985,393 $7,000
========= =========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
RETAINED
EARNINGS
(ACCUM-
PAID-IN ULATED
CAPITAL DEFICIT) TOTAL
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at January 28,
1995 $ 19,796,000 $(16,972,000) $ 29,812,000
Preferred stock
dividends (note 14) -- (3,040,000) (3,040,000)
Purchase of treasury
shares (33,000) -- (33,000)
Cancellation of
incentive shares
(notes 2 and 13) -- -- --
Net income -- 978,000 978,000
------------ ------------ ------------
Balance at
January 27, 1996 $ 19,763,000 $(19,034,000) $ 27,717,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 34
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended January 29, 1994
and the twelve months ended January 28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 1,113,000 (354,000) 1,478,000
Adjustments to reconcile income (loss) to net cash
provided by (used in) continuing operations:
Depreciation and amortization 1,186,000 2,229,000 3,285,000
Amortization of debt discount 1,281,000 1,167,000 1,555,000
Interest payable converted to preferred stock 423,000 -- --
Loss on disposal of equipment 5,000 232,000 74,000
Gain on revaluation of subordinated notes -- -- (822,000)
Excess of straight-line rent over cash payments 243,000 796,000 202,000
Decrease (increase) in merchandise inventories (2,766,000) (4,064,000) 124,000
Decrease (increase) in non-trade accounts receivable,
prepaid expenses, other current assets and other
assets (116,000) (945,000) (7,647,000)
Decrease (increase) in layaway receivables 178,000 124,000 (284,000)
Increase (decrease) in accounts payable 696,000 (690,000) 5,365,000
Increase (decrease) in accrued salaries, wages and
bonuses (17,000) 463,000 (1,431,000)
Increase (decrease) in other accrued expenses and
other current liabilities (1,229,000) (1,558,000) 2,377,000
----------- ---------- ----------
Net cash provided by (used in)
continuing operations 997,000 (2,600,000) 4,276,000
----------- ---------- ----------
Income (loss) from discontinued operations 87,000 (2,241,000) (500,000)
Adjustments to reconcile income (loss) to net cash
provided by (used in) discontinued operations:
Income taxes allocated to discontinued operations -- (346,000) --
Decrease (increase) in net assets of distribution
business -- 1,775,000 (287,000)
----------- ---------- ----------
Net cash provided by (used in) discontinued
operations 87,000 (812,000) (787,000)
----------- ---------- ----------
</TABLE>
F-9 (Continued)
<PAGE> 35
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the nine months ended January 29, 1994
and the twelve months ended January 28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchase of leasehold improvements and equipment $ (1,833,000) (2,169,000) (3,889,000)
Investment in and purchase of General Textiles,
net of cash acquired (1,486,000) -- --
Investment in and purchase of Factory 2-U, net of cash
acquired -- -- (520,000)
Purchase of subordinated notes (557,000) -- --
Purchase of option to retire debt at a discount (400,000) -- --
------------- ------------ ------------
Net cash used in investing activities (4,276,000) (2,169,000) (4,409,000)
------------- ------------ ------------
Cash flows from financing activities:
Borrowings on revolving credit notes 113,381,000 165,750,000 210,613,000
Payments on revolving credit notes (115,825,000) (162,927,000) (207,022,000)
Proceeds from issuance of long-term note -- -- 1,500,000
Payments of long-term debt (3,656,000) (11,046,000) (1,455,000)
Proceeds from issuance of notes payable
and debentures 4,067,000 -- --
Proceeds from issuance of common and
preferred stock, net 6,783,000 26,981,000 --
Purchase of subordinated notes -- -- (57,000)
Payment of deferred debt issuance costs (647,000) (94,000) (40,000)
Purchase of stock and warrants (80,000) (8,959,000) (33,000)
Payments of capital lease obligations -- (214,000) (110,000)
Payments of preferred stock dividends -- (2,222,000) (3,040,000)
------------- ------------ ------------
Net cash provided by financing activities 4,023,000 7,269,000 356,000
------------- ------------ ------------
Net increase (decrease) in cash 831,000 1,688,000 (564,000)
Cash at the beginning of the period 3,000 834,000 2,522,000
------------- ------------ ------------
Cash at the end of the period $ 834,000 2,522,000 1,958,000
============= ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,536,000 1,669,000 1,783,000
Cash paid for income taxes -- 502,000 --
</TABLE>
F-10 (Continued)
<PAGE> 36
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the nine months ended January 29, 1994 and
the twelve months ended January 28, 1995 and January 27, 1996
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of non-cash investing and
financing activities:
Conversion of preferred stock and accrued dividends to
private placement notes $ 958,000 -- --
Conversion of notes and accrued interest to common stock
324,000 -- --
Conversion of promissory notes to debt 1,250,000 -- --
Conversion of Batra note to debt 775,000 -- --
Conversion of private placement notes and accrued
interest to preferred stock 6,499,000 -- --
Conversion of subordinated debentures to private
placement notes 498,000 -- --
Conversion of bank guaranty to note payable
(note 4) 1,000,000 -- --
Conversion of bank guaranty to preferred stock (note 4)
2,500,000 -- --
Issuance of common stock for consulting services (note
15) 107,000 -- --
Issuance of common stock for option to retire debt at a
discount (note 11) 400,000 -- --
Issuance of common stock for General Textiles' debt
(note 11) 971,000 -- --
Accrued interest exchanged for preferred stock 423,000 -- --
Refinancing of General Textiles' long-term debt (note
11) 13,604,000 -- --
Investment in General Textiles financed by issuance of
note payable (note 2) 554,000 -- --
Acquisition of equipment financed by capital leases
(note 12) -- 547,000 123,000
Common stock issued in lieu of contingent common stock
(note 2) -- 1,750,000 --
Exercise of option to extinguish subordinated debt and
term note (note 11) -- 800,000 --
Issuance of note payable for Mandel-Kahn settlement
(note 21) -- -- 1,000,000
Issuance of note payable to former shareholders of
Factory 2-U (notes 3 and 11) -- -- 625,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 37
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 1994, January 28, 1995 and January 27, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Family Bargain Corporation and subsidiaries (the Company) operates
off-price retail apparel and housewares stores in the western and
southwestern United States.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements as of January 27, 1996
and for the twelve months then ended include the accounts of Family
Bargain Corporation and subsidiaries which include its wholly-owned
subsidiaries, General Textiles, Factory 2-U, Inc. (Factory 2-U)
(beginning November 10, 1995) and DRS Real Estate, Inc. (DRE). As of and
for the twelve months ended January 28, 1995, the wholly-owned
subsidiaries included General Textiles and DRS Real Estate, Inc. As of
and for the nine months ended January 29, 1994, the wholly-owned
subsidiaries included General Textiles (beginning May 30, 1993), DRS Real
Estate, Inc., Diversified Retail Services, Inc., CB/Camelot Acquisition
Corp. and CB/Murray Corporation, Inc.
All significant intercompany accounts have been eliminated in
consolidation.
FISCAL YEAR
The Company uses a 52/53 week year ending on the Saturday nearest January
31. The Company changed its reporting period from April 30 to the
Saturday nearest January 31, as of January 29, 1994. Accordingly, the
Company is reporting results of operations for the nine months ended
January 29, 1994 and the twelve months ended January 28, 1995 and January
27, 1996.
MERCHANDISE INVENTORY
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 warehousing and warehouse to store distribution costs. At both
January 28, 1995 and January 27, 1996, such costs included in inventory
were approximately $1,000,000.
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.
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs are amortized using the effective interest
method over the terms of the related debt.
F-12
<PAGE> 38
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
EXCESS OF COST OVER NET ASSETS ACQUIRED (GOODWILL)
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 amortization of the goodwill balance can be
recovered through undiscounted future operating cash flows of the
acquired entity over its remaining life. The amount of goodwill
impairment, if any, is measured based on projected discounted future
results using the Company's average cost of funds. The recoverability of
goodwill could be impacted if estimated future operating cash flows are
not achieved.
OTHER ASSETS
Other assets consist principally of rental deposits on leased stores.
STORE CLOSING COSTS
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 decision to close a store.
PRE-OPENING COSTS
New stores' opening costs, including promotions, training and other
direct incremental store opening costs, are capitalized and amortized
using the straight-line method over the first twelve months of operation.
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.
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. Because the remainder of
the long-term debt is evaluated each year based on expected debt
repayment (Note 11), it is not practical to estimate the fair value of
such instruments due to the potential volatility in repayment amounts.
F-13
<PAGE> 39
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
USE OF ESTIMATES
Management of the Company made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is based on the weighted average number of
shares of common stock outstanding. Common stock equivalents, which
include outstanding warrants and options, were not included when their
effects would be anti-dilutive. Weighted average shares and earnings per
share amounts for 1994 have been restated to give retroactive effect to
the one-for-six reverse stock split (Note 13). Weighted average shares
and earnings per share amounts have been restated for 1994 and 1995 to
give retroactive effect to the cancellation of contingent shares during
fiscal 1995 and 1996 (Note 2).
The following table presents information necessary to calculate earnings
per common share for the nine months ended January 29, 1994 and the
twelve months ended January 28, 1994 and January 27, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding:
Primary 3,067,464 4,008,311 4,006,420
Fully diluted 3,069,885 4,008,311 4,006,420
Income (loss):
Income (loss) from continuing
operations $ 1,113,000 (354,000) 1,478,000
Income (loss) from discontinued
operations 87,000 (2,241,000) (500,000)
Extraordinary gain 682,000 5,251,000 --
----------- ---------- ----------
Net income 1,882,000 2,656,000 978,000
Less preferred stock dividends (200,000) (2,030,000) (3,040,000)
----------- ---------- ----------
Income (loss) applicable
to common stock $ 1,682,000 626,000 (2,062,000)
=========== ========== ==========
</TABLE>
F-14
<PAGE> 40
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1994 1995 1996
-------- ----- -----
<S> <C> <C> <C>
Income (loss) applicable to common
stock per common share:
Continuing operations $ 0.30 (0.59) (0.39)
Discontinued operations 0.03 (0.56) (0.12)
Extraordinary gain 0.22 1.31 --
-------- ----- -----
Net income (loss) applicable to
common stock per common share
$ 0.55 0.16 (0.51)
======== ===== =====
Net income (loss) applicable to
common stock per common share,
fully diluted $ 0.55 0.16 (0.51)
======== ===== =====
</TABLE>
ADVERTISING COSTS
Advertising costs are charged to expense as incurred.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform their
presentation to the 1996 consolidated financial statements.
(2) ACQUISITION OF GENERAL TEXTILES
On December 31, 1992, the Company purchased from Batra, Inc. (Batra), a
company controlled by the principal stockholders of the Company,
approximately 79% of the common stock of FBS Holdings Inc. (FBS), the
immediate parent of General Textiles prior to bankruptcy, and 88% of the
Class B preferred stock of FBS, for the following consideration: (i)
$775,000 for reimbursement of expenses incurred by Batra and the
assumption of all of Batra's obligations $554,000 in connection with its
acquisition of FBS, (ii) $2,000,000 face amount of the Company's old
Series A Preferred Stock, which was subsequently converted into 193,798
shares of common stock (the FBS Sales Shares), and (iii) up to a maximum
of $10,000,000 of additional consideration, payable in shares of the
Company's common stock, based on an average per share trading price for
60 days prior to the calculation date, based on the earnings of General
Textiles before interest, taxes, depreciation and amortization, as
defined, during the twelve months ended April 30, 1995. Concurrent with
the offering of new Series A Preferred Stock (Note 14), which was
completed in July 1994, the Batra stockholders agreed to waive rights to
the additional consideration payable in common stock in exchange for
500,000 shares of the Company's common stock. This resolution increased
the excess of cost over net assets acquired (goodwill) and increased
paid-in capital by $1,750,000.
F-15
<PAGE> 41
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Under the original stock purchase agreement, the principal stockholders
of the Company and a member of management received shares of common stock
of the Company which were subject to cancellation if certain earnings
levels were not achieved. Of the 997,342 shares granted, 498,670 shares
were surrendered and canceled as of January 28, 1995. The remaining
498,672 shares were surrendered and canceled during fiscal 1996.
Because General Textiles was operating under the control of the
Bankruptcy Court, the Company was unable to exercise significant control
over the financial and business operations of General Textiles.
Accordingly, the Company's investment was accounted for using the cost
method for the twelve months ended April 30, 1993. The Company's
investment in General Textiles was carried on the cost basis pending
effectiveness of the plan of reorganization (the Plan). On May 28, 1993,
the Plan was declared effective and General Textiles emerged from Chapter
11. Under the terms of the Plan, the Company contributed $3,000,000 in
equity to General Textiles and the Company's ownership of General
Textiles increased to 100%. As a result, the consolidated financial
statements at January 29, 1994 and for the nine months then ended,
include the accounts of General Textiles on a fully consolidated basis
commencing on May 29, 1993, the date the Company achieved control, and
for the period from May 30, 1993 through January 29, 1994. For financial
statement reporting purposes, the transaction is considered to have
occurred on May 29, 1993, the closest accounting period-end to the
confirmation date.
The acquisition was accounted for under the purchase method of
accounting. All acquired assets and liabilities were recorded at their
estimated fair market values on May 29, 1993, with the excess purchase
price over the net fair market value allocated to goodwill. Major classes
of assets acquired included cash, merchandise inventory, prepaid
expenses, deposits, and property and equipment. Major classes of
liabilities assumed included accounts payable, accrued compensation,
accrued expenses, sales tax payable, and debt.
(3) ACQUISITION OF FACTORY 2-U
On November 13, 1995, the Company acquired Capin Mercantile Corporation,
an off-price clothing and housewares retailer operating in the
southwestern United States. The name of Capin Mercantile Corporation was
changed to Factory 2-U. The acquisition was accounted for under the
purchase method of accounting. The results of operations of Factory 2-U
have been included in these consolidated financial statements from
November 11, 1995, the end of the closest accounting period.
The purchase price consisted of the following:
<TABLE>
<S> <C>
Cash paid to former shareholders at closing $ 625,000
Promissory notes issued to former shareholders 625,000
Estimated acquisition expenses 1,050,000
----------
Total cost of acquisition $2,300,000
==========
</TABLE>
All acquired assets and liabilities of Factory 2-U have been recorded at
their estimated fair market values on November 10, 1995, with the excess
of the purchase price of $2,300,000 over the net tangible book deficit of
$12,370,000 allocated to goodwill acquired of $14,670,000.
F-16
<PAGE> 42
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company issued three promissory notes to the former shareholders of
Factory 2-U, a $125,000 note (the Downpayment Note), a $500,000 note (the
Absolute Note) and a note with a settlement value contingent upon the net
proceeds or appraised value of certain real property acquired in
connection with the acquisition (Note 11). The Absolute Note remains
outstanding at January 27, 1996 (Note 11).
In connection with the acquisition of Factory 2-U, trade accounts payable
of Factory 2-U were rescheduled to twenty-four monthly installments. The
rescheduled trade payables are reflected in the accompanying consolidated
balance sheet at net present value. The unpaid balance of the rescheduled
trade accounts payable at January 27, 1996 follows:
<TABLE>
<S> <C>
Rescheduled payables, gross $ 4,455,000
Less discount, at 11.5% (425,000)
-----------
4,030,000
Less current portion (included in accounts payable) (2,209,000)
-----------
Rescheduled payables, long-term (included in other
long-term obligations) $ 1,821,000
===========
</TABLE>
The following table sets forth the Company's pro forma unaudited
consolidated statement of operations for the twelve-month periods ended
January 28, 1995 and January 27, 1996. The pro forma consolidated
statements of operations give 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 that have been eliminated subsequent to
acquisition, the adjustment of general and administrative expenses to
reflect additional expenses incurred to support the Factory 2-U chain,
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 30, 1994.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1995 1996
------------------ ------------------
<S> <C> <C>
Net sales $ 214,583,000 220,084,000
Loss before extraordinary gain (3,794,000) (4,020,000)
Net income (loss) 1,457,000 (4,020,000)
Loss applicable to common stock (573,000) (7,060,000)
Loss applicable to common stock per common share $ (0.14) (1.76)
</TABLE>
F-17
<PAGE> 43
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) DISCONTINUED OPERATIONS - DISTRIBUTION BUSINESS
The Company divested its Distribution Business (Distribution Business),
which was comprised of the operations of MKI Acquisition, Mandel-Kahn,
CB/Camelot and CB/Murray, prior to April 30, 1993. Those operations have
been accounted for as discontinued operations in these consolidated
financial statements.
On December 7, 1993, the Company settled a $3,500,000 liability related
to the guaranty of certain Mandel-Kahn debt by issuing a $1,000,000
three-year term note bearing interest at 8-1/2% per annum, payable
quarterly, and $2,500,000 in Series C Preferred Stock. At January 28,
1995 and January 27, 1996, $750,000 and $250,000, respectively, was
outstanding on the term note.
Since April 30, 1993, all of CB/Murray's remaining assets other than
accounts receivable and preference claims have been liquidated,
collection of unliquidated accounts receivable and pending preference
claims have been pursued. During the nine months ended January 29, 1994,
CB/Murray collected outstanding accounts receivable and preference
claims, and reduced senior secured bank debt by $692,000.
During 1995 and 1996, the Company continued to litigate the cases related
to the Distribution Business. Accordingly, the accompanying consolidated
statements of operations includes a loss on disposal of discontinued
operations of approximately $2,400,000 and $500,000 related to legal
expenses and other costs in 1995 and 1996, respectively (Note 21).
(5) DISCONTINUED OPERATIONS - RETIREMENT COMMUNITIES
The Company has discontinued operations of two retirement communities
projects, White Horse and Oakmont. The Company's only activity relating
to these entities has been the payment of legal expenses, the collection
of remaining receivables and the liquidation of remaining liabilities.
The Company was obligated for $368,000 at January 28, 1995 and $401,000
at January 27, 1996 under a line of credit collateralized by a priority
lien on the marketing fee due from White Horse and the development and
marketing fees due from Oakmont. Principal amounts are payable solely
from proceeds of such marketing and development fees.
The net assets of the retirement communities businesses as of January 28,
1995 and January 27, 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Other receivables - fees $368,000 401,000
-------- --------
Long-term debt 368,000 401,000
Other liabilities -- --
-------- --------
Total liabilities 368,000 401,000
-------- --------
Net assets $ -- --
======== ========
</TABLE>
Through January 28, 1995 and January 27, 1996, the Company maintained a
reserve for uncollectibility sufficient to reduce the net book value of
the retirement communities to zero.
F-18
<PAGE> 44
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) ERIN RENTALS LIMITED
In March 1993, DRE sold a beneficial interest in the stock of Erin
Rentals Limited (Erin), a British Virgin Islands corporation, back to its
original owner. In consideration, a $3,000,000 promissory note was
canceled and DRE received a secured three-year note for $327,000. The
$327,000 note is secured by a pledge of the beneficial interest in the
stock of Erin and has priority over all other debt obligations of Erin,
except Erin's secured bank debt.
The Company is negotiating with Erin to extend repayment terms of the
promissory note. Management expects the note to be collected at the end
of three years with interest payments over that term.
(7) LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Furniture, fixtures and equipment $ 3,294,000 7,718,000
Leasehold improvements 1,775,000 2,928,000
Transportation and equipment 140,000 175,000
Equipment under capital leases 547,000 670,000
Construction in progress 250,000 187,000
------------ ------------
6,006,000 11,678,000
Less accumulated depreciation and amortization (1,084,000) (2,677,000)
------------ ------------
$ 4,922,000 9,001,000
============ ============
</TABLE>
(8) LAND AND BUILDING HELD FOR SALE
In connection with the Factory 2-U acquisition, the Company acquired
certain real property. This property is held for sale and is carried at
estimated fair value, net of estimated disposition costs, of $4,500,000.
(9) OTHER ACCRUED EXPENSES
Other accrued expenses as of January 28, 1995 and January 27, 1996
consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Sales tax payable $ 430,000 2,402,000
Accrued acquisition expenses -- 378,000
Other - current 368,000 1,027,000
Accrued advertising 301,000 368,000
Litigation proceeds payable -- 122,000
Deferred rent - current portion 110,000 176,000
Accrued interest 93,000 163,000
Accrued legal and professional fees 2,057,000 765,000
Contingent rent 58,000 113,000
---------- ----------
$3,417,000 5,514,000
========== ==========
</TABLE>
F-19
<PAGE> 45
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) INCOME TAXES
The principal temporary differences that give rise to significant
portions of the consolidated deferred tax assets and liabilities,
excluding the amount attributable to net operating loss carryforwards,
are presented below:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 6,090,000 6,090,000
Compensated absences and bonuses, principally due to
accruals for financial reporting purposes 622,000 311,000
Assets held for sale and other purchased assets -- 603,000
Excess of deferred straight-line rent over amount
accruable for tax purposes 624,000 729,000
Inventory sold on layaway and other reserves 111,000 184,000
Accrual for contingent liabilities related to
discontinued operations 1,013,000 541,000
----------- -----------
Total gross deferred tax assets 8,460,000 8,458,000
Less valuation allowance (8,057,000) (8,121,000)
----------- -----------
Net deferred tax assets $ 403,000 337,000
=========== ===========
Deferred tax liabilities:
Inventory reserves, prepaid expenses and
layaway receivables $ 342,000 194,000
Leasehold improvements and equipment, principally due to
differences in depreciation recognized on fixed assets
61,000 143,000
----------- -----------
Net deferred tax liabilities $ 403,000 337,000
=========== ===========
</TABLE>
The Company has established a valuation allowance attributable to lack of
historical earnings and annual limitations on the usage of net operating
loss carryforwards.
During the twelve months ended January 28, 1995 and January 27, 1996, the
valuation allowance, which represents deferred tax assets that may not be
realized by the reversal of future taxable temporary differences,
decreased by $1,424,000 and increased by $64,000, respectively.
Income taxes attributable to income from continuing operations,
discontinued operations and extraordinary item consist of:
<TABLE>
<CAPTION>
CONTINUING DISCONTINUED EXTRAORDINARY
OPERATIONS OPERATIONS ITEM TOTAL
--------------- ----------------- ------------- -----------
Twelve months ended January 28, 1995:
<S> <C> <C> <C> <C>
U.S. Federal $ 101,000 (276,000) 255,000 80,000
State and local 48,000 (70,000) 337,000 315,000
--------- --------- --------- ---------
$ 149,000 (346,000) 592,000 395,000
========= ========= ========= =========
</TABLE>
F-20
<PAGE> 46
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Due to the full valuation of net deferred tax assets, there are no
deferred taxes allocable to loss from continuing operations, loss on
disposal of discontinued operations or the extraordinary gain for the
twelve months ended January 28, 1995 and January 27, 1996.
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 the nine months ended January 29,
1994 and the twelve months ended January 28, 1995 and January 27, 1996 to
actual expense is a result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
Computed "expected" tax
<S> <C> <C> <C>
expense (benefit) $ 378,000 (70,000) 503,000
Amortization of goodwill 271,000 404,000 470,000
Change in valuation allowance -- (273,000) 64,000
Impact of purchase accounting
adjustments -- -- (603,000)
Debt forgiveness permanent difference
-- -- (279,000)
State income taxes, net of federal
income tax benefit -- 48,000 --
Net operating loss carryforward
utilization (664,000) -- --
Other, net 15,000 40,000 (155,000)
--------- --------- ---------
$ -- 149,000 --
========= ========= =========
</TABLE>
The difference between the "expected" income tax benefit computed by
applying the U.S. federal income tax rate of 34% to loss from
discontinued operations for the nine months ended January 29, 1994 and
the twelve months ended January 28, 1995 and January 27, 1996 to actual
is a result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax benefit $ 30,000 (880,000) (170,000)
Change in valuation allowance -- 604,000 --
State income taxes, net of federal
income tax benefit -- (70,000) --
Net operating loss carryforward
utilization (30,000) -- --
Income from continuing operations -- -- 170,000
--------- --------- ---------
$ -- (346,000) --
========= ========= =========
</TABLE>
At January 27, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $17.9 million, of which
approximately $3.2 million were available for use at fiscal year-end, and
which began expiring in 2007.
F-21
<PAGE> 47
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The difference between the "expected" income tax expense computed by
applying the U.S. federal income tax rate of 34% to extraordinary gain
for the nine months ended January 27, 1994 and the twelve months ended
January 28, 1995 to actual is a result of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Computed "expected" tax expense $ 232,000 1,987,000
Change in valuation allowance -- (1,755,000)
State income taxes, net of federal income tax benefit -- 337,000
Net operating loss carryforward utilization (232,000) --
Other, net -- 23,000
---------- ----------
$ -- 592,000
========== ==========
</TABLE>
(11) LONG-TERM DEBT
Long-term debt at January 28, 1995 and January 27, 1996 consists of the
following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Subordinated notes, non-interest bearing, discounted at rates
ranging from 8.5% to 25%, principal payments based
on excess cash flow, as defined $8,574,000 8,782,000
Revolving credit note, interest at prime plus 2% (10.5% at both
January 28, 1995 and January 27, 1996) payable monthly, principal
due in November 1998
7,943,000 9,948,000
Revolving credit note, interest at prime plus 2% (10.5% at January
27, 1996) payable monthly, principal due in November 1998 -- 5,211,000
Installment mortgage note payable to a bank, interest at prime plus
1.5 % (10% at January 27, 1996) payable monthly, principal
payable monthly in installments of $11,250 with a balloon payment
of $2,284,000, due in May 1996 -- 2,329,000
Installment note payable to a finance company, interest at prime
plus 2% (10.5% at January 27, 1996) payable monthly, principal
payable monthly in installments of $37,750, final payment due in
April 1998
-- 1,198,000
</TABLE>
F-22
<PAGE> 48
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Installment note payable in settlement of lawsuit; interest at 10%
payable commencing in February 1996; principal payable in
installments of $41,667 per month from July 1996 to September
1996, $83,333 in October and November 1996, with a balloon
payment of $708,333 payable in December 1996, secured by 153,846
shares of Series A Convertible Preferred Stock issued to and held
in trust subsequent to January 27, 1996 $ -- 1,000,000
Installment note payable to the Commerce and Economic Development
Commission of Arizona, interest at 6%, principal and interest
payable in monthly installments of $ 4,232 with final installment
due in December 1999, secured by certain warehouse equipment
-- 177,000
Installment note payable to the Economic Development Administration
of Arizona, interest at 5%, principal and interest payable in
monthly installments of $1,992 with final installment due in
March 1999, secured by certain warehouse equipment
-- 70,000
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 -- 655,000
Installment note payable to former shareholders of Factory 2-U,
interest at 8.75%, principal payments of $45,455 plus accrued
interest payable beginning in May 1996 and three months
thereafter until October 1998
-- 500,000
Note payable to a bank, interest at 8.5% payable quarterly,
final principal payment of $250,000,
due on April 30, 1996 750,000 250,000
------------ ------------
Total long-term debt 17,267,000 30,120,000
Less current maturities (3,112,000) (5,097,000)
------------ ------------
Long-term debt, net of current maturities $ 14,155,000 25,023,000
============ ============
</TABLE>
F-23
<PAGE> 49
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
SUBORDINATED NOTES
General Textiles' pre-bankruptcy unsecured claims were settled through
the issuance of New Subordinated Notes, Subordinated and Junior
Subordinated Reorganization Notes. At January 28, 1995 and January 27,
1996, these notes are carried at $8,574,000 and $8,782,000, respectively,
which is discounted $19,092,000 and $17,539,000, respectively, from face
value, calculated using discount rates ranging from 8.5% to 25%,
resulting from the notes being non-interest bearing. The discount to face
value is based in part on future excess cash flow projected in the Plan.
The discount is amortized over the estimated life of the notes and is
recorded as a non-cash charge to interest expense. Annual principal
payments are due based on excess cash flow available, as defined under
the Plan, with final payments due on April 30, 2003 for the New
Subordinated Notes, November 28, 2003 for the Subordinated Reorganization
Notes, and May 28, 2005 for the Junior Subordinated Reorganization Notes.
In January 1994, the Company, in return for $400,000 in cash and 66,667
shares of common stock, valued at $400,000, obtained an option to
repurchase General Textiles' term note payable (Senior Note) and certain
then outstanding Subordinated Notes for $9,000,000 in cash.
In July 1994, the Company exercised the option by using a portion of the
proceeds of its Series A Preferred Stock offering (Note 14) and
extinguished $15,544,000 of General Textiles' debt, including a
$1,817,000 unamortized deferred gain arising from a troubled debt
restructuring, by paying $9,000,000 in cash and exercising the option,
valued at $800,000, to extinguish the debt at less than face value. The
Company realized a pre-tax extraordinary gain on the extinguishment of
$5,744,000.
In January 1994, the Company purchased, for $558,000 in cash and 125,632
shares of common stock, with an estimated value at January 28, 1994 of
$971,000, $2,998,000 face amount of General Textiles' Subordinated Notes
from the pre-petition trade creditors with a carrying value of
$2,210,000. $682,000 was recognized as an extraordinary gain on the
consolidated statement of operations in 1994. Certain creditors
subsequently declined their commitments to sell their notes back to the
Company. As a result, a pre-tax extraordinary gain of $99,000 was
recognized during 1995, the notes are included as Subordinated Notes and
the 23,120 common shares which these creditors had formerly committed to
take as satisfaction for their notes were canceled.
REVOLVING CREDIT NOTES
Under General Textiles' Plan, pre-bankruptcy secured claims were settled
with the issuance of a revolving credit facility (the Facility) and the
Senior Note. The obligations are secured by the assets and stock of
General Textiles. The Facility currently consists of a $20,000,000 line
of credit issued by a lender. The Company also has established a
revolving credit facility (together with the General Textiles facility,
the Facility) with the same lender for Factory 2-U that consists of a
$10,000,000 line of credit and is secured by the assets of Factory 2-U.
Borrowings on the Facilities are based on advances against an inventory
formula. A facility fee of .50% of the unused portion of the Facilities
is payable annually. The balances of the Facilities fluctuate daily based
on inventory levels and working capital requirements. The unused portion
of the Facilities totaled $1,472,000 and $665,000 for General Textiles
and Factory 2-U, respectively, at January 27, 1996.
A $2,000,000 line of credit owed to a lender was paid in March 1995.
F-24
<PAGE> 50
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The future maturities of long-term debt include estimated principal
payments based on management's estimates of payments, based on future
years' excess cash flows, as defined by the Plan, on the General
Textiles' New Subordinated Notes, Subordinated Reorganization Notes, and
Junior Subordinated Reorganization Notes. The future maturities are:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ---------------------------------- ------------
<S> <C>
1997 $ 5,097,000
1998 2,696,000
1999 2,423,000
2000 49,000
2001 --
Thereafter 22,235,000
------------
32,500,000
Less portion representing interest (17,539,000)
------------
14,961,000
Less current maturities (5,097,000)
------------
$ 9,864,000
============
</TABLE>
Interest expense for the nine months ended January 29, 1994 and the
twelve months ended January 28, 1995 and January 27, 1996, respectively,
is summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Notes payable to related parties $ 320,000 -- --
Notes payable - private placements 581,000 12,000 --
Revolving credit facilities 476,000 1,027,000 1,671,000
General Textiles senior term notes 426,000 111,000 --
Debentures 99,000 -- --
General Textiles subordinated notes 1,281,000 1,362,000 1,555,000
Other debt 250,000 301,000 449,000
---------- ---------- ----------
Total $3,433,000 2,813,000 3,675,000
========== ========== ==========
</TABLE>
The Company is also obligated under the Contingent Note (Note 3). The
amount payable under the Contingent Note is subject to adjustment
consisting of an increase (decrease) by fifty percent of the degree to
which the net proceeds from the sale, or appraised value at a future
date, of the Factory 2-U Real Property (Note 8) is greater than (less
than) $6,700,000. As the Factory 2-U Real Property is currently valued at
$4,500,000, the Contingent Note has been assigned a settlement value of
zero at January 27, 1996.
F-25
<PAGE> 51
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) LEASE COMMITMENTS
The Company operates retail stores, warehouse facilities and executive
offices under various operating leases. Certain leases provide for
abatement of rent during the initial period or escalating rent payments
during the term of the lease. For financial reporting purposes, rent
expense is recognized on a straight-line basis over the term of the
lease. Accordingly, rent expense recognized in excess of cash rent paid
is reflected as deferred rent. Deferred rent, including current and
long-term portions at January 28, 1995 and January 27, 1996 amounted to
$1,554,000 and $1,806,000, respectively, and is included as a component
of other accrued expenses and deferred rent on the accompanying
consolidated balance sheet. Some leases provide for contingent rentals
which are recognized as expense. Total contingent rent expense for the
nine months ended January 29, 1994 and the twelve months ended January
28, 1995 and January 27, 1996 was $42,000 and $63,000, respectively.
Total rent expense, inclusive of deferred and contingent rentals, was
$4,519,000, $7,771,000 and $10,128,000 for the nine months ended January
29, 1994 and the twelve months ended January 28, 1995 and January 27,
1996, respectively.
The Company is also obligated under various capital leases for leasehold
improvements and equipment that expire at various dates during the next
four years. At January 28, 1995 and January 27, 1996, leasehold
improvements and equipment and related accumulated amortization recorded
under capital leases were as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Leasehold improvements $ 129,000 129,000
Equipment 418,000 541,000
--------- ---------
547,000 670,000
Less accumulated amortization (50,000) (163,000)
--------- ---------
$ 497,000 507,000
========= =========
</TABLE>
At January 27, 1996, the future minimum lease payments, excluding
executory costs under noncancelable operating leases follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------------- -----------------
<S> <C> <C>
1997 $ 181,000 9,476,000
1998 149,000 8,960,000
1999 91,000 8,667,000
2000 -- 6,492,000
2001 -- 3,436,000
Thereafter -- 9,192,000
------------ ------------
421,000 46,223,000
Less amount representing interest (rates ranging
from 9.0% to 14.8%) (55,000) --
------------ ------------
Present value of capital lease obligation 366,000 46,223,000
Less current maturities (141,000) --
------------ ------------
Long-term capital lease obligation $ 225,000 46,223,000
============ ============
</TABLE>
F-26
<PAGE> 52
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) COMMON STOCK
In May 1994, a one-for-six reverse stock split of the issued and
outstanding shares of the Company's common stock became effective. The
par value of the common shares was increased from $.0003 per share to
$.01 per share and the par value of the preferred shares was changed from
$.001 to $.01. In addition, the Board of Directors also increased the
number of authorized shares of preferred stock from 5,000,000 to
7,500,000. All common stock share amounts and per share data reflect the
reverse stock split.
During fiscal 1996, the Company canceled 498,672 shares of common stock
held in escrow (the Contingent Shares) upon failure to achieve after-tax
earnings of $5,000,000 for the twelve months ended April 30, 1995. Fully
diluted earnings per share for prior periods have been retroactively
restated to reflect the cancellation of these shares as though the shares
were never outstanding.
(14) PREFERRED STOCK
The Company has 7,500,000 shares of preferred stock authorized.
In July 1994, the Company completed an offering (Preferred Offering) of
Series A 9-1/2% Cumulative Convertible Preferred Stock (Series A
Preferred). The Company has 4,500,000 shares of Series A Preferred Stock
authorized. The Series A Preferred ranks senior to the common stock with
respect to dividends, upon liquidation, dissolution or winding up.
Cumulative dividends are payable quarterly at the rate of $.95 per year
on July 31, October 31, the last Friday in January and April 30 when
declared by the Board of Directors. Series A Preferred is convertible,
prior to redemption, at the option of the holder , into shares of common
stock at a conversion price of $3.719 per common share (so that each
Series A Preferred share is convertible into 2.69 shares of common
stock). If the Company fails to declare and pay dividends on the Series A
Preferred 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. The Company also has 25,000 shares of Series A Junior
Participating Preferred Shares authorized.
The $32.0 million in gross proceeds of the Preferred Offering were used
as followed:
<TABLE>
<S> <C>
Purchase of secured term note and a portion of the Subordinated Notes $ 9,000,000
Redemption of Series D Convertible preferred stock and accrued dividends
6,970,000
Repayment of General Textiles Revolving Credit Facility 3,900,000
Redemption of Series C Convertible preferred stock and accrued
dividends
2,632,000
Repayment of short-term debt and accrued interest 505,000
Cash to fund expansion 3,974,000
Underwriting discount, commissions and expense allowance 2,880,000
Offering expenses 2,139,000
-----------
Gross proceeds $32,000,000
===========
</TABLE>
F-27
<PAGE> 53
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) EMPLOYMENT AND CONSULTING CONTRACTS
Benson A. Selzer, Chairman of the Company, is employed by the Company
pursuant to an employment agreement for an initial three-year term
expiring on June 1, 1996, that will be automatically extended each year
for an additional year unless either party gives a notice of termination
to the other. The agreement provides, among things, for an annual base
salary of $232,000, life insurance of $1,000,000, an automobile
allowance, and incentive compensation based on pre-tax operating income
of the Company.
Joseph Eiger, Vice Chairman and Executive Vice President of the Company,
is employed by the Company pursuant to an employment agreement having
substantially the same terms as those of Mr. Benson A. Selzer's, except
that his base salary is $215,000.
John A. Selzer, Chief Executive Officer and President of the Company. is
employed by the Company pursuant to an employment agreement having
substantially the same terms as those of Benson A. Selzer, except that
his base salary is $193,000.
William Mowbray, Chief Executive Officer and President of GT, is employed
by the Company pursuant to an employment agreement having substantially
the same terms as those of Benson A. Selzer, except that his base salary
is $300,000.
Kevin Frabotta, Senior Vice President of GT, is employed by the Company
pursuant to an employment agreement having substantially the same terms
as those of Benson A. Selzer, except that his base salary is $135,000.
In January 1996, the Company entered into a five-year consulting
agreement with Joel Mandel. Under this agreement, the Company will pay
Mr. Mandel $125,000 per year for three years and $187,500 for two years.
This agreement also provides for the issuance of 60,000 shares of the
Company's Series A Convertible Preferred Stock. These shares were issued
in February 1996 (Note 21).
The Company is also party to consulting and advisory contracts with
certain other parties which require annual payments of approximately
$130,000.
On January 19, 1994, the Company entered into a consulting agreement with
a former executive of the Company. The former executive received 17,833
shares of the Company's common stock and is to provide consulting
services through November 30, 1997.
(16) EMPLOYEE RETIREMENT PLAN
Effective January 1, 1994, by retroactive adoption, the Company initiated
sponsorship of a qualified defined contribution plan, under Internal
Revenue Code Section 401(k), covering employees who have completed twelve
months of service and who work a minimum of 1,000 hours during that
twelve month period. The Company contributes 20% of participants'
voluntary contributions. Participants may contribute from 1% to 15% of
their compensation annually. The Company's contribution expense was
$37,000 and $116,000 for 1995 and 1996, respectively.
F-28
<PAGE> 54
(17) STOCK OPTIONS
At January 28, 1995, an aggregate of 558,333 options to purchase common
stock were held by officers, former officers, employees and directors of
the Company at exercise prices ranging from $9.00 to $18.00 per share.
During 1996, the Company retired 264,582 options, repriced 235,417
options to an exercise price of $1.375 per share and granted 560,833
options at $1.375 per share. At January 27, 1996, 854,584 options were
outstanding at exercise prices ranging from $1.375 to $18.00 per share.
The options become exercisable over a period from the date of issuance to
three years from the date of issuance. All options were granted at prices
equal to or greater than the fair market value of the related stock on
the date of grant. No options have been exercised as of January 27, 1996.
(18) WARRANTS
As of January 27, 1996, there are outstanding 2,571,500 Redeemable Class
D Common Stock Purchase Warrants (assuming the separation of the 4,903
warrants not yet separated from the Units in which they were originally
issued) (Class D Warrants). Each Class D Warrant entitles the holder to
purchase one-sixth of one share of Common Stock at a price of $15.00 per
share of Common Stock at any time until September 15, 1996 (unless
earlier redeemed by the Company).
The Class D Warrants are redeemable by the Company at a redemption price
of $.06 per Warrant, upon 30 days notice given at any time if the last
sale price per share of the Common Stock for 20 consecutive trading days
ending not more than 10 days prior to the date notice of redemption is
given equals or exceeds 120% of the exercise purchase price therefor
(i.e., $18.00). If the Company gives a redemption notice, a holder would
be forced either to exercise his Warrant within 30 days of the notice of
redemption or accept the redemption price.
In addition, as of January 27, 1996, there were also outstanding 328,831
additional warrants (collectively with the Class D Warrants, the
Warrants) of the Company expiring between May 1996 and December 1998 at
exercise prices ranging from $6.37 to $16.20 per share; 15,000 warrants
expiring between June and December 1998 may be exercised at the then
market price of the Company's common stock.
The Warrants contain provisions that protect the holders against dilution
by adjustment of the exercise price in certain events, such as stock
dividends and distributions, stock splits and recapitalizations. The
holder of a Warrant will not possess any rights as a stockholder of the
Company unless and until such holder exercises the Warrant.
The Class A Warrants expired in June 1994. The Class C Warrants expired
in September 1995. The Company redeemed 125,000 Put Warrants, for which
the option to put the warrants back to the Company had expired, from a
related party for $53,000 in cash during 1995.
In conjunction with the Series A Preferred Stock offering, the Company
issued warrants to purchase 320,000 shares of its Series A Preferred
Stock. The warrants are exercisable at $16.50 per preferred share.
F-29
<PAGE> 55
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(19) GENERAL TEXTILES MANAGEMENT AGREEMENT
On May 28, 1993, General Textiles entered into a management agreement
with Transnational Capital Ventures, Inc. (TCV). TCV is a merchant
banking and management consulting company that is affiliated with Joseph
Eiger, Vice Chairman, Executive Vice President and a Director of the
Company. Under the agreement, TCV receives a monthly fee for merchant
banking and management consulting services of $30,000 per month plus
reimbursement of up to $5,000 of expenses per month. Also, to the extent
General Textiles' operating income exceeds an amount specified in the
Plan, TCV will receive an amount equal to 10% of such excess. Amounts
payable to TCV would be reduced in the event of a default under General
Textiles' senior loan agreement, due to the subordinated position of the
agreement. On January 28, 1994, the agreement was assigned to the
Company.
(20) RELATED PARTY TRANSACTIONS
At January 27, 1996, accounts receivable of approximately $170,000 was
outstanding from an affiliated group.
(21) COMMITMENTS AND CONTINGENCIES
Mandel-Kahn. In January 1996, the Company settled a lawsuit commenced in
1993 by former owners of Mandel-Kahn Industries, Inc. ("Mandel-Kahn"),
which was purchased by the Company in 1992. Under the settlement (the
"Mandel-Kahn Settlement"), a payment of $230,000 has been made, a
five-year consulting agreement entered into with Joel Mandel and an
obligation to pay $1.0 million plus interest during 1996. The latter
obligation is secured by 153,846 shares of the Company's Series A
Convertible Preferred Stock. The Company has the obligation to register
these shares with the Securities and Exchange Commission and may sell
such shares, with the proceeds of any such sale being used to reduce such
indebtedness.
The Company is at all times subject to pending and threatened legal
actions which arise out of the normal course of business. In the opinion
of management, based in part on the advice of legal counsel, the ultimate
disposition of these matters will not have a material adverse affect on
the financial position or results of operations of the Company.
(22) SUBSEQUENT EVENTS
Regulation S Offering. During March 1996, the Company sold 726,000 shares
of Series A Preferred Stock for net proceeds of $3,221,000. In connection
with this offering, the Company issued five year warrants to purchase up
to 181,500 shares of common stock for $1.875 per share. These warrants
expire in March 2001.
Equipment Financing. In April 1996, the Company obtained financing for up
to $1,100,000 under an installment note with a financing company.
F-30
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 12, 1994, the Company engaged the services of KPMG Peat
Marwick LLP as its new independent auditors. KPMG Peat Marwick LLP has served as
General Textiles' independent auditors since 1988. Following the effectiveness
of the Reorganization Plan in May 1993, the Audit Committee of the Company's
Board of Directors (the "Audit Committee") determined that since General
Textiles is the principal business of Company, the Company and General Textiles
should retain the services of the same auditing firm. Accordingly, in January
1994, the Audit Committee recommended to the Board of Directors, and the Board
subsequently approved, the engagement of KPMG Peat Marwick LLP to act as both
the Company's and General Textiles' auditors.
Prior to engaging KPMG Peat Marwick LLP, the Company's independent
auditors were Cooper Selvin & Strassberg ("CSS") (from March 25, 1993 to January
28, 1994) and Deloitte & Touche ("D&T") (from 1987 until CSS was engaged).
During the Company's two fiscal years ended April 30, 1992 and December 31,
1991, and during the subsequent period immediately prior to its engagement of
CSS, the Company did not consult with CSS regarding either (i) the application
of accounting principles to a specific transaction or the type of audit opinions
which might be rendered on the Company's financial statements which in either
instance CSS has concluded was an important factor considered by the Company in
reaching its decision as to accounting, auditing and financial reporting issues
or (ii) any matter which was either the subject of disagreement or a reportable
event with D&T.
In January 1993, D&T advised the Company that primarily because of the
bankruptcy filing of C-B/Murray, the net loss and stockholders' equity amounts
reported in the Company's Form 10-Q for the quarter ended October 31, 1992 could
be materially incorrect and should be corrected.
In February 1993, the Company concluded that correction of such
financial statements would be required. After completion of a comprehensive
review of its October 31, 1992 financial statements, on April 2, 1993 the
Company filed an amended and restated Form 10-Q for the quarter ended October
31, 1992.
On March 5, 1993, D&T advised the Company that due to significant
changes in the Company's business D&T would need to audit the Company's
financial statements for the nine months ended January 31, 1993 prior to signing
a consent to the use of D&T's independent accountants' report on the Company's
financial statements previously audited by it, which financial statements were
to be included in a registration statement then in the process of being
prepared.
On March 25, 1993, the Company's Board of Directors decided to change
accountants and engaged CSS as the Company's independent accountants. At such
time, the Company's Board of Directors had not formed an Audit Committee.
On January 28, 1994, the Company notified CSS that it had determined
that it would change auditors and that the services of CSS would no longer be
required. The report of CSS on the financial statements of the Company as of
April 30, 1993 and for the year then ended did not contain any adverse opinions
or disclaimers of opinion and were not qualified or modified as to audit scope
or accounting principles. However, the report of CSS on the financial statements
of the Company for the year ended April 30, 1993 contained an explanatory
paragraph which discussed the Company's ability to continue as a "going
concern." As of April 30, 1993, the Company had discontinued all of its
operations other than General Textiles, which at such time was operating in
bankruptcy, and there was uncertainty as to the Company's ability to meet its
obligations.
During the period that CSS was the Company's auditor, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of CSS, would have caused it to make reference to
the subject matter of the disagreements in connection with its report.
During the Company's two most recent fiscal years and during any
subsequent period, the Company has not consulted KPMG Peat Marwick LLP regarding
either (i) the application of accounting principles to a specific transaction or
the type of audit opinion that might be rendered on the Company's financial
statements, which, in either instance, KPMG Peat Marwick LLP has concluded was
an
26
<PAGE> 57
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issues, or (ii) a matter which was
either the subject of a disagreement or a reportable event with CSS.
27
<PAGE> 58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the executive officers and directors of
Family Bargain, General Textiles, and Factory 2-U as of January 27, 1996. The
Company has a classified Board of Directors, under which its nine members are
divided into three classes. The term of office of each Director in a given class
expires at the third annual meeting of stockholders following his election. The
classification of the Board of Directors was implemented by Family Bargain in
1994 and, accordingly, the initial terms of six of the nine directors were for
less than three years.
<TABLE>
<CAPTION>
DIRECTOR'S
NAME AGE PRINCIPAL POSITION TERM EXPIRES
- ---- --- ------------------ ------------
<S> <C> <C> <C>
John A. Selzer 41 Chief Executive Officer 19961
President, Assistant Secretary
and Director
William W. Mowbray 56 Chief Financial Officer and Director; 1997
President and Chief Executive Officer of
General Textiles and Factory 2-U
Benson S. Selzer 75 Chairman and Director 1997
Joseph Eiger 65 Vice Chairman, Executive Vice President, 1996
Secretary and Director
John J. Borer III 38 Director 1997
Edwin C. Nevis 69 Director 19961
Francis G. Warburton 67 Director 1996
Barton P. Ferris, Jr. 56 Director 19961
Joseph J. Collins 46 Director 1996
H. Jurgen Schlichting 59 Director 1996
James M. Baker 41 Chief Financial Officer of
General Textiles and Factory 2-U
Kevin P. Frabotta 44 Senior Vice President of Store Operations
of General Textiles
and Factory 2-U
Mary McNabb 46 Vice President - Merchandising of General
Textiles and Factory 2-U
</TABLE>
- --------
1 Although the terms of Messrs J. Selzer, Nevis and Ferris were through 1995,
in the absence of an annual meeting and their re-election or replacement,
they have remained as directors until re-elected or replace at the 1996
Annual Meeting of Shareholders.
28
<PAGE> 59
<TABLE>
<S> <C> <C>
Denis LeClair 46 Vice President - Merchandising of General
Textiles and Factory 2-U
</TABLE>
The business experience of each of the directors and executive officers
is as follows:
JOHN A. SELZER, Chief Executive Officer, President and Director. For
more than the past five years, Mr. Selzer has been engaged in merchant and
investment banking and corporate management activities. His activities have
concentrated on situations involving financially and/or operationally troubled
companies. He has been a Director of the Company since January 1992, its Chief
Executive Officer since March 1992, and its President since January 1993. He has
been a Director of General Textiles since its acquisition in July 1992 (at which
time it filed for Chapter 11 Reorganization and emerged from Chapter 11
Reorganization on May 28, 1993). He served as Secretary and a Director of Tyco
Toys, Inc. ("Tyco"), a publicly held company, from December 1988 until July
1991. Mr. Selzer served in various capacities as an officer and director of the
following companies or their affiliates, which filed for Chapter 11
Reorganization within the past five years: C-B/Murray Corporation, Inc. ("C/B
Murray"), Mandel-Kahn, American Specialty Equipment Corp. ("American
Specialty"), and Canadian's Corp. John A. Selzer is the son of Benson A. Selzer.
WILLIAM W. MOWBRAY, Chief Financial Officer and Director of the Company
and President and Chief Executive Officer of General Textiles and Factory 2-U.
Mr. Mowbray has served as Chief Financial Officer of the Company since May 1994
and as a Director since November 1995. Mr Mowbray has served as President and
Chief Executive Officer of General Textiles since June 1995. Prior to being
named President of General Textiles, he served as Executive Vice President and
Chief Financial Officer of General Textiles since July 1991. General Textiles
filed for Chapter 11 Reorganization in July 1992 and emerged from Chapter 11
Reorganization on May 28, 1993. Prior to joining General Textiles, Mr. Mowbray
was employed from July 1990 to July 1991 as Chief Financial and Operating
Officer for Casfam, Inc., an off-price lingerie retailer. From June 1986 through
June 1990, he was an independent management consultant to retail clients. From
November 1981 to June 1986, Mr. Mowbray was Senior Vice President and Chief
Financial Officer of Clothestime, Inc.
BENSON A. SELZER, Chairman and Director. Mr. Selzer has for more than
the past five years been engaged in merchant and investment banking and
corporate management activities. His activities have concentrated on situations
involving financially and/or operationally troubled companies. He has been
Chairman and a Director of the Company since January 1992. He has been a
Director of General Textiles since its acquisition in July 1992 (at which time
it filed for Chapter 11 Reorganization and emerged from Chapter 11
Reorganization on May 28, 1993). He was Chairman of the Board and a Director of
Tyco from September 1988 until July 1991. Mr. Selzer served in various
capacities as an officer and director of the following companies or their
affiliates, which filed for Chapter 11 Reorganization within the past five
years: C-B/Murray, American Specialty, and Canadian's Corp. Benson A. Selzer is
the father of John A. Selzer. Benson A. Selzer and Joseph Eiger have been
business associates in a number of business ventures during the past 20 years.
JOSEPH EIGER, Vice Chairman, Executive Vice President and Director. Mr.
Eiger has been engaged, for more than the past five years, as a corporate
manager and entrepreneur who has been involved in numerous acquisitions,
divestitures and financings. His activities have concentrated on situations
involving financially and/or operationally troubled companies. He has been Vice
Chairman, Executive Vice President and a Director of the Company since January
1992. He has been a Director of General Textiles since its acquisition in July
1992 (at which time it filed for Chapter 11 Reorganization and emerged from
Chapter 11 Reorganization on May 28, 1993). Mr. Eiger served in various
capacities as an officer and director of the following companies or their
affiliates, which filed for Chapter 11 Reorganization within the past five
years: C-B/Murray, American Specialty and Canadian's Corp.
JOHN J. BORER III has been a Director of the Company since July 1994.
Since October 1991, Mr. Borer has been a Managing Director and Senior Vice
President of Rodman & Renshaw, Inc., the Representative of the Underwriters of
the Company's 1994 Offering. Prior to October 1991, Mr. Borer was a Senior Vice
President for Security Pacific Business Credit Inc. Mr. Borer served as a
Director of Canadian's Corp., which filed for Chapter 11 Reorganization in 1996.
EDWIN C. NEVIS has been a Director of the Company since July 1994.
Since 1991, Dr. Nevis has been the Director of Special Studies, Organizational
Learning Center Systems Dynamics Group, at the Sloan School of Management at the
Massachusetts Institute of Technology. From 1986 to 1991, Dr. Nevis was the
Director of Executive Program Development at the Sloan School of Management.
Since 1969, Dr. Nevis has also been President of Wellfleet House, Inc., a
management education and development and organization development consulting
firm. Dr. Nevis received his Ph.D in Industrial and Organizational Psychology
from Western Reserve University in 1954.
29
<PAGE> 60
FRANCIS G. WARBURTON, Director. Mr. Warburton has been a Director of
the Company since March 1992 and a Director of General Textiles since February
1994. He served as a Director of Nasta International Inc. from May 1987 until
September 1990. He has been President of Warburton & Associates, Inc., a
consulting firm specializing in mergers and acquisitions, since December 1985.
BARTON P. FERRIS, JR. has been a Director of the Company since July
1994. Since October 1995, Mr. Ferris has been a Managing Director of
Commonwealth Associates, an investment banking firm which was the Placement
Agent for the 1996 Offering. From 1990 to October 1995, Mr. Ferris was a
Managing Director of Lepercq, De Neuflize & Co. Incorporated, a merchant banking
firm, and a member of its Board of Directors. Mr. Ferris is presently a Director
of Ronson Corporation.
JOSEPH J. COLLINS has been a Director of the Company since July 1994.
Mr. Collins has over twenty years of diversified retail management and
consulting experience. Since 1995, Mr. Collins has been Executive Vice President
of Kmart Corporation ("Kmart"). Prior to joining Kmart, Mr. Collins managed
retail business transformation projects for Gemini Consulting, Inc., a
consulting firm which provides business transformation and information
technology services to primarily Fortune 500 companies. From 1990 to 1993, Mr.
Collins was President of Capital Management Corp., a consulting firm
specializing in performing due diligence for acquisitions and management
workouts. From 1992 to 1993, Mr. Collins served as Consultant and Vice President
- - Operational Planning of Montgomery Ward.
H. JURGEN SCHLICHTING has been a Director of the Company since November
1995. From 1986 to 1993, Mr. Schlichting served as Managing Director and Chief
Executive - North America for Westdeutsche Landesbank. Mr. Schlichting also
serves as a strategic and financial advisor to the Company pursuant to an
Advisory Agreement dated November 1, 1995 which expires in November 1996.
JAMES M. BAKER has been the Chief Financial Officer of General Textiles
since November, 1995 and of Factory 2-U since its acquisition by the Company in
November 1995. Mr. Baker joined General Textiles in May 1991 and served as
Director of Budgeting and Planning responsible for budgeting, warehousing, loss
prevention, inventory control and administration. Prior to joining General
Textiles, Mr. Baker was Controller for Oshman's Sporting Goods.
KEVIN FRABOTTA has been Senior Vice President of Store Operations of
General Textiles since August, 1995 and of Factory 2-U since its acquisition by
the Company. From 1992 until joining the Company, Mr. Frabotta was Vice
President of Operation for General Cinema Theatres. From 1985 to 1992, Mr.
Frabotta was Vice President of Stores with Oshman's Sporting Goods. Prior to
1985, Mr. Frabotta also held various positions with General Mills Specialty
Retailing Group, including Vice President of Stores and Vice President of Human
Resources.
MARY McNABB, Vice President - Merchandising of General Textiles and
Factory 2-U, joined General Textiles in 1990 and before then was employed by One
Price Clothing. Ms. McNabb has over 26 years of experience in retail buying and
merchandising.
DENIS LeCLAIR, Vice President - Merchandising of General Textiles and
Factory 2-U, joined General Textiles in 1991 as a buyer and since 1992 has held
his current position. Mr. LeClair has over 25 years of experience in retail and
has served in various buying and merchandise management positions for several
department store and specialty chains.
The Company has a classified Board of Directors, under which its nine
members are divided into three classes. the term of office of each Director in a
given class expires at the third annual meeting of stockholders following his
election. The classification of the Board of Directors was implemented by the
Company in 1994 and, accordingly, the initial terms of six out of the nine
directors on the Board at that time were for less than three years.
General Textiles' By-Laws provide that the Board of Directors of
General Textiles will be comprised of the same directors as that of Family
Bargain's Board of Directors. In addition, the Board of Directors of General
Textiles is subject to the same restrictions concerning transactions with
affiliates, other than transactions with Family Bargain, and acquisitions of
businesses outside of certain Standard Industrial Classification Codes to which
the Board of Directors of General Textiles is subject. The Plan of
Reorganization provides that if General Textiles fails to make certain minimum
payments to holders of Subordinated Notes, the holders of the Original Lender
Subordinated Notes and the Creditors Committee will have the right to elect a
minority of the directors in certain circumstances and all of the directors in
other circumstances. See "Management's Discussion And Analysis Of Financial
Conditions and Results of Operations--Liquidity and Capital Resources." Until
the Subordinated Notes are paid in full or properly cancelled, the Board of
Directors of the General Textiles must be
30
<PAGE> 61
comprised of at least five members. The officers of the Company and General
Textiles serve at the discretion of their respective Boards of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation information relating to the
Company's Chief Executive Officer, its four most highly compensated executive
officers (other than the Chief Executive Officer) and all directors and
executive officers of the Company as a group, as of January 27, 1996, January
28, 1995, and January 29, 1994, the end of the Company's three most recently
completed fiscal years, for services rendered in all capacities to the Company
and its subsidiaries during such respective fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
============================================================================================================================
AWARDS
============================================================================================================================
Restricted Securities
Name and Principal Fiscal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Award(s) Options/SARs Compensation
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Selzer, 1996 $184,423 $ 0 $--(2) $ 0 55,000 $ 0
Chief Executive Officer 1995 $175,000 $ 70,000 $--(2) $ 0 0 $ 0
and President 1994 $ 93,750(1) $ 6,731 $ 0 $ 0 0 $ 0
- ----------------------------------------------------------------------------------------------------------------------------
Benson A. Selzer, 1996 $221,308 $ 0 $--(2) $ 0 75,000 $ 0
Chairman 1995 $210,000 $ 84,000 $--(2) $ 0 0 $ 0
1994 $157,500(3) $ 8,077 $22,766(4) $ 0 0 $ 40,040(5)
- ----------------------------------------------------------------------------------------------------------------------------
Joseph Eiger, 1996 $205,500 $ 0 $--(2) $ 0 75,000 $ 0
Vice Chairman and 1995 $195,000 $ 78,000 $--(2) $ 0 0 $ 0
Executive Vice President 1994 $146,250(6) $ 7,500 $42,350(7) $ 0 0 $ 28,628(8)
- ----------------------------------------------------------------------------------------------------------------------------
William W. Mowbray,
Chief Financial Officer,
President and Chief 1
Executive Officer of 1996 $260,345 $224,852 $--(2) $ 0 91,667 $ 0
General Textiles and 1995 $210,048 $164,800 $--(2) $ 0 0 $ 0
Factory 2-U 1994 $150,000(9) $162,790 $--(2) $ 0 8,333(0) $ 0
- ----------------------------------------------------------------------------------------------------------------------------
Kevin P. Frabotta, 1996 $ 57,115 $ 28,488 $--(2) $ 0 17,000 0
Senior Vice President of
General Textiles and
Factory 2-U(11)(12)
============================================================================================================================
</TABLE>
(1) Represents salary earned from May 1, 1993 until January 29, 1994. John
A. Selzer's annual salary increased from $100,000 to $175,000 effective
November 1, 1993.
(2) The aggregate amount of such compensation is less than the lesser of
either $50,000 or 10% of such person's total annual salary and bonus.
(3) Represents salary earned from May 1, 1993 until January 29, 1994.
(4) Represents payments of $11,340 for automobile expenses, $9,231 for a
driver, and $2,195 for country club dues, which were paid pursuant to
the terms of Benson A. Selzer's employment agreement.
(5) Represents payments for life insurance premiums, which were paid
pursuant to the terms of Benson A. Selzer's employment agreement.
(6) Represents salary earned from May 1, 1993 until January 29, 1994.
(7) Represents payments of $18,119 for automobile expenses and $24,231 for
a driver, which were paid pursuant to the terms of Mr. Eiger's
employment agreement.
(8) Represents payments for life insurance premiums, which were paid
pursuant to the terms of Mr. Eiger's employment agreement.
(9) Represents salary earned from May 1, 1993 until January 29, 1994.
(10) Represents options to purchase shares of Common Stock granted to Mr.
Mowbray on December 28, 1993 at an exercise price, as amended, of
$1.375 per share.
(11) Represents salary earned from August 21, 1995 until January 27, 1996.
(12) In addition to Mr. Frabotta, although not an executive officer, Ms.
McNabb's compensation in fiscal year 1996 equalled $154,372 (salary),
$11,535 (bonus), and $6,000 (other).
31
<PAGE> 62
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (2)
- -----------------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price
Name Granted (#)(1) Fiscal Year ($/sh) Expiration Date 5%($) 10%($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Selzer(3) 55,000 10.3% $1.375 April 13, 2005 $47,560 $120,527
Benson A. Selzer(3) 75,000 14.0% $1.375 April 13, 2005 $64,855 $164,355
Joseph Eiger(3) 75,000 14.0% $1.375 April 13, 2005 $64,855 $164,355
William W. Mowbray (3) 88,333 16.5% $1.375 April 13, 2005 $76,384 $193,573
Kevin P. Frabotta(3) 17,000 3.2% $1.375 September 1, 2005 $17,473 $26,883
========================= =============== ================= ============ ===================== ============ ==============
</TABLE>
- --------------------
(1) The options granted are exercisable for 10 years, subject to earlier
expiration in the event of termination of employment with Family
Bargain. All of the options, other than Mr. Frabotta's, are
fully-vested. The Company accelerated the vesting of Mr. Mowbray's
options when Mr. Mowbray became Chief Executive Officer of General
Textiles in August 1995. Mr. Frabotta's options vest one-third each
year commencing September 1, 1996.
(2) These amounts represent assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall stock market conditions.
(3) The market price of the Common Stock on the date of all such grants was
$1.375 per share.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/SARs at Fiscal SARs at Fiscal Year End
Year End (#) ($)
Shares Acquired On Exercisable/ Exercisable/
Name Exercise Value Realized ($) Unexercisable Unexercisable
---- -------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
John A. Selzer 0 0 75,833/0 $47,395/0
Benson A. Selzer 0 0 163,917/0 $102,448/0
Joseph Eiger 0 0 163,917/0 $102,448/0
William W. Mowbray 0 0 100,000/0 $62,500/0
Kevin P. Frabotta 0 0 0/17,000 0/$10,625
</TABLE>
No SARs have been issued by Family Bargain.
32
<PAGE> 63
MANAGEMENT OPTIONS
On April 13, 1995, the Board of Directors authorized the issuance of
options to purchase an aggregate of 540,000 shares of Common Stock to certain
Directors, officers and employees of Family Bargain, the Company and General
Textiles. On April 18, 1995, the Executive Committee set the exercise price of
such options at $1.375 per share, the closing bid price of the Family Bargain
Common Stock on April 12, 1995 on the NASDAQ SmallCap Market. In September 1995,
the Company granted options to purchase 85,833 shares of Common Stock to certain
directors, officers and employees of the Company, General Textiles and Factory
2-U. COMPENSATION OF DIRECTORS
All directors are reimbursed for any out-of-pocket travel expenses
incurred by them in attending meetings of the Board of Directors or committees
thereof. Directors who are not salaried employees of the Company, General
Textiles or Factory 2-U receive a $1,500 fee for each Board or committee meeting
attended. There are no other arrangements or agreements pursuant to which any of
the Directors are entitled to be compensated for serving as directors.
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION
Benson A. Selzer is employed by the Company pursuant to an employment
agreement for an initial three year term expiring on June 1, 1996, providing for
automatic one-year renewals unless either party gives notice of termination to
the other. The agreement provides, among other things, for an annual base salary
of $232,000, subject to annual increases of 5%. In November 1995, following the
acquisition of Factory 2-U, the base salary was increased to $350,000 per year
effective with fiscal year 1997. Mr. Selzer is eligible to receive a bonus of up
to 100% of his base salary based on the Company's pre-tax income, as defined in
the employment agreement. Bonus payments ranging from 10% to 100% of base salary
are earned if Family Bargain achieves specified thresholds of Family Bargain's
pre-tax income, as set forth in the employment agreement. Mr. Selzer also
receives a car allowance of $700 per month. The agreement permits Family Bargain
to terminate Mr. Selzer's employment at its discretion, provided that if his
employment is terminated without cause, as defined, Mr. Selzer will be entitled
to a severance payment equal to his base salary for the remainder of the term.
In addition, upon the occurrence of a change of control, as defined, of Family
Bargain, Mr. Selzer may terminate his employment agreement and receive, as a
severance payment, an amount equal to his base salary for the remainder of the
term. Severance payments are payable within 30 days of termination of the
agreement.
Joseph Eiger is employed by the Company pursuant to an employment
agreement having substantially the same terms as those of Benson A. Selzer's
agreement, except that his base salary is $215,000. In November 1995, following
the acquisition of Factory 2-U, the base salary was increased to $340,000 per
year effective with fiscal year 1997.
John A. Selzer is employed by the Company pursuant to an employment
agreement having substantially the same terms as those of Benson A. Selzer's
agreement, except that he receives an annual base salary of $193,000.
William W. Mowbray is employed by General Textiles pursuant to an
employment agreement for a term expiring on August 1, 1998, subject to automatic
one year extensions each August unless terminated by either party. Under the
agreement, Mr. Mowbray receives a base salary of $300,000 per year subject to
annual increases of 5% plus any increase in the Consumer Price Index. He is
eligible to receive a bonus of up to 100% of his base salary based on General
Textiles' EBITDA, as defined in the agreement. Bonus payments are earned if
General Textiles achieves specified thresholds of its EBITDA plan, as set forth
in Mr. Mowbray's employment agreement. Bonus payments range from 10% of his base
salary, if General Textiles earns 85% of its EBITDA plan, to 100% of base salary
if General Textiles earns 202% of its EBITDA plan. Mr. Mowbray receives a car
allowance of $850 per month, plus related expenses. The Company does not carry
any key man life insurance on Mr. Mowbray.
Kevin P. Frabotta is employed by General Textiles pursuant to an
employment agreement for a term expiring on August 21, 1998. Under the
agreement, Mr. Frabotta receives a base salary of $135,000 per year subject to
annual increases of 5% plus any increase in the Consumer Price Index. He is
eligible to receive a bonus of up to 100% of his base salary under conditions
substantially the same as those of Mr. Mowbray. Mr. Frabotta receives a car
allowance of $750 per month, plus related expenses.
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<PAGE> 64
The Company entered into an Advisory Agreement dated as of November 1,
1995 with Mr. Schlichting pursuant to which he provides strategic and financial
advisory services to the Company and receives compensation of $100,000 per year,
plus bonuses upon the occurrence of certain events. The Advisory Agreement
terminates on November 1, 1997.
General Textiles entered into a Consulting Agreement dated as of October
1995 with Joel Mandel pursuant to which he provides consulting services to the
Company and receives compensation of $125,000 for the first three years,
$187,500 for the fourth and fifth years during the agreement's five year term.
Such compensation is paid monthly in arrears. The Company is a guarantor under
this Consulting Agreement.
Pursuant to the Reorganization Plan, Transnational Capital Ventures, Inc.
("TCV"), a company owned by Joseph Eiger, entered into a Management Agreement
with General Textiles pursuant to which it is entitled to receive from General
Textiles a management fee of $30,000 per month and $5,000 in expenses. TCV also
is entitled to a bonus of 10% of the amount by which General Textiles' EBITDA
exceeds specified earnings levels set forth in the Management Agreement. There
was no bonus payable for the fiscal year ended January 27, 1996. Pursuant to an
arrangement with TCV, Benson A. Selzer is entitled to receive one-half of any
management fees and bonus payments payable to TCV under the Management
Agreement. TCV has assigned to the Company all of its rights and obligations
under the Management Agreement, including its right to receive all future bonus
payments and monthly management fees. The obligations of General Textiles under
the Management Agreement are subordinated to General Textiles payment
obligations under the Secured Term Note and the GT Revolving Credit Facility.
Under the terms of General Textiles' debt instruments, General Textiles
is subject to certain covenants, including limitations on executive
compensation. General Textiles may not increase the combined base salaries or
employee benefits of its President, Executive Vice President or any Senior Vice
President in any fiscal year by more than 10%. Bonuses to such officers are also
limited to between 10% of base salary (in the event that EBITDA of General
Textiles is between 85% and 90% of Target EBITDA (as defined in the debt
instruments ("Target EBITDA"))) and 68% - 100% of base salary (in the event
EBITDA of General Textiles is 138% or more of Target EBITDA).
TAX SHARING AND OTHER AGREEMENTS
The Company and General Textiles are parties to the Tax Sharing Agreement
which was entered into in connection with the Reorganization Plan. The Tax
Sharing Agreement requires General Textiles to pay to the Company an amount
equal to 80% of the reduction in General Textiles' federal income tax liability,
if any, caused by General Textiles filing its federal income tax return on a
consolidated basis with the Company as opposed to filing its federal income tax
return separately from the Company. The Tax Sharing Agreement also requires the
Company to pay to General Textiles 80% of the reduction in the Company's federal
income tax liability, if any, caused by the Company filing its federal income
tax return on a consolidated basis with General Textiles, as opposed to filing
its federal income tax return separately from General Textiles. Payments to the
Company or General Textiles under the Tax Sharing Agreement are made monthly
with respect to the estimated reduction, if any, in such tax liability.
BOARD COMMITTEES; COMPENSATION COMMITTEE AND INSIDER PARTICIPATION
In accordance with the By-Laws of the Company, the Board of Directors has
designated three committees, an Executive Committee, an Audit Committee and a
Compensation Committee. The Executive Committee acts between Board meetings on
all corporate matters and nominates candidates for membership on the Audit and
Compensation Committees. Certain actions by the Executive Committee require
prior approval of the Audit Committee or the Compensation Committee as described
below The members of the Executive Committee are Benson A. Selzer (Chairman),
Joseph Eiger and John A. Selzer.
The Compensation Committee reviews and approves compensation arrangements
for top management and employee compensation programs and administers the
Company's stock option plans. The Company's Board of Directors determines the
compensation of the Company's executive officers based on recommendations from
the Compensation Committee. The compensation of Messrs. Selzer and Eiger is
determined pursuant to their respective employment agreements, each of which was
approved by the Compensation Committee and the Company's Board of Directors. The
Compensation Committee consists of Joseph Eiger, Joseph J. Collins, and John J.
Borer III.
The Audit Committee reviews and evaluates the results and scope of the
audit and other services provided by the Company's independent accountants, as
well as the Company's accounting principles and system of internal accounting
controls. The Company's By-Laws provide that
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<PAGE> 65
affiliated transactions and acquisitions by Family Bargain of business not
within certain SIC Codes (including certain codes covering wholesale apparel
trade, retail stores, and apparel stores) must be unanimously approved by the
Audit Committee: provided, however, that (i) if at any time there are fewer than
two independent directors designated or approved by the representative of the
1994 Offering on the Audit Committee, such transactions shall require the
unanimous consent of all independent directors on the Board of Directors and
(ii) if at any time there are no remaining shares of Series A Convertible
Preferred Stock outstanding, acquisition by Family Bargain of businesses not
within certain SIC Codes will require approval by only a majority of the Audit
Committee. The members of the Audit Committee are Francis G. Warburton, John J.
Borer III and Joseph J. Collins.
During fiscal 1996, there were two meetings of the Executive Committee,
one meeting of the Audit Committee, and one meeting of the Compensation
Committee of the Board of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that, pursuant to
Delaware law, no director shall be personally liable for monetary damages for
breach of his fiduciary duty as a director to the Company and its stockholders
in connection with his acts or omissions. This provision in the Certificate of
Incorporation does not eliminate the director's fiduciary duty and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief are available. In addition, each director is subject to
liability for breach of his duty of loyalty to the Company or to the
stockholders, including acts leading to improper personal benefit to the
director and payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision does not affect
a director's responsibilities under any other law, such as the federal or state
securities laws.
In addition, the Company's Certificate of Incorporation provides that the
Company will indemnify, to the fullest extent permitted by Delaware law, each
person the Company has the power to indemnify under such law which includes,
among others, the Company's directors, officers, employees and agents. The
Company believes that indemnification under its Certificate of Incorporation
covers at least negligence and gross negligence by indemnified parties and
permits the Company to advance litigation expenses in the case of stockholder
derivative actions or other actions against an undertaking by the indemnified
party to repay such advances if it is ultimately determined that the indemnified
party is not entitled to indemnification. The Company believes that these
Certificate of Incorporation provisions are necessary to attract and retain
qualified persons as directors and officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The outstanding voting stock of the Company, as of April 22, 1995,
consisted of 4,111,635 shares of Common Stock. Holders of shares of Common Stock
are entitled to one vote per share. Holders of shares of Series A Convertible
Preferred Stock are not entitled to vote, except under certain limited
circumstances.
COMMON STOCK
The following table identifies each person or entity known to the Company
to be the beneficial owner of more than 5% of Family Bargain's Common Stock,
each executive officer of the Company and each director of the Company and all
directors and executive officers of the Company as a group, and sets forth the
number of shares of the Company's Common Stock beneficially owned by each such
person and such group and the percentage of the shares of the Company's
outstanding Common Stock owned by each such person and group.
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<PAGE> 66
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF CLASS PERCENT OF CLASS
NATURE OF PRIOR TO CONVERSION ASSUMING CONVERSION
NAME OF BENEFICIAL OWNER AND BENEFICIAL OF SERIES A CONVERTIBLE OF SERIES A CONVERTIBLE
IDENTITY OF GROUP OWNERSHIP(1) PREFERRED STOCK PREFERRED STOCK
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kabushi Investments Limited(3) 607,275 14.7% 4.0%
11 Myrtle Street
Douglas, Isle of Man
- ------------------------------------------------------------------------------------------------------------------
Jungfrau Trust, Jorvik 607,275 14.7% 4.0%
Limited, Trustee
11 Myrtle Street
Douglas, Isle of Man(3)
- ------------------------------------------------------------------------------------------------------------------
Benson A. Selzer (2)(4) 771,192 18.0% 5.4%
- ------------------------------------------------------------------------------------------------------------------
Joseph Eiger(2)(5) 163,917 3.8% 1.0%
- ------------------------------------------------------------------------------------------------------------------
John A. Selzer(2)(6) 75,833 1.8% .9%
- ------------------------------------------------------------------------------------------------------------------
William W. Mowbray(7)(8) 105,000 2.5% .6%
- ------------------------------------------------------------------------------------------------------------------
Kevin P. Frabotta(7) 0 0% 0%
- ------------------------------------------------------------------------------------------------------------------
John J. Borer III(10) 20,000 .4% .1%
245 Park Avenue, 28th Flr.
New York, NY 10167
- ------------------------------------------------------------------------------------------------------------------
Barton P. Ferris, Jr.(9)(10) 20,000 .4% 0%.1
610 West End Avenue
New York, New York 10024
- ------------------------------------------------------------------------------------------------------------------
Edwin C. Nevis(10) 20,000 .4% .1%
1501 Beacon Street, #1905
Brookline, MA 02146
- ------------------------------------------------------------------------------------------------------------------
Mary McNabb(7)(10) 17,583 .4% .1%
- ------------------------------------------------------------------------------------------------------------------
Denis LeClair(7)(10) 17,583 .4% .1%
- ------------------------------------------------------------------------------------------------------------------
Francis G. Warburton(10) 22,500 .5% .1%
P.O. Box 162
Washington Crossing, PA 18977
- ------------------------------------------------------------------------------------------------------------------
Joseph J. Collins(10) 20,000 .4% .1%
25 Airport Road
Morristown, NJ 07960
- ------------------------------------------------------------------------------------------------------------------
H. Jurgen Schlichting 0 0% 0
8 East 76th St.,
New York, NY 10021
- ------------------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as 1,860,883 39.1% 12.6%
a Group(11)(13 persons)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------
(1) Unless otherwise indicated, all stockholders have sole voting rights and
sole power to dispose of their shares. For a description of the rights of
members of the Creditors Committee and holders of Original Lender
Subordinated Notes to elect members of GT's Board of Directors if a
specified percentage of the Subordinated Notes are not repaid, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Liquidity and Capital Resources" and "Directors and
Executive Officers of the Registrant."
(2) The address for Benson A. Selzer, Joseph Eiger and John A. Selzer is 315
East 62nd Street, New York, New York 10021.
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<PAGE> 67
(3) Jungfrau Trust, a Liechtenstein discretionary trust, is the sole
stockholder of Kabushi. The beneficiaries of Jungfrau Trust include the
children of Joseph Eiger. Jorvik Limited, a professional trust company,
is the trustee of the Jungfrau Trust and, in such capacity, exercises
sole voting and investment power over the shares of Common Stock held by
Jungfrau Trust. David Moorhouse is the Chief Executive Officer of Jorvik
Limited.
(4) Also includes 163,917 shares of Common Stock issuable upon the exercise
of options. Mr. Selzer owns 23,225 shares of Series A Convertible
Preferred Stock which are only reflected in the "Percent of Class
Assuming Conversion" column of the preceding chart. See "EXECUTIVE
COMPENSATION." Benson A. Selzer is the father of John A. Selzer and each
of them disclaims any beneficial ownership interest in each other's
holdings.
(5) Represents 163,917 shares of Common Stock issuable to Mr. Eiger upon the
exercise of options. Does not include any shares owned by Kabushi.
Jungfrau Trust, a Liechtenstein discretionary trust, is the sole
stockholder of Kabushi. The beneficiaries of Jungfrau Trust include the
children of Joseph Eiger. Jorvik Limited, a professional trust company,
is the trustee of the Jungfrau Trust and, in such capacity, exercises
sole voting and investment power over the shares of Common Stock held by
Jungfrau Trust. David Moorhouse is the Chief Executive Officer of Jorvik
Limited. Mr. Eiger disclaims any beneficial interest in the shares
beneficially owned by Jungfrau Trust and Kabushi.
(6) Represents 75,833 shares of Common Stock issuable to John A. Selzer upon
exercise of options. John A. Selzer is Benson A. Selzer's son and each
disclaims any beneficial ownership interest in the other's holdings. Mr.
Selzer owns 25,000 shares of Series A Convertible Preferred Stock which
are only reflected in the "Percent of Class Assuming Conversion" column
of the preceding chart. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS -- Private Placements."
(7) The address for Mr. Mowbray, Mr. Frabotta, Ms. McNabb, and Mr. LeClair is
4000 Ruffin Road, San Diego, CA 92123.
(8) Represents shares of Common Stock owned and 100,000 shares issuable upon
exercise of vested options.
(9) Mr. Ferris owns 500 shares of Series A Convertible Preferred Stock which
are only reflected in the "Percent of Class Assuming Conversion" column
of the preceding chart.
(10) Includes 20,000 shares of Common Stock issuable upon exercise of options,
except in the case of Ms. McNabb and Mr. LeClair in which there are
17,583 shares issuable to each upon exercise of their options.
(11) Includes the shares beneficially owned by Messrs. Benson A. Selzer,
Eiger, John A. Selzer, Warburton, Mowbray, Borer, Nevis, Collins,
Schlichting and Ferris, except as otherwise set forth herein (see Notes
1-10).
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<PAGE> 68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information relates to certain transactions between the
Company and related parties, including officers, directors and certain related
entities. It is the Company's policy that it will not enter into any
transactions with officers, directors or beneficial owners of more than 5% of
any class of voting securities, or their affiliates, on terms which are less
favorable to the Company than could be obtained from unaffiliated third parties,
and that all such transactions will require the approval of all of the members
of the Company's Audit Committee; provided, however that if at any time there
are fewer than two independent directors designated or approved by the
representative of the underwriters of the 1994 Offering on the Audit Committee,
such transactions will require the unanimous consent of all independent
directors on the Board of Directors.
GENERAL
In January 1992, the Principal Stockholders acquired a controlling
interest in the Company in exchange for the transfer of their controlling
interest in C-B/Murray and their option to acquire a controlling interest in
Mandel-Kahn, which the Company subsequently exercised. Following these
transactions, Benson A. Selzer, Joseph Eiger and John A. Selzer were appointed
senior executive officers and directors of the Company. During 1992 and 1993,
C-B/Murray and Mandel-Kahn experienced severe financial problems which
ultimately led to the liquidation of C-B/Murray under Chapter 11 of the U.S.
Bankruptcy Code and the liquidation of Mandel-Kahn.
In July 1992, the Principal Stockholders through Batra acquired General
Textiles. Selzer/Eiger implemented a strategic plan for the reorganization and
restructure of General Textiles, the first phase of which began with the filing
by General Textiles for Chapter 11 Reorganization. After Selzer/Eiger put into
place several major components of the strategic plan, General Textiles was sold
to the Company in December 1992 for a purchase price comprised primarily of
additional equity in the Company, including the right to receive up to $10.0
million of additional equity based on future earnings of General Textiles. Under
the continued direction of Selzer/Eiger, General Textiles successfully
negotiated the Reorganization Plan which became effective on May 28, 1993. In
connection therewith, the Company invested $3.0 million in General Textiles in
exchange for 100% of General Textiles' equity.
During the latter part of 1992 and in 1993, the Company required a
significant amount of financing, primarily to fund the Company's equity
investment in General Textiles, its efforts to turnaround C-B/Murray and
Mandel-Kahn and for ongoing operating expenses. In order to obtain this
financing, the Company sold a variety of debt and equity securities through a
series of private placements. Selzer/Eiger provided a significant amount of the
funds raised by the Company for these purposes. In addition, in order to
facilitate the Company's financing programs and enhance the Company's credit,
Benson A. Selzer and Joseph Eiger personally guaranteed certain loans of the
Company and granted put options to certain investors. Messrs. Selzer and Eiger
also were granted call options from certain investors. Because a registration
statement covering certain shares of Common Stock was filed with the Commission
in April 1994, by their terms such put options and call options were terminated.
As a result of the foregoing transactions, Selzer/Eiger hold a
significant amount of the outstanding Common Stock of the Company. In connection
with the 1994 Offering, the Principal Stockholders amended certain of their
arrangements with the Company by which they would be entitled to receive
additional Common Stock upon achievement by General Textiles of certain earnings
thresholds in exchange for the issuance upon completion of the 1994 Offering of
a reduced number of shares of Common Stock. In addition, Benson A. Selzer and
Joseph Eiger agreed with the 1994 Offering Representative to reduce their
compensation and transfer to the Company the right of an affiliated entity to
receive certain payments from General Textiles under the Management Agreement.
See "Directors and Executive Officers of the Registrant -- Employment Agreements
and Other Compensation."
There are no voting or other agreements between the Principal
Stockholders or between Benson A. Selzer and Joseph Eiger pursuant to which they
have agreed to act in concert regarding their respective investments in the
Company. However, Messrs. Selzer and Eiger have been business associates in a
number of ventures during the past 20 years and consult closely with each other
on decisions relating to the Company.
Set forth below is a description of the transactions summarized above and
certain other transactions involving Selzer/Eiger.
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<PAGE> 69
ACQUISITION OF GENERAL TEXTILES
In July 1992, Selzer/Eiger through Batra acquired its interest in General
Textiles from an unaffiliated investor group for a purchase price of $50,000 in
cash and the assumption of a $565,000 promissory note. In addition, Batra agreed
to pay an additional $415,960 upon the financial restructuring of General
Textiles if Selzer/Eiger retained control of General Textiles.
On December 31, 1992, the Company acquired from Batra, a company
controlled by the Principal Stockholders, approximately 79% of the common stock
of FBS Holdings, Inc. ("FBS Holdings"), the parent company of General Textiles,
and 88% of the Class B Preferred Stock of FBS Holdings, pursuant to an agreement
dated December 31, 1992 between Batra and the Company, as amended (the "GT
Acquisition Agreement"), for the following consideration:
(i) an agreement to pay $775,000 for reimbursement of
expenses incurred by Batra in connection with its acquisition of
General Textiles (the "Batra Reimbursement Expenses"), which amount
was paid through the issuance of 15% Units in May 1993, (see
"Private Placements -- 15% Units" below), and the assumption of
approximately $554,000 of obligations previously assumed by Batra
in connection with its acquisition of General Textiles;
(ii) $2.0 million face amount of the Company's then
authorized Series A convertible preferred stock, which was
subsequently converted into 193,795 shares of Common Stock; and
(iii) an agreement by the Company to pay to Batra up to an
additional $10.0 million, which amount was to be paid by issuing
additional shares of Common Stock based on General Textiles'
EBITDA, as defined in the agreement, during the twelve months ended
April 30, 1994 and April 30, 1995 (the "Batra Earnout"). The value
of Common Stock to be issued for each of these periods was to be
100% of the EBITDA earned during such period, subject to an
aggregate maximum of $10.0 million in value for the two periods.
The actual number of shares of Common Stock to be issued was to be
determined by dividing the EBITDA achieved by the average trading
price of the Common Stock during the 60 days prior to the date of
issuance. For the twelve months ended January 27, 1996, General
Textiles had achieved EBITDA, as defined in the agreement, of $10.7
million.
The Company determined to pay this consideration for the FBS Holdings
stock after Batra's stockholders submitted a proposal to the Company which was
reviewed and negotiated by the sole independent director on the Company's Board
of Directors with the assistance of an investment banking firm. Such firm issued
a fairness opinion with respect to the transaction.
In March 1993, for tax reasons, the acquisition of General Textiles was
restructured as a merger of Batra into a subsidiary of the Company and the
Company formed DRS Apparel for that purpose. As a result of the merger, Batra's
stockholders, including the Principal Stockholders and SEG Associates (a general
partnership, the partners of which were the Principal Stockholders and Michael
A. Gibbs, and which was subsequently dissolved) became entitled to the
consideration previously paid or payable to Batra. In January 1994, the
Principal Stockholders transferred to Michael A. Gibbs the right to receive 7.5%
of the Batra Earnout.
In connection with the 1994 Offering, the stockholders of Batra waived
their right to receive the Batra Earnout in consideration for the issuance of
500,000 shares of Common Stock to the stockholders of Batra and Mr. Gibbs, of
which 181,250 shares were issued to each of the Principal Stockholders.
ACQUISITION OF C-B/MURRAY,
MANDEL-KAHN AND RELATED TRANSACTIONS
On January 2, 1992, the Company acquired options to acquire: (i) the
common stock of CB/Camelot (the "CB Camelot Common Stock"), the parent company
of C-B/Murray (the "CB Common Stock Option"), for no additional consideration,
which common stock was held by the Principal Stockholders, (ii) the preferred
stock of CB/Camelot (the "CB/Camelot Preferred Stock") having a liquidation
preference of $2.3 million (the "CB Preferred Stock Option"), which preferred
stock was held by the Principal Stockholders, and (iii) an option to purchase
all of the common stock of Mandel-Kahn (the "Mandel-Kahn Option") held by
affiliates of Benson A. Selzer and
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<PAGE> 70
Joseph Eiger. These acquisitions were effected pursuant to a Stock Purchase
Agreement dated December 13, 1991, as amended (the "Purchase Agreement").
In consideration for these options and the redemption of $2.0 million
liquidation value of CB/Camelot Preferred Stock, the Company issued to each of
the Principal Stockholders 720,892 shares of Common Stock. The shares of Common
Stock issued to the Principal Stockholders represented in the aggregate in
excess of 50% of the issued and outstanding Common Stock at the time of
issuance. In March 1992, the Principal Stockholders transferred to Michael A.
Gibbs, then Senior Vice President and a Director of the Company, 108,134 shares
of Common Stock in consideration for promissory notes in the aggregate principal
amount of $153,750. Mr. Gibbs agreed to vote the shares of Common Stock which he
received as directed by the Principal Stockholders until such time as the notes
were paid in full. The Principal Stockholders were also granted certain
registration rights with respect to their shares.
Pursuant to the Purchase Agreement, the Principal Stockholders and Mr.
Gibbs agreed to classify an aggregate of 997,341 shares of Common Stock as
Incentive Shares which would be surrendered to the Company if it did not achieve
certain earnings thresholds for the twelve month periods ending April 30, 1993,
1994 and 1995. All of the Incentive Shares were surrendered to the Company and
retired.
SALE OF MANDEL-KAHN
On June 10, 1993, the Company sold the common stock of MKI Acquisition
(the parent of Mandel-Kahn) to MKI Holding Corp. ("MKI Holdings"), a
Selzer/Eiger company, in exchange for a promissory note pursuant to which MKI
Holdings was required to pay to the Company an amount equal to its remaining
investment value, if any, in Mandel-Kahn as of April 30, 1993. Subsequent to the
sale, the Company determined that the Company's remaining investment in
Mandel-Kahn had no value since all of the Company's investment had been written
off and, accordingly, no consideration was paid to the Company. Under the sale
agreement, the Company remained liable for up to $1.0 million under a guaranty
in favor of TCB, Mandel-Kahn's senior lender, and an indemnification agreement
with Joseph Eiger and Benson A. Selzer in respect of their $2.5 million guaranty
in favor of TCB. In addition, the Company remained liable for severance payments
of $150,000 to Mandel-Kahn's president. Following the sale, MKI Holdings decided
to cease operations and liquidated the assets of Mandel-Kahn. Mandel-Kahn's
assets were liquidated for less than the amount of its liabilities. The proceeds
of the liquidation were used to repay outstanding secured indebtedness of
Mandel-Kahn and Selzer/Eiger did not receive any of the proceeds thereof.
In December 1993, the Company refinanced its obligation to TCB through
the issuance of a $1.0 million principal amount promissory note which bears
interest at 8.5% per year and is payable over three years commencing June 1994,
and $2.5 million of the Company's Series C Convertible Preferred Stock. In
connection therewith, Benson A. Selzer and Joseph Eiger agreed with TCB to
repurchase, at the option of TCB, the $2.5 million liquidation value of Series C
Convertible Preferred Stock in incremental amounts between April 1996 and July
1999. In addition, TCB granted an option to each of Messrs. Selzer and Eiger to
purchase 50% of its Series C Convertible Preferred Stock at any time at its
liquidation value and granted each of Messrs. Selzer and Eiger a proxy to vote
its Series C Convertible Preferred Stock. Pursuant to an agreement dated May 11,
1994, the Company purchased all of TCB's shares of Series C Convertible
Preferred Stock upon completion of the 1994 Offering for a purchase price of
$2.5 million ($100 per share), plus accrued and unpaid dividends.
MANDEL-KAHN SETTLEMENT
In January 1996, the Company entered into a settlement of an action
which had been brought against certain of its affiliates, and certain members of
its management in September 1993 in the District Court of Harris County, Texas
by former stockholders of Mandel-Kahn arising out of the acquisition of
Mandel-Kahn and its subsequent curtailment of operations and liquidation. See
"Management's Discussion And Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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<PAGE> 71
EMPLOYMENT, MANAGEMENT AND CONSULTING AGREEMENTS
For description of employment agreements between the Company and
certain officers, an advisory agreement with a Director of the Company, and the
agreement of a Selzer/Eiger entity to transfer certain management fees and bonus
payments to the Company, see "Directors and Executive Officers -- Employment
Agreements and Other Compensation."
SHARE REPURCHASE
In December 1995, the Company's Board of Directors approved the Company's
purchase of 22,916.66 shares of Common Stock for a purchase price of $140,000
and the subsequent retirement of such shares in connection with the settlement
between American Specialty Equipment Profit Sharing Plan, John A. Selzer and
Joseph Eiger.
REGULATION S OFFERING
A Director of the Company, Barton P. Ferris, Jr., is a Managing
Director of Commonwealth Associates, the Placement Agent for the 1996 Offering.
In addition to a commission on the securities sold in the 1996 Offering, Mr.
Ferris received warrants to purchase 16,335 shares of Common Stock of the
Company at an exercise price of $1.875 per share, exercisable commencing
December 9, 1996.
Prior to the execution of the Stock Purchase Agreement, there was no
material relationship between the Company and Factory 2-U or between the
directors and officers of the Company and the directors and officers of Factory
2-U.
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<PAGE> 72
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 26.
2) Financial Statement Schedules; Financial Statement Schedules
II, VIII and X filed as part of this report are listed in the
index to financial statements on page 26.
3) 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)
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))
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)
42
<PAGE> 73
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)
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))
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))
10.9(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)
43
<PAGE> 74
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))
10.16 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))
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
Trustees (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)
23.1 Consent of KPMG Peat Marwick LLP
================================================================================
44
<PAGE> 75
(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 the fiscal
year ended April 30, 1993.
(3) Incorporated by reference to the Registrant's Form 10-K for the 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.
(b) Reports on Form 8-K. The Registrant filed a Form 8-K and Form 8-K/A
dated November 28, 1995 reporting the acquisition of Capin Mercantile
Corporation (renamed Factory 2-U, Inc.) including financial statements
of Factory 2-U as of and for the years ended December 31, 1994,
December 31, 1993 and December 31, 1992, and pro forma financial
statements. In addition, a Form 8-K dated November 27, 1995 was filed
by the Registrant reporting the adoption of a Shareholders Rights Plan.
45
<PAGE> 76
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/ John A Selzer
-------------------------
John A. Selzer
Chief Executive Officer and President
Dated: April 26, 1996
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John A. Selzer Chief Executive Officer, April 26, 1996
John A. Selzer President and Director
(Principal Executive Officer)
/s/ Benson A. Selzer Chairman and Director April 26, 1996
- -----------------------------------------
Benson A. Selzer
/s/ Joseph Eiger Vice Chairman, Executive Vice President April 26, 1996
- ----------------------------------------- and Director
Joseph Eiger
/s/ Francis G. Warburton Director April 26, 1996
- -----------------------------------------
Francis G. Warburton
/s/ William W. Mowbray Chief Financial Officer and April 26, 1996
- -----------------------------------------
William W. Mowbray Director (Chief Financial and
Accounting Officer); President
and Chief Executive Officer of
General Textiles and Factory 2-U, Inc.
/s/ H. Jurgen Schlichting Director April 26, 1996
- -----------------------------------------
H. Jurgen Schlichting
/s/ Joseph J. Collins Director April 26, 1996
- -----------------------------------------
Joseph J. Collins
/s/ John J. Borer III Director April 26, 1996
- -----------------------------------------
John J. Borer III
/s/ Edwin C. Nevis Director April 26, 1996
- -----------------------------------------
Edwin C. Nevis
/s/ Barton P. Ferris, Jr. Director April 26, 1996
- -----------------------------------------
Barton P. Ferris, Jr.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Family Bargain Corporation:
We consent to incorporation by reference in the registration statement (No.
333-1066) on Form S-8 of Family Bargain Corporation and subsidiaries of our
report dated April 23, 1996, relating to the consolidated balance sheets of
Family Bargain Corporation and subsidiaries as of January 28, 1995 and January
27, 1996, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the nine months ended January 29, 1994 and
the twelve months ended January 28, 1995 and January 27, 1996, which report
appears in the January 27, 1996, annual report on Form 10-K of Family Bargain
Corporation.
KPMG Peat Marwick LLP
San Diego, California
April 23, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR THE TWELVE MONTHS ENDED JANUARY
27, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-27-1996
<PERIOD-START> JAN-29-1995
<PERIOD-END> JAN-27-1996
<CASH> 1958
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 25874
<CURRENT-ASSETS> 30190
<PP&E> 13501
<DEPRECIATION> 592
<TOTAL-ASSETS> 87152
<CURRENT-LIABILITIES> 30376
<BONDS> 0
0
26981
<COMMON> 7
<OTHER-SE> 729
<TOTAL-LIABILITY-AND-EQUITY> 87152
<SALES> 179820
<TOTAL-REVENUES> 179820
<CGS> 117188
<TOTAL-COSTS> 117188
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3675)
<INCOME-PRETAX> 1478
<INCOME-TAX> 0
<INCOME-CONTINUING> 1478
<DISCONTINUED> (500)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 978
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
