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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A-2
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL PERIOD ENDED JANUARY 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD TO
COMMISSION FILE NUMBER 0-16309
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FAMILY BARGAIN CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
DELAWARE 51-0299573
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
4000 RUFFIN ROAD 92123
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of Principal Offices)
</TABLE>
(Registrant's Telephone Number, Including Area Code)
(619) 627-1800
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS: REGISTERED:
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
SERIES A 9 1/2% CUMULATIVE CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE
(Title of Class)
------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or fore such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES /X/ NO / /
At April 17, 1998 the aggregate market value of the voting stock of the
Registrant held by non-affiliates was approximately $12,336,000.
At April 17, 1998 the Registrant had outstanding 4,929,122 shares of Common
Stock, $0.01 par value per share.
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FORM 10-K INDEX
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PART I
Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 8
Item 3. Legal Proceedings............................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders........................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 8
Item 6. Selected Financial Data....................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 11
Item 8. Financial Statements and Supplementary Data................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 21
Item 11. Executive Compensation........................................................ 23
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 27
Item 13. Certain Relationships and Related Transactions................................ 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 32
</TABLE>
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PART I
ITEM 1. BUSINESS
THE COMPANY
Through its wholly-owned subsidiaries, General Textiles and Factory 2-U,
Inc. ("Factory 2-U"), Family Bargain Corporation (the "Company"), at January 31,
1998, operated 166 off-price retail apparel and home goods stores under the
names Family Bargain Center and Factory 2-U in Arizona, California, Nevada, New
Mexico, Oregon, Texas and Washington. The Company acquired General Textiles in
1993, while General Textiles was operating under Chapter 11 of the U.S.
Bankruptcy Code. The Company purchased Factory 2-U in November 1995.
The Company's 127 Family Bargain Center and 39 Factory 2-U stores sell
primarily first quality, in-season clothing for men, women and children and home
goods at retail prices which generally are lower than the prices of competing
discount and regional off-price stores. The Company's stores sell merchandise at
bargain prices by purchasing in-season, excess inventory and close-out
merchandise at substantially discounted wholesale prices and by setting retail
prices which pass along the savings to customers.
Typical customers of the Company's stores are low-income families, including
agricultural, service and other blue-collar workers, a significant portion of
whom are of Hispanic origin or members of other ethnic groups. The Company's
store merchandising selection, everyday low price strategy and store format are
designed to reinforce the concept of value and enhance the customers' shopping
experience while maximizing inventory turns.
Family Bargain Centers, which average 11,950 square feet, and Factory 2-U
stores, which average 17,357 square feet, are designed in a self-service format
that affords easy access to merchandise displayed on bargain tables, hanger
racks and open shelves. Stores are stocked with new merchandise at least weekly.
Prices are clearly marked, often with a comparable retail price. Most stores
display signs in English and Spanish and are staffed with bilingual personnel.
The playing of locally popular music, the use of brightly colored pennants and
occasional festive outdoor promotions enhance store atmosphere.
OPERATIONS
OPERATING STRATEGY
The Company seeks to be the leading off-price apparel and home goods
retailer to lower income customers in the markets it serves. The major elements
of its operating strategy include:
Provide First Quality Merchandise at Bargain Prices: The Company's
stores sell first quality merchandise at bargain prices by purchasing
in-season, excess inventory and close-out merchandise at substantially
discounted wholesale prices and by setting retail prices which pass along
the savings to customers.
Target Under-Served Market Segments, Including the Hispanic Market: The
Company's stores target customers who are under-served in many markets.
Typical customers are low-income families, including agricultural, service
and other blue collar workers, a significant portion of whom are of Hispanic
origin or members of other ethnic groups. The Company's store merchandise
selection is a product of purchasing and marketing programs tailored to the
purchasing patterns of customers in each store.
Maximize Inventory Turns: General Textiles and Factory 2-U emphasize
inventory turn in their merchandise and marketing strategies. Merchandise
presentation, an everyday low price strategy, frequent store deliveries, and
advertising programs all target rapid inventory turn, which management
believes leads to increased profits and efficient use of capital.
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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 an overall
focus on cost controls.
EXPANSION PLANS
Opening of New Stores: The Company plans to increase its store count by 3 to
169 stores in the fiscal year ending January 30, 1999 (fiscal 1998). The new
stores will be opened in markets in which the Company currently operates. During
fiscal 1997, the Company opened 23 new stores and closed 7 stores. During the
period from January 31, 1998 through April 4, 1998, four stores closed and no
new stores were opened. Average store opening expenses for equipment, fixtures,
leasehold improvements and preopening costs are approximately $195,000. Average
initial inventory for a new store is approximately $275,000. Generally, during
the two to three month grand opening period, a new store achieves sales in
excess of sales of an average comparable mature store and, within six months,
generates sales consistent with comparable mature store levels.
Renovation and Relocation Program: The Company plans to renovate and
relocate stores; relocation will be considered as superior sites become
available in their markets. Store renovations generally include installing new
fixtures, redesigning layouts and refurbishing floors and walls. The cost to
renovate or relocate a store is approximately $50,000. During fiscal 1997, the
Company renovated twenty stores and relocated one store.
CUSTOMERS
The Company's primary customers are families with annual household income of
under $25,000, many of whom are employed in the agricultural sector or are
blue-collar workers. A significant portion of the Company's customers is of
Hispanic origin or members of other minority ethnic groups including African-
Americans, Asians and Native Americans. The Company estimates, that
approximately 50% to 55% of its customers are of Hispanic origin. According to
the U.S. Bureau of the Census, the Hispanic population in the states where the
Company's stores are located (Arizona, California, Nevada, New Mexico, Oregon,
Texas and Washington) grew from 5.7 million in 1980 to 9.4 million in 1990, a
65% increase. The overall population for these states grew by 24% in the same
period. The Hispanic population in the states where the Company's stores are
located is projected to grow by 25%, from 10.6 million to 13.2 million, in the
period from 1993 to 2000 (according to the U.S. Bureau of the Census). The
overall population for these states is projected to grow by 12% in the same
period. The Census projections through 2020 reflect the Hispanic population in
these states continuing to grow at approximately twice the rate of the total
population.
PURCHASING
The Company purchases merchandise from domestic manufacturers, jobbers,
importers and other vendors. Payment terms are typically net 30 days. The 10
largest vendors supply approximately 12% of the Company's merchandise. The
Company continually adds new vendors and does not maintain long-term or
exclusive purchase commitments or agreements with any vendor. The Company has
generally not had difficulty locating and purchasing appropriate apparel for its
stores. Management believes that there are a substantial number of additional
sources of supply of first quality, off-price apparel goods and expects that it
will be able to meet its increased inventory needs as the Company grows. The
Company's general merchandise manager, merchandise managers and buyers, who
average over 10 years of apparel and home goods industries experience, seek to
purchase in-season goods and first-run and last-run merchandise at substantial
discounts to normal wholesale pricing.
In-Season Goods. Unlike traditional department stores and discount
retailers, which primarily purchase merchandise in advance of the selling season
(for example, back-to-school clothing is purchased by
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March), the Company purchases approximately 70% of its merchandise in-season.
In-season purchases generally represent closeouts of vendors' excess inventories
remaining after the traditional wholesale selling season and are often created
by other retailers' order cancellations. Such merchandise is typically available
at prices below wholesale. Management believes that such in-season buying
practices are well suited to the Company's customers, who tend to make purchases
on an as-needed basis later into a season. The Company's in-season buying
practice is facilitated by its ability to process and ship merchandise through
its distribution center to its stores, usually within two or three days of
receipt from the vendor, and to process a large number of relatively small
purchase orders. Management believes that General Textiles and Factory 2-U are
desirable customers for vendors seeking to liquidate inventory because they can
take immediate delivery of large quantities of in-season goods. Furthermore, the
Company rarely requests markdown concessions, advertising allowances or special
shipping and packing procedures, insisting instead on the lowest possible price.
First-run and Last-run Merchandise. Approximately 10% of the Company's
purchases consist of "first-run" and "last-run" merchandise. To ensure product
consistency, manufacturers typically produce a preliminary or "first run" of an
item. Additionally, manufacturers will produce "last runs" of certain items to
fill out production schedules, maintain stock for potential customer reorders,
convert excess fabric to finished goods and keep machinery in use. Manufacturers
occasionally designate such first and last runs as "irregulars" to differentiate
such goods from full price merchandise or to indicate that such merchandise may
contain minor imperfections (which do not affect the wear-ability of the items),
and typically such merchandise may be purchased at prices below wholesale.
Manufacturers ship goods directly to the Company's San Diego distribution
center or, in the case of East Coast vendors, to the Company through its East
Coast freight consolidator. Goods received at the Company's warehouse are
generally shipped to its stores using independent trucking companies within two
to three days of their arrival. The Company generally does not store goods from
season to season at its warehouse.
MERCHANDISING AND MARKETING
The Company's merchandise selection, pricing practices and store formats are
designed to reinforce the concept of value and maximize customer enjoyment of
the shopping experience. The Company's stores offer their customers a diverse
selection of primarily first quality, in-season merchandise at prices which
generally are lower than those of competing discount and regional off-price
stores in their local markets. Nearly all of their merchandise carries brand
name labels, including nationally recognized brands. The Company uses an
everyday low price strategy. For the Family Bargain Center chain, women's and
children's apparel each account for approximately 30% of sales, men's apparel
accounts for approximately 25% of sales, with the remainder, approximately 15%,
consisting of footwear, domestic items, home goods and toys. For the Factory 2-U
chain, men's, women's and children's apparel each account for approximately 20%
of sales, domestic items account for approximately 22% of sales, with the
remainder, approximately 18% of sales, consisting of footwear, home goods and
toys.
The Company delivers new merchandise to its stores at least once per week to
encourage frequent shopping trips by its customers and to maximize the rate of
inventory turn. As a result of its purchasing practices, store inventory may not
always include a full range of colors, sizes and styles in a particular item.
Management believes, however, that price, quality and product mix is more
important to the Company's customers than the availability of a specific item at
a given time.
The Company emphasizes inventory turn in its merchandising and marketing
strategy. Merchandise presentation, everyday low prices, frequent store
deliveries, staggered vendor shipments, promotional advertising, store-tailored
distribution and prompt price reductions on slow moving items all target rapid
inventory turn. The Company believes that the pace of its inventory turn leads
to increased profits, reduced inventory markdowns, efficient use of capital and
customer urgency to make purchase decisions.
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The Company's administrative headquarters receives daily store sales and
inventory information from point-of-sale computers located at each of its
stores. This data is reported by stock keeping unit (or "SKU"), permitting
management to tailor purchasing and distribution decisions. A chain-wide
computer network also facilitates communications between the administrative
headquarters and stores, enabling management to provide store management with
immediate pricing and distribution information.
The Company's stores are characterized by easily accessible merchandise
displayed on bargain tables, hanger racks and open shelves, brightly colored
pennants and signs and the playing of locally popular music. Prices are clearly
marked, usually displayed in whole dollars. A comparative retail-selling price
is often noted on price tags. Many stores display signs in English and Spanish
and are staffed with bilingual store personnel. Stores have "gala" grand
openings and, on occasion, feature outdoor sidewalk promotions with live music
and other festive activities. The Company's major advertising vehicle is the use
of a full-color print tab showing actual photos of its merchandise. Print media
is delivered to the consumers in newspaper inserts and marriage-mail drops.
Other advertising programs include radio, television and outdoor promotional
activities.
The Company's stores emphasize customer satisfaction to develop customer
loyalty and generate repeat sales. If a customer is not completely satisfied
with any purchase, the Company's stores will make a full refund or exchange.
Most sales are for cash, although checks and credit cards are accepted. The
Company does not issue its own credit card, but does offer a layaway program.
The layaway program is an important means for the Company's customers, many of
who do not possess credit cards, to purchase goods over time.
Approximately 60% of the Company's sales occur in its third and fourth
quarters, during the back-to-school (August and September) and Christmas
(November and December) seasons. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Seasonality and Quarterly
Fluctuations."
THE STORES
As of April 4, 1998 the Company operated 162 stores located in seven western
states. Stores are primarily located in rural and lower income suburban
communities and, to a lesser extent, in metropolitan areas. Most stores are
located in strip shopping centers, where occupancy costs are most favorable. As
of January 31, 1998, the number of store locations was as follows:
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STRIP
STATE CENTER DOWNTOWN OTHER
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California.................................................................... 71 15 6
Arizona....................................................................... 29 4 0
Washington.................................................................... 9 2 2
New Mexico.................................................................... 8 0 1
Nevada........................................................................ 7 0 0
Oregon........................................................................ 7 0 1
Texas......................................................................... 3 1 0
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134 22 10
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STATE TOTAL
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California.................................................................... 92
Arizona....................................................................... 33
Washington.................................................................... 13
New Mexico.................................................................... 9
Nevada........................................................................ 7
Oregon........................................................................ 8
Texas......................................................................... 4
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166
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Family Bargain Centers range in size from 4,500 square feet to 34,846 square
feet, averaging 11,950 square feet. Factory 2-U stores range in size from 8,064
square feet to 40,567 square feet, averaging 17,357 square feet. Management
continually reviews the ability of stores to provide positive contributions to
the Company's operating results and may elect to close stores that do not meet
performance criteria. Costs associated with closing stores, consisting primarily
of the recognition of remaining lease obligations and provisions to re-value
assets to net realizable value, are charged to operations during the fiscal year
in which the commitment is made to close a store.
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The Company's stores typically employ one store manager, two assistant store
managers, and seven to ten sales associates, most of whom are part-time
employees. New store managers are trained in all aspects of store operations
through a management-training program. Other store personnel are trained on
site. The Company often promotes experienced assistant store managers to fill
open manager positions.
The Company's store managers participate in a bonus plan in which they are
awarded bonuses upon achieving plan objectives. The Company believes that the
bonus program is an important incentive for its key employees, helps reduce
employee turnover and lowers costs.
Management believes store opening and operating costs are low compared to
those of similar retailers due to the selection of low rent store locations, a
self-service format, use of basic fixtures and use of part-time employees
whenever possible. The Company generally leases previously occupied sites on
terms that it believes are more favorable than those available for newly
constructed facilities. After signing a store lease, a store opening team
prepares the store for opening by installing fixtures, signs, bargain tables,
racks, dressing rooms, checkout counters, cash register systems and other items.
The district manager and store manager arrange the merchandise according to the
standard store layout and train new personnel before and after the store is
opened. The Company selects store sites based on demographic analysis of the
market area, sales potential, local competition, occupancy expense, operational
fit and proximity to existing store locations. Store opening preparations
generally take up to two weeks.
The Company, General Textiles and Factory 2-U maintain commercial liability,
fire, theft, business interruption and other insurance policies.
COMPETITION
The Company operates in a highly competitive marketplace. The Company's
stores compete with large discount retail chains such as Wal-Mart, K-Mart,
Target and Mervyn's, and with regional off-price chains, such as MacFrugal's,
some of which have substantially greater resources than the Company. They also
compete with independent and small chain retailers and flea markets (also known
as "swap meets") which serve the same low and low-middle income market as the
Company. Management believes that the principal competitive factors in the
Company's markets are price, quality and site location and that the Company is
well positioned to compete on the basis of these factors.
EMPLOYEES
As of April 4, 1998 the Company employed 3,023 people, of whom 2,773 were
store employees and store field management (1,760 of whom were part-time), 192
were executives and administrative employees and 58 were warehouse employees.
None of the Company's employees is subject to any collective bargaining
agreements and management considers its relations with its employees to be good.
TRADEMARKS
Except for the trade names "Family Bargain Center" and "Factory 2-U", which
are federally registered trademarks, the Company, General Textiles and Factory
2-U do not use any other material trademarks. The Company is not aware of any
infringing uses that could materially impair the use of its trademarks.
GOVERNMENT REGULATION
The Company's operations are subject to various federal, state and local
laws, regulations and administrative practices affecting its business, and the
Company must comply with provisions regulating various matters, including equal
employment and minimum wages. The Company believes it is in substantial
compliance with all material federal, state and local laws and regulations
governing its operations and has obtained all material licenses and permits
required for the operation of its business.
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The Company believes that the compliance burdens and risks relating to such laws
and regulations do not have a material adverse effect on the Company.
ITEM 2. PROPERTIES
As of April 4, 1998 the Company operated 162 retail stores located in
Arizona, California, Nevada, New Mexico, Oregon, Texas and Washington, under
various operating leases with third parties. The leases are separately
negotiated and are generally not uniform. The store locations include strip
centers, downtown business districts, and stand alone sites. Typical lease terms
are for five years with renewal options in five year increments. Approximately
two-thirds of the leases are "triple net leases" under which the Company is
required to reimburse landlords for insurance, real estate taxes and common area
maintenance costs. Some leases require the Company to pay a minimum monthly rent
and a percentage of sales in excess of a certain sales level. The current
estimated annual rent expense for the 166 stores open at January 31, 1998 is
approximately $17.3 million.
The Company's headquarters are located in a 269,000 square foot facility at
4000 Ruffin Road, San Diego, California. This facility consists of 37,000 square
feet of office space, an 8,000 square foot retail store and a 224,000 square
foot warehouse and distribution center. This facility is leased for a term of 12
years expiring in September 2005. The lease provides for annual base rent at an
average of approximately $1.5 million over the lease term.
ITEM 3. LEGAL PROCEEDINGS
The Company is at all times subject to pending and threatened legal actions
that arise out of the normal course of business. In the opinion of management,
based in part on the advice of legal counsel, the ultimate disposition of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Series A Cumulative Convertible Preferred
Stock (the "Series A Preferred Stock") are quoted on the Nasdaq SmallCap Market.
The table below sets forth certain information with respect to the high and low
closing bid prices (rounded to the nearest hundredth) of the Company's Common
Stock and Series A Preferred Stock during the years ended January 31, 1998
(fiscal 1997) and February 1, 1997 (fiscal 1996), and the subsequent interim
period, as quoted by Nasdaq. These
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quotations represent inter-dealer prices without retail markups, markdowns or
commissions and may not be representative of actual transactions.
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SERIES A
COMMON STOCK PREFERRED STOCK
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HIGH LOW HIGH LOW
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FISCAL 1996
First Quarter................................................................... $ 3.22 $ 1.56 $ 8.50 $ 5.63
Second Quarter.................................................................. $ 3.13 $ 1.75 $ 8.38 $ 6.88
Third Quarter................................................................... $ 2.56 $ 1.38 $ 7.44 $ 6.75
Fourth Quarter.................................................................. $ 2.34 $ 1.31 $ 8.38 $ 6.13
FISCAL 1997
First Quarter................................................................... $ 3.09 $ 2.00 $ 9.38 $ 7.75
Second Quarter.................................................................. $ 2.75 $ 1.63 $ 9.00 $ 8.00
Third Quarter................................................................... $ 1.94 $ 0.50 $ 8.44 $ 6.69
Fourth Quarter.................................................................. $ 1.75 $ 1.00 $ 7.94 $ 6.25
FISCAL YEAR ENDING JANUARY 30, 1999
First Quarter (through April 17, 1998).......................................... $ 3.09 $ 1.28 $ 9.63 $ 7.13
</TABLE>
The closing bid prices of the Common Stock and the Series A Preferred Stock
on April 17, 1998 as reported on the Nasdaq SmallCap Market were $3.09 per share
and $9.63 per share, respectively.
As of January 31, 1998, the number of record holders of Common Stock and
Series A Preferred Stock were approximately 341 and 88, respectively. These
numbers do not include an indeterminate number of stockholders whose shares are
held by financial institutions in "street name." The Company has estimated
beneficial holders of its Common Stock to be more than 3,000 and the beneficial
holders of its Series A Preferred Stock to be more than 350.
The Company paid quarterly dividends on its Series A Preferred Stock
aggregating $3.5 million for fiscal 1997. The Company has never paid cash
dividends on its Common Stock and does not anticipate paying cash dividends on
its Common Stock in the foreseeable future. The declaration and payment of any
cash dividends on its Common Stock in the future will be determined by the Board
of Directors in light of conditions then existing, including the Company's
earnings, financial condition and cash requirements.
On February 20, and March 13, 1997, the Company issued 5,000 and 4,600
shares, respectively, of its Series B Junior Convertible, Exchangeable Preferred
Stock (the "Series B Preferred Stock") for aggregate proceeds of $9.6 million.
On March 20, 1997 and June 16, 1997, the Company issued 1,865 and 250 shares,
respectively, of Series B Preferred Stock to certain members of management in
return for $2.1 million aggregate principal amount of full-recourse notes
collateralized by the stock. Each of the issuances was made in reliance on the
exemption from the registration requirement of the Securities Act of 1933, as
amended contained in Section 4(2) of that Act for a "transaction by an issuer
not involving any public offering."
Although the Series B Preferred Stock is entitled to participate in any
dividends paid to holders of the Company's common stock, it is not entitled to a
preferential dividend until January 2002. Beginning in 2002, the Company is
obligated to pay a dividend to holders of the Series B Preferred Stock in the
amount of $60 per share subject to increases of $20 per share every year
thereafter until 2005 up to a maximum of $120 per share. Annual cash dividends
may be required prior to 2002 or in amounts greater than otherwise required
prior to or after 2002 in the event the Company defaults on its revolving credit
facilities or declares a dividend on its common stock.
The Company recorded non-cash dividends on the Series B preferred stock
using the effective interest method to recognize the dividend ratably over the
estimated period in which the Series B preferred stock will be outstanding. For
fiscal 1997, such accreted dividends totaled approximately $2.7 million. See
Note 11 to Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected financial data for the Company and its
subsidiaries. In January 1994, the Company changed its fiscal year end to the
Saturday closest to January 31 to conform its fiscal year end to that of General
Textiles. All of the selected financial data, except for Operating Data, are
derived from audited financial information. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Financial Statements and Supplementary
Data."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
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JANUARY 31, FEBRUARY 1, JANUARY 27, JANUARY 28, JANUARY 29,
1998 1997(2) 1996 1995 1994(1)
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<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
Statement of Operations Data
Net sales.................................... $ 300,592 $ 252,165 $ 179,820 $ 146,520 $ 96,496
Operating income (loss)...................... 5,097 (27,939) 5,153 2,608 4,547
Income (loss) from continuing operations..... (129) (36,564) 1,478 (354) 1,113
Net income (loss)............................ (129) (37,390) 978 2,656 1,882
Dividends on series A preferred stock........ 3,456 3,509 3,040 2,030 200
Dividends on series B preferred stock........ 2,661 -- -- -- --
Net income (loss) applicable to common
stock...................................... (6,246) (40,899) (2,062) 626 1,682
Weighted average shares outstanding.......... 4,901 4,507 4,006 4,008 3,070
Net income (loss) from continuing operations
applicable to common stock................. (1.27) (8.89) (0.39) (0.59) 0.30
Net income (loss) per common share(3)........ (1.27) (9.07) (0.51) 0.16 0.55
Diluted net income (loss) per common
share(3)................................... (1.27) (9.07) (0.51) 0.07 0.47
Operating Data
Number of stores............................. 166 150 131 97 81
Total selling square footage................. 1,788,000 1,567,000 1,367,000 867,000 702,000
Sales per square foot........................ 180 172 161 187 133
Comparable store sales growth................ 3.4% 5.3% 2.8% 0.9% 17.2%
Balance Sheet Data
Working capital (deficit).................... $ (2,749) $ 248 $ 4,314 $ 10,098 $ 5,731
Total assets................................. 84,817 80,669 87,152 59,905 52,279
Long-term debt and revolving credit notes,
including current portion.................. 29,076 37,894 30,120 17,267 30,491
Stockholders' equity......................... 17,218 11,208 27,717 29,812 10,089
</TABLE>
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NOTES TO SELECTED FINANCIAL DATA
(1) 39 weeks.
(2) 53 weeks.
(3) In December 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". The statement specifies the
computation, presentation, and disclosure requirements for earnings per
share (EPS) and diluted earnings per share (DEPS). The statement requires
retroactive adoption for all prior periods presented.
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Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision and (c) revising the
contingent share provisions and the supplemental EPS data requirements.
The computation of diluted EPS is similar to the computation of basic EPS
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. In addition, in computing the dilutive effect of
convertible securities, the numerator is adjusted to add back (a) any
convertible preferred dividends and (b) the after-tax amount of interest
recognized in the period associated with any convertible debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
information set forth under "Selected Financial Data" and "Financial Statements
and Supplementary Data."
GENERAL
During the past two fiscal years, a number of events occurred which have had
a significant impact on the financial condition of the Company and its
subsidiaries. In January 1997, an investment group (the "TCR Investors") advised
by Three Cities Research, Inc. ("TCR") obtained a controlling equity interest,
approximately 79% after all Series B transactions, in the Company when the TCR
Investors acquired all of the Common and Series A Preferred Stock held by the
former chairman, vice chairman and chief executive officer of the Company (the
"Former Executives") and the Company issued 22,000 shares of newly authorized
Series B Preferred Stock to the TCR Investors (the "1997 Private Placement").
Subsequent to the close of fiscal 1996, the Company issued an additional 11,715
shares of the Series B Preferred stock to TCR Investors, directors and
management of the Company. The Series B Preferred Stock has voting rights
equivalent to the number of common shares into which it is convertible.
In connection with the change in control, three former directors resigned
from the Board of Directors and three managing directors of TCR were appointed
to serve on the Company's Board. The person then serving as President and Chief
Executive Officer of General Textiles and Factory 2-U, who was a director of the
Company, was appointed President and Chief Executive Officer of the Company. In
February 1997, the Company's Board of Directors elected three new directors, one
of whom was elected Chairman of the Board of Directors. In August 1997, the
President and Chief Executive Officer of the Company entered into a separation
agreement and resigned from all positions with the Company (the "Former
President and CEO"). In March 1998 the Company appointed a new President and
Chief Executive Officer of General Textiles and Factory 2-U, and he was elected
a member of the Board of Directors of the Company.
During fiscal 1997, the Company shifted its focus from expanding its store
base to improving the operating performance of existing stores. The Company
expects to devote substantially all of fiscal 1998 to continuing to improve
operating results and upgrading its information systems.
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RESULTS OF OPERATIONS
The Company defines its fiscal year by the calendar year in which most of
the activity occurs (e.g. the year ended January 31, 1998 is referred to as
fiscal 1997). The following table sets forth selected statement of operations
data expressed as a percentage of net sales for the period indicated:
<TABLE>
<CAPTION>
FISCAL YEAR 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Net sales...................................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................................. 64.9 67.8 65.2
--------- --------- ---------
Gross profit................................................................. 35.1 32.2 34.8
Selling and administrative expenses............................................ 32.1 34.8 31.2
Amortization of intangibles.................................................... 0.7 0.8 0.8
Special charges................................................................ 0.6 3.6 --
Provision for goodwill impairment.............................................. -- 3.3 --
Write off of deferred offering costs........................................... -- 0.8 --
--------- --------- ---------
Operating income (loss)...................................................... 1.7 (11.1) 2.8
Interest expense............................................................... 1.7 3.4 2.0
--------- --------- ---------
Income (loss) from continuing operations before income taxes................... (0.0) (14.5) 0.8
Income taxes................................................................... -- -- --
Discontinued operations, net of income tax benefit............................. -- (0.3) (0.3)
--------- --------- ---------
Net income (loss)............................................................ 0.0 (14.8) 0.5
Preferred dividends.......................................................... (2.1) (1.4) (1.7)
--------- --------- ---------
Net loss applicable to common stock.......................................... (2.1%) (16.2%) (1.2%)
--------- --------- ---------
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Fiscal 1997 was a 52 week year and fiscal 1996 was a 53 week year. For
purposes of determining comparable store sales, fiscal 1996 was adjusted to
reflect a comparable 52 week year. As of January 31, 1998, the Company operated
166 stores compared to 150 as of February 1, 1997.
Net sales were $300.6 million for fiscal 1997 compared to $252.2 million for
fiscal 1996, an increase of $48.4 million. Comparable store sales increased $7.7
million, or 3.4%, in fiscal 1997, while new and noncomparable (open for less
than one year) stores generated $40.7 million of sales.
Gross profit was $105.6 million for fiscal 1997 compared to $81.3 million in
fiscal 1996, an increase of $24.3 million. The increase in gross profit was due
to the opening of new stores, an increase in comparable store sales and an
increase in gross profit as a percentage of sales. As a percentage of sales,
gross profit was 35.1% in fiscal 1997 compared to 32.2% in fiscal 1996. The
increase in gross profit as a percentage of sales was a result of lower
inventory shrinkage due to improved inventory controls and higher initial
markups in fiscal 1997 compared to fiscal 1996.
Selling and administrative expenses were $96.5 million for fiscal 1997
compared to $87.8 million for fiscal 1996, an increase of $8.7 million. As a
percentage of sales, selling and administrative expenses were 32.1% for fiscal
1997 compared to 34.8% in fiscal 1996. The decrease in selling and
administrative expenses as a percentage of sales was primarily attributable to
moving the Company's executive offices from New York City to San Diego and
economies associated with increased sales volume.
Amortization of intangibles consists of amortization of excess of cost over
net assets acquired and agreements not to compete. The noncompete agreements are
the result of two transactions discussed in the following paragraph.
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In January 1997, the Former Executives entered into an agreement not to
compete with the Company until June 2000 in return for $1.8 million in secured
promissory notes that were paid in January 1998. In August 1997, the Former
President and CEO entered into an agreement not to compete with the Company
until January 2001 in return for payments totaling $970,000.
The Company recognized special charges to operations in the aggregate amount
of $1.8 million in fiscal 1997 and $9.2 million during fiscal 1996. The fiscal
1997 amount pertains to the separation from the Company of the Former President
and CEO, whereas the fiscal 1996 charges relate to terminating contracts with
the Former Executives, former directors and consultants and closure of the
former executive offices in New York City in connection with the change in
control. At the end of fiscal 1997, future payments totaling $1.6 million
related to special charges in both fiscal 1996 and 1997 were included in accrued
liabilities.
Interest expense was $5.2 million in fiscal 1997 compared to $8.6 million
for fiscal 1996, a decrease of $3.4 million. The decrease was attributable to
decreases in the amortization of debt discount related to the Bankruptcy Debt of
General Textiles (see Liquidity and Capital Resources--Bankruptcy Debt of
General Textiles).
There were no discontinued operations in fiscal 1997 compared to a loss from
discontinued operations of $0.8 million in fiscal 1996.
The net loss before dividends was $0.1 million in fiscal 1997 compared to a
net loss before dividends of $37.4 million in fiscal 1996. Total dividends were
$6.1 million in fiscal 1997 and $3.5 million in fiscal 1996. In fiscal 1997
non-cash dividends on the Series B preferred stock were $2.6 million, while
there were no Series B preferred stock dividends in fiscal 1996. The net loss
applicable to common stock was $6.2 million in fiscal 1997 compared to a net
loss applicable to common stock of $40.9 million in fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Fiscal 1996 was a 53 week year and fiscal 1995 was a 52 week year. For
purposes of determining comparable store sales, fiscal 1996 was adjusted to
reflect a comparable 52 week year. As of February 1, 1997, the Company operated
150 stores compared to 131 as of January 27, 1996.
Net sales were $252.2 million for fiscal 1996 compared to $179.8 million for
fiscal 1995, an increase of $72.4 million. Of the increase, $41.5 million was
attributable to the inclusion of Factory 2-U sales for a full year in fiscal
1996 compared to only 11 weeks in fiscal 1995, $7.7 million was due to increases
in comparable store sales, $3.3 million was attributable to a 53rd week in
fiscal 1996 and the remaining $19.9 million increase in sales was due to new and
noncomparable (open for less than one year) stores.
Gross profit was $81.3 million for fiscal 1996 compared to $62.6 million for
fiscal 1995, an increase of $18.7 million. Of the total increase, $15.4 million
was attributable to the inclusion of a full year of Factory 2-U sales for fiscal
1996 as compared to only 11 weeks for fiscal 1995. The remaining increase in
gross profit was due to the opening of new stores, an increase in comparable
store sales, the additional week in fiscal 1996, all net of a decrease in gross
profit as a percentage of sales. As a percentage of sales, gross profit was
32.2% in fiscal 1996 compared to 34.8% in fiscal 1995. The decrease in gross
profit as a percentage of sales was a result of increased markdown activity,
higher inventory shrinkage, which the Company believes was primarily related to
its integration of Factory 2-U, and the establishment of a markdown allowance
related to parking lot sale inventory to be liquidated in the first half of
fiscal 1997 ($1.2 million). The higher fiscal 1996 inventory shrinkage led the
Company to take steps to improve inventory controls.
Selling and administrative expenses were $87.8 million for fiscal 1996
compared to $56.1 million for fiscal 1995, an increase of $31.7 million. Of the
total increase, $14.4 million was attributable to the inclusion of a full year
of operations for Factory 2-U in fiscal 1996 compared to 11 weeks of activity in
fiscal 1995. As a percentage of sales, selling and administrative expenses were
34.8% in fiscal 1996 compared to
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31.2% in fiscal 1995. The increase in selling and administrative expenses as a
percentage of sales was attributable to increases in salaries and wages, an
increase in store closing and opening expenses and an increase in expenses of
the former New York office. The increase in salaries and wages was due to the
increase in the minimum wage during the latter part of fiscal 1996 and an
increase in corporate wages as the Company increased its staff to accommodate
anticipated additional growth. The increase in store closing and opening
expenses arose from a $1.5 million charge taken at the end of fiscal 1996 to
provide an allowance for stores that were identified for closing and to
write-off $0.5 million in capitalized store preopening costs. Expenses related
to the former New York office were $3.6 million, exclusive of unusual and
closure charges, in fiscal 1996 compared to $1.8 million in fiscal 1995, an
increase of $1.8 million. The Company closed the New York City office in January
1997 when it moved its executive offices to San Diego, CA.
The Company recognized special charges to operations as a result of the
change in control, in the aggregate amount of $9.2 million during fiscal 1996
related to the termination of employment and benefit contracts of the Former
Executives ($7.1 million), the accrual of future lease payments on its former
executive offices in New York City ($0.8 million) and costs to cancel contracts
with consultants and former directors that were not expected to provide value to
the Company in the future ($1.3 million). At the end of fiscal 1996, future
payments totaling $1.1 million were included in accrued liabilities.
The Company recognized a charge to operations in the amount of $8.4 million
during fiscal 1996 when it determined it was unlikely Factory 2-U's discounted
future cash flows would be sufficient to recover the entire goodwill arising
from its acquisition, and therefore that goodwill was impaired.
The Company recognized a charge to operations in the amount of $1.9 million
in fiscal 1996 arising from the write-off of capitalized costs related to a
public offering of securities that was withdrawn. In lieu of the withdrawn
offering, the Company completed the private placement with the TCR Investors.
Interest expense was $8.6 million in fiscal 1996 compared to $3.7 million
for fiscal 1995, an increase of $4.9 million. Of the increase, $2.8 million was
attributable to increases in the amortization of debt discount related to the
Bankruptcy Debt (as defined below) of General Textiles. The remaining $2.1
million increase was attributable to increased debt arising from expansion of
the Company, including the financing of Factory 2-U for a full fiscal year as
compared to only two and one half months in the prior fiscal year.
Loss on disposal of discontinued operations was $0.8 million in fiscal 1996
compared to $0.5 million in fiscal 1995. In fiscal 1996, the Company determined
that a consulting contract arising from the settlement of a lawsuit had no
value. Accordingly, the Company charged all prepaid and future payments related
to the consulting contract to discontinued operations.
The net loss before dividends was $37.4 million in fiscal 1996 compared to
net income before dividends of $1.0 million in fiscal 1995. The net loss
applicable to common stock was $40.9 million in fiscal 1996 compared to a net
loss applicable to common stock of $2.1 million in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
GENERAL. The Company relies on payments from General Textiles and Factory
2-U to service the required principal, interest and dividend payments related to
its debt and preferred stock and to pay operating costs and expenses. Such
payments from General Textiles include payments to the Company pursuant to a Tax
Sharing Agreement (defined below), debt service arising from certain
subordinated debt of General Textiles (which the Company owns pursuant to
purchases from third parties), and a Management Agreement (the "GT Management
Agreement"), as described below. General Textiles filed as part of its
bankruptcy proceedings a plan of reorganization ("The Reorganization Plan"). The
U.S. Bankruptcy Court confirmed it April 20, 1993. Debt securities issued under
the Reorganization Plan prohibit the payment of dividends and other
distributions by General Textiles to the Company. Payments by Factory
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<PAGE>
2-U to the Company are limited under the Factory 2-U Revolving Credit Facility
to payments pursuant to a management agreement (the "Factory 2-U Management
Agreement") and a debt guaranty agreement ("the Guaranty Fee Agreement").
Pursuant to the Reorganization Plan, the Company and General Textiles
entered into the tax sharing agreement (the "Tax Sharing Agreement"). The Tax
Sharing Agreement requires General Textiles to pay to the Company or to its
affiliates, an amount equal to 80% of any federal income tax savings achieved by
General Textiles' sharing in net tax losses arising from General Textiles filing
its federal income tax return on a consolidated basis with the Company and its
affiliates as opposed to filing a federal income tax return on an unconsolidated
"stand-alone" basis. Likewise, the Tax Sharing Agreement also requires the
Company to pay to General Textiles 80% of any federal income tax savings
accruing to the Company that arise from the filing of a consolidated federal
income tax return. Payments or accruals to the Company or General Textiles under
the Tax Sharing Agreement are made annually based on the estimated tax savings,
if any. The payments or accruals under the Tax Sharing Agreement are
intercompany transactions that are eliminated in consolidation, and have no
effect on the consolidated financial position or results of operations. At
January 31, 1998, the Company has significant net operating loss carryforwards
("NOLs") that may benefit General Textiles in future periods and result in
General Textiles being required to make payments to the Company under the Tax
Sharing Agreement. General Textiles experienced a tax loss for federal purposes
in fiscal 1997 and therefore did not benefit from the Company's NOLs.
Furthermore, a significant portion of the Company's NOLs are of limited use in
the future because of Section 382 of the Internal Revenue Code, which limits the
offsetting of NOLs against current taxable income following a change in control.
Therefore, to the degree that General Textiles experiences tax losses in the
future or has its own NOLs available to offset future taxable income, or to the
degree there are limits on the availability of the Company's NOLs to offset
future taxable income of General Textiles, payments to the Company pursuant to
the Tax Sharing Agreement may be significantly limited.
At January 31, 1998, the Company owned an aggregate of $11.3 million face
amount of General Textiles subordinated notes acquired from third party note
holders in fiscal 1993 and 1994. General Textiles makes payments to the Company
in accordance with the terms of the notes and the Reorganization Plan as
described below.
The debt securities issued under the Reorganization Plan permit the payment
of management fees and bonuses by General Textiles to the Company pursuant to
the GT Management Agreement. Obligations for payments by General Textiles under
the GT Management Agreement are subordinated to General Textiles' obligations
under its revolving credit facility.
Management believes that the Company's sources of cash, including the cash
received under the Tax Sharing Agreement, the Trade Subordinated Notes (defined
below), the Company Subordinated Note (defined below), the GT Management
Agreement, the F2U Management Agreement, and the Guaranty Fee Agreement will be
adequate to finance its operations and meet obligations under its existing
indebtedness as they become due for at least the next twelve months. The ability
of the Company to make dividend payments on the Series A Preferred Stock as they
come due will be dependent on the results of operations of the Company.
OBLIGATIONS OF THE COMPANY. As of January 31, 1998, the Company, exclusive
of General Textiles and Factory 2-U, had outstanding indebtedness in the
principal amount of $0.8 million.
The November 1995 acquisition of Factory 2-U was completed pursuant to a
Stock Purchase Agreement between the Company and the former shareholders of
Factory 2-U. The acquisition was financed in part by the issuance of certain
notes payable. At January 31, 1998, the Company was obligated pursuant to two
promissory notes: a $0.6 million term note with principal and accrued interest
due in October 1998 and a $0.2 million installment note with principal and
interest payable in quarterly installments until October 1998 (collectively, the
"F2U Acquisition Notes"). The F2U Acquisition Notes
15
<PAGE>
bear interest at a rate of 8.75% per annum and are subject to penalties and
adjustment in the event of failure to pay amounts when due.
In January 1996, the Company settled a lawsuit commenced in 1993 by former
owners of Mandel-Kahn Industries, Inc. which was purchased by the Company in
1992. Under the settlement, the Company paid $1.2 million and entered into a
five-year consulting agreement requiring an aggregate of $0.8 million in cash
payments and issuance of 60,000 shares of Series A Preferred Stock. The Company
remains obligated at January 31, 1998 to pay an aggregate of $0.4 million in
monthly installments until January 2001.
SERIES A PREFERRED STOCK. Dividends on the Series A Preferred Stock total
$3.5 million per year based on the annual dividend rate of $0.95 per share and
are payable quarterly if, as, and when declared by the Board of Directors.
1997 PRIVATE PLACEMENTS OF SERIES B PREFERRED STOCK. On February 20, and
March 13, 1997, the Company issued 5,000 and 4,600 additional shares,
respectively, of its Series B Junior Convertible, Exchangeable Preferred Stock
(the "Series B Preferred Stock") for aggregate proceeds of $9.6 million. Then,
on March 20, 1997 and June 16, 1997, the Company issued 1,865 and 250 shares,
respectively, of Series B Preferred Stock to certain members of management in
return for $2.1 million in full-recourse notes collateralized by the stock. The
Series B Preferred Stock has an increasing rate dividend. Accordingly, dividends
on Series B Preferred Stock are recorded using the effective interest method to
recognize the dividends ratably over the estimated period in which the stock
will be outstanding. Although dividends are recorded for financial statement
purposes, the Series B Preferred Stock pays no cash dividends, except under
certain events of liquidity, until there is no longer any Series A Preferred
Stock outstanding. The net proceeds obtained from the private placements were
used by the Company to pay the costs to settle the existing employment and
benefit agreements of the Former Executives and to reduce outstanding
indebtedness under the Revolving Credit Facilities (defined below).
GENERAL TEXTILES
GENERAL. General Textiles finances its operations through credit provided
by vendors and other suppliers, its $35.0 million working capital facility (the
"GT Revolving Credit Facility"), $2.2 million in installment notes ("the GT
Installment Notes"), capital leases, trade credit and internally generated cash
flow. Credit terms provided by vendors and other suppliers are usually net 30
days. Amounts borrowed under the working capital facility are based on a
percentage of eligible inventories, as defined, outstanding from time to time,
as more fully described below.
Upon and after emerging from bankruptcy in May 1993, General Textiles issued
non-interest bearing Subordinated Notes and Reorganization Securities
(collectively, the "Bankruptcy Debt") in satisfaction of the claims of its
creditors. Payments to holders of the Bankruptcy Debt are contingent upon the
annual earnings and cash flow levels of General Textiles. Interest expense and
carrying value of the Bankruptcy Debt is determined based on projections of the
earnings and cash flows of General Textiles, which in turn impact the projected
amounts and timing of payments to be made on debt principal. Due to the
contingent nature of the timing and amounts of future payments, the carrying
value and annual interest expense related to the Bankruptcy Debt can be
significantly impacted by changes in expected earnings and cash flows of General
Textiles. Likewise, actual earnings and cash flows, as well as minimum payment
provisions of the Reorganization Plan and the related notes, can result in
substantial principal payment requirements in future years. The inability of
General Textiles to make such payments can result in additional issuance of debt
or, ultimately, in the loss of control of General Textiles, as described more
completely below.
Management believes that General Textiles will have sufficient resources to
provide for capital expenditures, to finance its working capital needs and to
make expected payments required under the Bankruptcy Debt and other debt during
the next twelve months from credit supplied by the Company, its suppliers, its
working capital facility and internally generated cash flow.
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GT REVOLVING CREDIT FACILITY. Under the GT Revolving Credit Facility,
General Textiles may borrow 65% of eligible inventory, as defined, subject to a
maximum of $35.0 million of revolving credit indebtedness outstanding at any
time. As of January 31, 1998, General Textiles owed $9.5 million under the GT
Revolving Credit Facility and there was $9.3 million available for additional
borrowing under the GT Revolving Credit Facility. Amounts borrowed under the GT
Revolving Credit Facility bear interest at the prime rate plus 0.75%, payable
monthly. The GT Revolving Credit Facility expires in November 1999 and is
secured by a lien on all of the assets and a pledge of all the capital stock of
General Textiles.
GT INSTALLMENT NOTES. As of January 31, 1998, General Textiles owed $2.2
million to the working capital lender under three installment notes used to
finance equipment purchases and general working capital needs. The GT
Installment Notes bear interest at rates ranging from prime plus 2% to prime
plus 3% per annum. Interest and principal are payable monthly and maturity dates
range from April 1998 to July 2001.
Under the GT Revolving Credit Facility and the GT Installment Notes, General
Textiles is required to comply with certain covenants, including restrictions on
distributions and dividends, additional indebtedness, salary increases and
bonuses, changes in capital structure and business objectives, mergers,
consolidations and sales of all or substantially all of General Textiles'
assets. In addition, General Textiles is subject to certain financial covenants
and ratios including those covering working capital, limitations on capital
expenditures and payments of any money to affiliates, current ratios, minimum
net worth and debt-to-net-worth ratios. Breach of these covenants or the
occurrence of certain other events, including any material adverse change in the
business or financial condition of General Textiles, may result in an event of
default.
General Textiles was not in compliance with the current ratio covenant in
the GT Revolving Credit Facility as of January 31, 1998. The working capital
lender has waived that requirement at January 31, 1998. In March 1998, General
Textiles and its working capital lender agreed to amend certain terms and
conditions of the GT Revolving Credit Facility. As a result, General Textiles'
covenants and financial ratios will be reset to reflect the anticipated
earnings, capital expenditures and cash flow of General Textiles during fiscal
1998.
BANKRUPTCY DEBT OF GENERAL TEXTILES
SUBORDINATED NOTES. Under the Reorganization Plan, General Textiles issued
Subordinated Notes in the principal amount of $28.8 million in settlement of
unsecured claims of approximately $47.2 million. At January 31, 1998, $5.6
million of Subordinated Notes were held by creditors not affiliated with General
Textiles (the "Trade Subordinated Notes") and an additional $13.8 million
Subordinated Note, which had been purchased by the Company in 1994, was held by
it (the "Company Subordinated Note"). The Subordinated Notes do not bear
interest. Principal is payable out of excess cash flow. Beginning in fiscal
1996, 30% of General Textiles' excess cash flow must be applied to pay Trade
Subordinated Notes and the remaining 70% must be applied to pay the Company
Subordinated Note (prior to fiscal 1996, 70% of excess cash flow was used to pay
the Trade Subordinated Notes and 30% was used to pay the Company Subordinated
Note). The Subordinated Notes are subordinated to all indebtedness of General
Textiles other than that issued under the Reorganization plan. The Company
Subordinated Note is eliminated in consolidation and is therefore not reflected
on the Company's consolidated balance sheet.
If General Textiles failed to pay at least 60% of the original principal
amount of the Trade Subordinated Notes by 30 days after determination of its
excess cash flow for fiscal 1996, it would be required to issue additional
Subordinated Notes equal to 29% of those which had originally been issued.
However, sufficient principal payments have been made to avoid this requirement.
There will be a similar requirement if 80% of the original principal amount of
the Trade Subordinated Notes is not paid within 30 days after the determination
of the excess cash flow for fiscal 1999. Unless all the Trade Subordinated Notes
are repaid within 30 days after the determination of the excess cash flow for
fiscal 2002, the holder of the Company Subordinated Note and the Creditor's
Committee from the Reorganization Proceeding will have the right to elect all
General Textile's directors in proportion to the outstanding principal amounts
of the Company Subordinated Note and of the Trade Subordinated Notes. In
addition, if
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specified percentages of all the original Subordinated Notes are not repaid
within 39 days after determination of the excess cash flow for specified fiscal
years (43.4% with regard to fiscal 1997, 53.5% with regard to fiscal 1998 and
70% with regard to fiscal 1999), the holders of the Trade Subordinated Notes and
the Company Subordinated Note will have the right to elect a minority of General
Textiles' directors, with the holders of the Trade Subordinated Notes and the
Company Subordinated Note each being entitled to elect one half of the minority
directors or, if there is an odd number of minority directors, the holders of
the Company Subordinated Note being entitled to elect one more director than the
holders of the Trade Subordinated Notes. The Subordinated Notes contain
covenants, including limitations on executive compensation, limitations on
dividends and mandatory prepayment under certain change in control events.
REORGANIZATION SECURITIES. Pursuant to the Reorganization Plan,
pre-petition subordinated lenders received $4.9 million principal amount of
Subordinated Reorganization Notes and $17.3 million principal amount of Junior
Subordination Reorganization Notes (collectively, the "Reorganization
Securities").
The Subordinated Reorganization Notes are non-interest bearing and are not
entitled to any cash payments until all of the Subordinated Notes are paid in
full. However, the principal amount payable under the Subordinated
Reorganization Notes increases annually on the anniversary of the notes as
required under the Reorganization Plan and the terms of the notes. Under the
terms of the Subordinated Reorganization Notes, General Textiles is subject to
certain covenants, including limitations on executive compensation and
dividends.
The Junior Subordinated Reorganization Notes are currently non-interest
bearing. During any fiscal year that General Textiles' adjusted earnings
("EBITDA" as defined in such notes) exceeds $10.0 million, the Junior
Subordinated Reorganization Notes will accrue interest at the lesser of (i) 6%
per annum, or (ii) 80% of General Textiles' EBITDA in excess of $10.0 million
(the "Contingent Payments"). No interest or principal payments are payable on
the Junior Subordinated Reorganization Notes until all of the Subordinated Notes
are paid in full. In the event of a qualifying event of liquidity, as defined in
the Reorganization Plan, which includes a public offering of General Textiles'
securities, the Junior Subordinated Reorganization Notes could be exchanged, at
the option of General Textiles, for 19% of the remainder of the market equity
value of General Textiles, as defined, less $3.0 million payable at the option
of the Company either in cash or in stock of General Textiles. Under the terms
of the Junior Subordinated Reorganization Notes, General Textiles must devote a
substantial portion of the Annual Payments to the repayment of the Subordinated
Notes and is subject to certain covenants including limitations on executive
compensation and dividends.
Annual Payments are allocated to the Reorganization Securities commencing 30
days after the Subordinated Notes are paid in full. Annual Payments allocated to
the Reorganization Securities are applied first to any accrued Contingent
Payments, then to the Subordinated Reorganization Notes and lastly to the Junior
Subordinated Reorganization Notes.
FACTORY 2-U
GENERAL. Factory 2-U finances its operations through credit provided by its
affiliates and suppliers, its $15.0 million working capital facility and
internally generated cash flow. Amounts available under the working capital
facility are based on a percentage of eligible inventory, as defined,
outstanding from time to time, as more fully described below. General Textiles
provides administrative services to Factory 2-U and charges Factory 2-U a
management fee for such services. These services include merchandising, finance,
accounting, distribution, advertising and executive administrative support.
General Textiles also serves as the purchasing agent for all merchandise shipped
to Factory 2-U. Factory 2-U generally pays General Textiles for merchandise
purchased by General Textiles within 30 days of receipt of goods by General
Textiles.
Management believes that Factory 2-U will have sufficient working capital to
meet its needs during the next twelve months from credit terms supplied by its
affiliates and suppliers, its working capital facility and internally generated
cash flow.
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F2U REVOLVING CREDIT FACILITY. Factory 2-U has a $15.0 million revolving
credit facility with a lender (the "F2U Revolving Credit Facility", and
collectively with the GT Revolving Credit Facility, the "Revolving Credit
Facilities") secured by a lien on all of the assets of Factory 2-U, a Guaranty
of the Company, and a pledge of certain other assets owned by the Company. Under
the F2U Revolving Credit Facility, Factory 2-U may borrow up to 65% of eligible
inventory, as defined, subject to a maximum of $15.0 million of amounts
outstanding at any time. This rate was increased to 65% from 60% effective April
28, 1997. As of January 31, 1998 there was $3.2 million outstanding and $4.9
million available for additional borrowing under the F2U Revolving Credit
Facility. Amounts borrowed under the F2U Revolving Credit Facility bear interest
at an annual rate equal to prime plus 0.75%, payable monthly. The F2U Revolving
Credit Facility expires in November 1999 and is secured by a lien on all of the
assets of Factory 2-U. In addition, the Company is a guarantor under the F2U
Revolving Credit Facility.
METLIFE OBLIGATIONS. In connection with the Company's acquisition of
Factory 2-U, Factory 2-U entered into a Consent and Restructure Agreement dated
as of November 30, 1995 between Factory 2-U and MetLife Capital Corporation,
which restructured indebtedness under a 1992 aircraft lease (the "MetLife
Agreement"). Under the MetLife Agreement, Factory 2-U is obligated to repay the
$0.4 million principal balance outstanding at January 31, 1998 plus interest at
8% per annum, in monthly payments through November 1998 and a balloon payment of
$0.3 million in December 1998. The Company is a guarantor of this obligation.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $6.0 million on capital
expenditures in fiscal 1998 which includes costs to open new stores, to renovate
and/or relocate existing stores and to upgrade information systems. Management
believes that future expenditures will be financed from internal cash flow, the
GT Revolving Credit Facility and the F2U Revolving Credit Facility.
INFLATION
In general, the Company believes that inflation has had no recent material
impact on operations and none is anticipated in the next fiscal year.
MINIMUM WAGE INCREASES AND WELFARE REFORM
The Company employs, both in its stores and in its corporate headquarters, a
substantial number of employees who earn hourly wages near or at the minimum
wage. Actions by both the federal and certain state governments have increased
the hourly wages payable by the Company to such employees. To mitigate the
impact of this wage increase, the Company has instituted policies to maintain
its ratio of wages to gross margins by controlling aggregate wage increases
through an enhanced wage control and monitoring system and increased initial
mark-ons to its retail prices. Management believes that these measures will be
adequate to control the impact of hourly wage increases on the overall
profitability of its operations.
A significant number of the Company's customers are believed to come from
low-income families whose incomes have historically been subsidized by
government and other forms of assistance. Management believes that action by the
federal and certain state governments to reform income subsidies may have an
impact on its operating performance. However, management also believes it is too
early to tell whether the impact will be materially adverse to the Company.
Although management expects demand for off-price apparel and low-priced home
goods to continue to grow in the markets its serves despite governmental
reforms, management recognizes that there can be no assurance that demand will
grow at all or as fast as it has historically. The Company has made substantial
investments and financial commitments towards serving low-income customers, and
any adverse impact on the income of such customers may adversely impact the
operating results of the Company.
19
<PAGE>
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company historically has realized its highest level of sales and income
during the third and fourth quarters of fiscal year (the quarters ending in
October and January) as a result of the "Back to School" (August and September)
and Christmas (November and December) seasons. If the Company's sales were
substantially below seasonal expectations during the third and fourth quarters,
the Company's annual results would be adversely affected.
The Company historically has realized lower sales in its first two quarters
(February through July), which often has resulted in the Company incurring
losses during those quarters. The Company incurred a net loss and net losses
applicable to common stock in both of the first two quarters of fiscal 1997.
Based on these historical results, management believes that it may, during the
first two quarters of fiscal 1998, experience operating results that are
substantially below those expected for the third and fourth quarters of fiscal
1998.
YEAR 2000 ISSUE
The Company uses various computer programs that would fail to perform
accurately if not replaced before the year 2000 affects any transactions. The
Company has reviewed new integrated software packages to support future growth
and which are capable of addressing the issues associated with the year 2000. As
part of its capital expenditure plans previously discussed, the Company plans to
install new software commencing in 1998 at a cost of approximately $2 million to
$3 million and does not anticipate that conversion issues will materially
influence operations or operating results.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not related to historical
results are forward-looking statements. Actual results may differ materially
from those projected or implied in the forward-looking statements. These
forward-looking statements involve risks and uncertainties which are more fully
described in Part I, Item 1 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FAMILY BARGAIN CORPORATION
Reports of Independent Public Accountants.................................................................. F-1
Family Bargain Corporation and Subsidiaries Consolidated Balance Sheets as of January 31, 1998 and February
1, 1997.................................................................................................. F-3
Family Bargain Corporation and Subsidiaries Consolidated Statements of Operations for fiscal years ended
January 31, 1998, February 1, 1997 and January 27, 1996.................................................. F-4
Family Bargain Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity for fiscal
years ended January 31, 1998, February 1, 1997 and January 27, 1996...................................... F-5
Family Bargain Corporation and Subsidiaries Consolidated Statements of Cash Flows for fiscal years ended
January 31, 1998, February 1, 1997 and January 27, 1996.................................................. F-6
Family Bargain Corporation and Subsidiaries Notes to Consolidated Financial Statements..................... F-7
</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
consolidated financial statements and notes thereto.
20
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant filed a Form 8-K dated May 14, 1997. A Form 8-K/A-1 filed May
23, 1997 amended it in its entirety. The reports on Form 8K and 8K/A-1 reported
on a change in certifying accountants filed pursuant to Section 13 of the
Securities Act of 1934.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Board of Directors (the "Board") of the Company is divided into three
classes. Directors are elected, by class, for three-year terms by the holders of
Common Stock and the holders of Series B Preferred. Successors to the class of
directors whose term expires at any annual meeting shall be elected for the next
three-year term. The terms of office expire for Class I in 2000, for Class II in
1998 and for Class III in 1999.
The following table sets forth certain information regarding each director:
<TABLE>
<CAPTION>
EXPIRATION OF
NAME AGE POSITION TERM AS DIRECTOR
- -------------------------------------------- --- -------------------------------------------- -----------------
<S> <C> <C> <C>
James D. Somerville......................... 56 Director, Chairman of the Board 2000
John J. Borer III........................... 39 Director 1999
Peter V. Handal............................. 54 Director 1998
Ronald Rashkow.............................. 56 Director 1998
Michael Searles............................. 48 Director, President and Chief Executive 1998
Officer for General Textiles and Factory 2-U
(1)
J. William Uhrig............................ 36 Director 1998
H. Whitney Wagner........................... 41 Director 2000
Thomas G. Weld.............................. 34 Director 2000
</TABLE>
- ------------------------
(1) General Textiles Inc. ("General Textiles") and Factory 2-U Inc. ("Factory
2-U") are wholly owned operating subsidiaries of the Company. As the
President and Chief Executive Officer of the Company's operating
subsidiaries, Mr. Searles performs policy making functions for the Company
and, pursuant to Rule 3b-7 of the Exchange Act, is considered an "executive
officer" of the Company.
JAMES D. SOMERVILLE has been a director and Chairman of the Board of the
Company since February 1997. He has more than 30 years of broad-based experience
in both consulting and general management. Since 1996, Mr. Somerville has headed
his own firm, Somerville & Associates, consulting to senior management and
boards of directors. He also serves as Chairman of the Board of American Re-
Manufacturers, Inc. From 1991 until 1996, he served as Executive Vice President
of BET, Inc. and as a director of BET plc, an international services
conglomerate.
JOHN J. BORER III has been a director of the Company since August 1994. From
October 1991 to March 1998, Mr. Borer was a Managing Director of Rodman and
Renshaw, Inc., an investment banking firm. Since March 1998, Mr. Borer is a
Senior Managing Director of R&R Capital Group.
PETER V. HANDAL has been a director of the Company since February 1997.
Since 1990, he has been President of COWI International Group (a management
consulting firm). Mr. Handal is also a partner in Carlisle & Handal
International (consultants and advisors on matters relating to international
business), Chief Executive Officer of J4P Associates LP (a real estate
developer), and President of Fillmore Leasing Company, Inc. (which leases
automobiles, computers and warehouse equipment). He serves on the Board of
Directors of Cole National Corporation, Jos. A. Bank Clothiers, Perry Ellis
International and Graham-Field Health Products, Inc.
RONALD RASHKOW has been a director of the Company since February 1997. He
has been a principal of Chapman Partners, L.L.C., an investment banking firm,
since its founding in September 1995. For more than five years prior thereto, he
served as Chief Executive Officer and Chairman of the Board of Directors
21
<PAGE>
of Handy Andy Home Improvement Centers, Inc. (a building supply retailer started
by his family in 1946 and consensually liquidated in 1996). Mr. Rashkow is also
a director of Garden Ridge Corporation, a specialty retailing company ("Garden
Ridge"). From 1989 to 1993, Mr. Rashkow was a director, vice president and
consultant to Spirit Holdings Company, Inc. and its two operating subsidiaries,
Central Hardware Company, Inc. and Witte Hardware Corporation (each a retailer
and wholesaler of hardware and building materials). Spirit Holdings Company,
Inc., Central Hardware Company, Inc. and Witte Hardware Corporation filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code in
March 1993 and emerged from bankruptcy in February 1994.
J. WILLIAM UHRIG has been a director of the Company since January 1997. Mr.
Uhrig has been a Managing Director of TCR Associates since 1991. Mr. Uhrig
joined TCR Associates in 1984. From January 1993 to January 1998, Mr Uhrig
served on the board of directors of MLX Corp., a holding company ("MLX").
MICHAEL SEARLES has been a director of the Company and President and Chief
Executive Officer of General Textiles and Factory 2-U since March 1998. Between
May 1996 and June 1997, Mr. Searles held the position of President,
Merchandising and Marketing, at Montgomery Ward Inc. Prior to that, from April
1993 to July 1995, Mr. Searles served as President and Chief Executive Officer
of the Women's Special Retail Group (Casual Corner Group), a division of U.S.
Shoe Corp. Earlier in his career, from 1984 to 1993, Mr. Searles was President
of Kids "R" US, a division of Toys "R" US, Inc.
H. WHITNEY WAGNER has been director of the Company since January 1997. He
has been a Managing Director of TCR Associates since 1989. He joined TCR
Associates in 1983 and was elected a Vice President in 1986. Mr. Wagner also
serves on the boards of directors of Garden Ridge. From January 1993 to January
1998, Mr. Wagner served on the board of directors of MLX.
THOMAS G. WELD has been a director of the Company since January 1997. Mr.
Weld has been a Managing Director of TCR since 1993. From 1988 until 1993, Mr.
Weld was an associate with McKinsey and Company, a management consulting firm.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers of the Company, other than Messrs. Searles and Somerville who are
listed in the table above.
<TABLE>
<CAPTION>
OFFICER OF THE
COMPANY AND/OR ITS
NAME POSITION AGE SUBSIDIARIES SINCE
- ------------------------------------------- ------------------------------------------- --- ---------------------
<S> <C> <C> <C>
B. Mary McNabb............................. Executive Vice President-- Merchandising 49 1990
for General Textiles and Factory 2-U (1)
William F. Cass............................ Executive Vice President -Operations for 48 1996
General Textiles and Factory 2-U (2)
Jonathan W. Spatz.......................... Executive Vice President and Chief 42 1997
Financial Officer
</TABLE>
22
<PAGE>
- ------------------------
(1) General Textiles and Factory 2-U are wholly owned operating subsidiaries of
the Company. As Executive Vice-President-Merchandising of the Company's
operating subsidiaries, Ms. McNabb performs policy making functions for the
Company and, pursuant to Rule 3b-7 of the Exchange Act, is considered an
"executive officer" of the Company.
(2) As Executive Vice-President-Operations of General Textiles and Factory 2-U,
Mr. Cass performs policy making functions for the Company and, pursuant to
Rule 3b-7 of the Exchange Act, is considered an "executive officer" of the
Company.
B. Mary McNabb is the Executive Vice President of Merchandising of General
Textiles and Factory 2-U. Ms. McNabb joined General Textiles and Factory 2-U in
1990.
William F. Cass is the Executive Vice President of Operations of General
Textiles and Factory 2-U. Mr. Cass joined General Textiles and Factory 2-U in
March 1996. Prior to joining General Textiles and Factory 2-U, Mr. Cass held
positions as Managing Director, Director of New Business Development and Senior
Vice President of Merchandising at Clothestime.
Jonathan W. Spatz is the Executive Vice President and Chief Financial
Officer of the Company. Mr. Spatz joined the Company in June 1997. Prior to
joining the Company, from July 1994 to June 1997, Mr. Spatz was the Chief
Financial Officer of Strouds.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and any persons who own more than ten percent of the Common Stock
or Series A Preferred to file reports of initial ownership of the Common Stock
or Series A Preferred, as the case may be, and subsequent changes in that
ownership with the SEC. Officers, directors and greater than ten percent
beneficial owners are also required to furnish the Company with copies of all
Section 16(a) forms they file. Based solely upon the review of the copies of the
forms furnished to the Company, or written representations from certain
reporting persons that no Forms 5 were required, the Company believes that
during the fiscal year ended January 31, 1998, the Section 16(a) filing
requirements were complied with, except for the following reports which were
filed late by the following persons: Five reports for eleven transactions by
Ronald Rashkow, one report for one transaction by Thomas A. Weld, three reports
for four transactions by William W. Mowbray, four reports for five transactions
by James D. Somerville, one report for one transaction by William J. Uhrig, one
report for two transactions by B. Mary McNabb, two reports for five transactions
by William F. Cass, three reports for four transactions by James M. Baker, four
reports for five transactions by John J. Borer III and one report for two
transactions by Jonathan W. Spatz.
ITEM 11. EXECUTIVE COMPENSATION
The following tables and descriptive materials set forth information
concerning compensation earned for services rendered to the Company and its
subsidiaries by the current and former Chief Executive Officer of the Company,
and its four other most highly compensated executive officers, who were serving
as executive officers of the Company at January 31, 1998, the end of Fiscal
1997.
23
<PAGE>
SUMMARY OF COMPENSATION
The following table summarizes the compensation earned by the Named
Executive Officers during Fiscal 1997, 1996 and 1995. Summary Compensation Table
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------------------------ ------------------------------
OTHER RESTRICTED SECURITIES PAYOUTS
FISCAL ANNUAL STOCK UNDERLYING LTIP
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS
- ----------------------------- ----------- ---------- ---------- ----------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
James D. Somerville.......... 1997 $ 137,308 $ 0 $ -- (3) $ 0 257,500 $ 0
Chairman of the Board
William F. Cass.............. 1997 $ 199,038 $ 32,500 $ -- (3) $ 0 110,000 $ 0
Executive Vice President-- 1996 $ 110,769 $ 0 $ -- (3) $ 0 10,000 $ 0
Operations for General
Textiles and Factory 2-U
B. Mary McNabb............... 1997 $ 197,596 $ 42,500 $ -- (3) $ 0 275,000 $ 0
Executive Vice President-- 1996 $ 168,846 $ 0 $ -- (3) $ 0 7,417 $ 0
Merchandising for General 1995 $ 154,372 $ 17,832 $ -- (3) $ 0 17,583 $ 0
Textiles and Factory 2-U
Denis LeClair................ 1997 $ 145,000 $ 3,800 $ -- (3) $ 0 32,417 $ 0
Vice President 1996 $ 138,692 $ 0 $ -- (3) $ 0 0 $ 0
Divisional Marchandise 1995 $ 109,858 $ 25,328 $ -- (3) $ 0 17,583 $ 0
Manager for General
Textiles and Factory 2-U
William W. Mowbray........... 1997 $ 388,328 $ 125,000 $ -- (3) $ 0 652,500 $ 0
Former President and Chief 1996 $ 332,078 $ 0 $ -- (3) $ 0 10,000 $ 0
Executive Officer(4) 1995 $ 260,345 $ 224,852 $ -- (3) $ 0 100,000 $ 0
Michael Searles.............. 1997 $ 0 $ 0 $ 0 $ 0 0 $ 0
President and Chief
Executive
Officer of General Textiles
and Factory 2-U(5)
Jonathan W. Spatz............ 1997 $ 139,423 $ 65,000 $ -- (3) $ 0 120,000 $ 0
Executive Vice President
and Chief Financial
Officer(6)
<CAPTION>
ALL OTHER
COMPEN-
NAME AND PRINCIPAL POSITION SATION(2)
- ----------------------------- -----------
<S> <C>
James D. Somerville.......... $ 0
Chairman of the Board
William F. Cass.............. $ 3,900
Executive Vice President-- $ 0
Operations for General
Textiles and Factory 2-U
B. Mary McNabb............... $ 1042
Executive Vice President-- $ 900
Merchandising for General $ 789
Textiles and Factory 2-U
Denis LeClair................ $ 870
Vice President $ 549
Divisional Marchandise $ 723
Manager for General
Textiles and Factory 2-U
William W. Mowbray........... $ 900
Former President and Chief $ 900
Executive Officer(4) $ 410
Michael Searles.............. $ 0
President and Chief
Executive
Officer of General Textiles
and Factory 2-U(5)
Jonathan W. Spatz............ $ 3,398
Executive Vice President
and Chief Financial
Officer(6)
</TABLE>
- ------------------------
(1) In previous years the Company referred to a fiscal year according to the
year in which the fiscal year ended (for example, the fiscal year ended
February 1, 1997 was previously referred to by the Company as Fiscal Year
1997). The Company now refers to the fiscal year as the year in which most
of the
24
<PAGE>
activity occurred (for example, the fiscal year ended January 31, 1998 is
referred to herein as Fiscal Year 1997).
(2) "All Other Compensation" for 1997 includes (i) contributions made for the
named Executive Officers under the Family Bargain Corporation 401(k) Savings
Plan, a defined contribution plan meeting the requirements of Section 401(k)
of the Internal Revenue Code of 1986, as amended, to match 1997 pre-tax
elective deferral contributions (included under "Salary") made to such plan
by the named Executive Officer, (ii) with regards to Mr. Cass an additional
$3,000 paid for moving expenses and (iii) with regards to Mr. Spatz $3,398
paid for moving expenses.
(3) The aggregate amount of such compensation is less than the lesser of either
$50,000 or 10% of such person's total annual salary and bonus.
(4) Mr. Mowbray was President and Chief Executive Officer of the Company until
his resignation on August 1, 1997.
(5) Mr. Searles was appointed President and Chief Executive Officer of General
Textiles and Factory 2-U in March 1998.
(6) Mr. Spatz was appointed Executive Vice President and Chief Financial Officer
of the Company in June 1997.
GRANTS OF STOCK OPTIONS
The following table sets forth information concerning the award of stock
options to the Named Executive Officers during Fiscal 1997.
POTENTIAL REALIZABLE
<TABLE>
<CAPTION>
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL INDIVIDUAL GRANTS STOCK PRICE
UNDERLYING OPTIONS/SARS ---------------------------- APPRECIATION FOR
OPTIONS/SARS GRANTED TO EXERCISE OF OPTION TERM (1)
GRANTED EMPLOYEES IN BASE PRICE ----------------------
NAME (#) FISCAL YEAR ($/SH) EXPIRATION DATE 5%($) 10%($)
- ----------------------------- ------------- --------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William F. Cass.............. 110,000 4.05% $ 2.25 4/3/2002 $ 68,200 $ 150,700
Danis LeClair................ 32,417 1.20% $ 2.25 4/3/2002 $ 20,099 $ 44,411
B. Mary McNabb............... 275,000 10.13% $ 2.25 4/3/2002 $ 170,500 $ 376,750
William W. Mowbray........... 652,500 24.08% $ 2.25 4/3/2002 $ 404,550 $ 893,925
Michael Searles.............. 0 0% $ 0 -- $ 0 $ 0
James D. Somerville.......... 257,500 9.48% $ 2.25 4/3/2002 $ 159,650 $ 352,775
Jonathan W. Spatz............ 120,000 4.42% $ 2.25 6/24/2002 $ 55,200 $ 140,400
</TABLE>
- ------------------------
(1) 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.
EXERCISE OF STOCK OPTIONS
The following table sets forth information concerning the exercise of stock
options during Fiscal 1997 by each of the Named Executive Officers and the
fiscal year-end value of unexercised options.
25
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/ SARS
AT FY END(#) AT FY END($)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------------- --------------------- ----------------------- ------------------- -------------
<S> <C> <C> <C> <C>
William F. Cass................................ 0 0 0/120,000 $ 0/1,560
Denis LeClair.................................. 0 0 0/50,000 $ 0/2,374
B. Mary McNabb................................. 0 0 0/300,000 $ 0/3,900
William W. Mowbray............................. 0 0 0/762,500 $ 0/17,160
Michael Searles................................ 0 0 0/0 $ 0/0
James D. Somerville............................ 0 0 0/257,500 $ 0/0
Jonathan W. Spatz.............................. 0 0 0/120,000 $ 0/0
</TABLE>
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 or TCR receive a $10,000
annual fee payable quarterly and a fee of $1,000 for each meeting of the Board
of Directors attended. In addition, commencing as of June 20, 1997, the three
independent directors of the Company, Messrs. Borer, Handal and Rashkow are
granted at the end of each fiscal quarterly period, options to acquire 1,250
shares of Common Stock, exercisable immediately. The Chairman of the Board is a
salaried employee of the Company and consequently does not receive a director's
fee. There are no other arrangements or agreements pursuant to which any of the
directors are entitled to be compensated for serving as directors.
EMPLOYMENT CONTRACTS WITH NAMED EXECUTIVE OFFICERS AND SEVERANCE ARRANGEMENTS
THE MOWBRAY SEPARATION AGREEMENT. On August 1, 1997 the Company and Mr.
William W. Mowbray entered into a Separation Agreement (the "Separation
Agreement"), whereby Mr. Mowbray resigned from his positions as director and
officer of the Company and the Amended and Restated Employment Agreement, dated
February 24, 1997 (the "Employment Agreement"), between Mr. Mowbray and the
Company was terminated. Under the Separation Agreement, Mr. Mowbray agreed that
for the period ending December 31, 2000, he will not, directly or indirectly,
compete with the Company or any of its subsidiaries in any of the States in
which the Company is operating. In consideration therefor, the Company agreed to
pay Mr. Mowbray the following sums: (i) $970,000 to be paid in three
installments on March 30, 1998, March 30, 1999 and August 1, 2000 and (ii)
$341,536, $365,444, $391,025 and $418,396, to paid during the years 1997, 1998,
1999 and 2000, respectively, in addition to the bonus due for Fiscal 1997 under
the Company's existing bonus plan and payment for accrued and unused vacation
days. In the event of a change of control of the Company, all such amounts
mentioned in (ii) above shall become immediately due and payable.
The Company also agreed to continue to provide Mr. Mowbray with all of the
health, life insurance and automobile benefits set forth in the Employment
Agreement. In addition, the Company agreed to amend the Secured Promissory Note,
which Mr. Mowbray issued to the Company in connection with his purchase of
Series B Preferred, to forgive and waive all interest payable thereunder.
Mr. Mowbray's stock options were also amended to enable him to exercise
fifty percent (50%) of such options if the market price of the Common Stock
exceeds $6 per share for sixty (60) consecutive days and
26
<PAGE>
the remaining fifty percent (50%) of such options if the market price of the
Common Stock exceeds $7.50 per share for sixty (60) consecutive days.
THE SEARLES EMPLOYMENT AGREEMENT. Mr. Michael Searles, General Textiles'
President and Chief Executive Officer and a member of the Company's Board of
Directors, is employed pursuant to a five-year employment agreement, dated March
30, 1990, among the Company, General Textiles and Mr. Searles (the "Searles
Agreement"). Pursuant to the Searles Agreement, Mr. Searles is entitled to
receive an annual salary of not less than $600,000 and (b) an annual bonus
targeted at 50% of the base salary.
In connection with the execution of the Searles Agreement, Mr. Searles was
granted equity compensation in the form of (a) options under the Company's
incentive stock option plan to acquire 300,000 shares of Common Stock at the
closing market price on March 10, 1998. Such options shall vest in equal
increments on the first five anniversaries of the Searles Agreement; (b) options
to acquire 900,000 shares of Common Stock at a price of $2.00 per share of which
options to purchase 450,000 shares shall become exercisable when the closing
market price is equal to or exceeds $6.00 for 60 trading days during any twelve
month period and the options to purchase the remaining 450,000 shares shall
become exercisable when the closing market price is equal to or exceeds $7.50
for 60 trading days during any twelve month period; and (c) 1,400 shares of
Series B Preferred to be purchased by Mr. Searles, the cost of which shall be
loaned to Mr. Searles by the Company. With respect to such 1,400 shares, Mr.
Searles will grant the Company an option to acquire such shares in the event
that Mr. Searles' employment under the Searles Agreement shall be terminated, at
the prices and on the terms described in the Searles Agreement.
The Searles Agreement further provides for the indemnification of Mr.
Searles by the Company if Mr. Searles is made a party to or threatened to be
made a party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director or officer of the Company, General Textiles or any other affiliate
("Constituent Corporation") or is or was serving at the request of the
Constituent Corporation as a director, officer, member, employee, fiduciary or
agent of another entity.
The Company will obtain officer and director liability insurance policies
covering Mr. Searles in the same aggregate amount and under the same terms as
are maintained by the Company for senior officers and directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company are Messrs. John J.
Borer III, Ronald Rashkow, James D. Somerville and Thomas G. Weld. Except for
Mr. Somerville, no member of the Compensation Committee of the Board of
Directors of the Company was, during Fiscal 1997, an officer or employee of the
Company or any of its subsidiaries, or was formerly an officer of the Company or
any of its subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Voting Stock as of January 31, 1998: (i) by each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of the Common Stock or the Series B Preferred; (ii) by each
of the Company's directors; (iii) by each of the Company's executive officers
named in the Summary Compensation Table herein (the "Named Executive Officers");
and (iv) by all directors and executive officers as a group. Except as otherwise
indicated, the Company believes that the beneficial owners of the securities
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to the Voting Stock shown as being
beneficially owned by them.
27
<PAGE>
(a) Security Ownership of Certain Beneficial Owners.
<TABLE>
<CAPTION>
COMMON STOCK SERIES B PREFERRED
-------------------------- ----------------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
OF BENEFICIAL OWNER(1) OF SHARES OF CLASS(2) OF SHARES OF CLASS(3)
- -------------------------------------------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Three Cities Fund II L.P.(5)...................... 231,198 4.7 6,665 19.8
Three Cities Offshore II C.V.(6).................. 390,978 7.9 11,272 33.4
TCR Offshore Associates L.P.(6)................... 390,978 7.9 11,272 33.4
TCR Associates L.P.(5)............................ 231,198 4.7 6,665 19.8
Willem F.P. de Vogel.............................. 231,198 4.7 6,665 19.8
Quilvest American Equity, Ltd.(7)................. 763,984 14.0 4,484 13.3
Craigmuir Chambers................................
P.O. Box 71, Road Town
Tortola, British Virgin Islands
Kennedy Capital Management, Inc.(8)............... 620,708 12.0 2,580 7.6
10829 Olive Blvd.
St. Louis, MO 63141
Wynnefield Group(9)............................... 278,000 5.64 -- --
c/o Mr. Nelson Obus
One Penn Plaza--Suite 4720
New York, NY 10119
Bank of New York(10).............................. -- -- 2,243 6.7
as Trustee for
Employees Retirement Plan of
Brooklyn Union Gas Co.
<CAPTION>
PERCENT OF
AGGREGATE
VOTING POWER
OF
COMMON STOCK
NAME AND ADDRESS AND
OF BENEFICIAL OWNER(1) SERIES B PREFERRED(4)
- -------------------------------------------------- -----------------------
<S> <C>
Three Cities Fund II L.P.(5)...................... 16.5
Three Cities Offshore II C.V.(6).................. 27.9
TCR Offshore Associates L.P.(6)................... 27.9
TCR Associates L.P.(5)............................ 16.5
Willem F.P. de Vogel.............................. 16.5
Quilvest American Equity, Ltd.(7)................. 13.4
Craigmuir Chambers................................
P.O. Box 71, Road Town
Tortola, British Virgin Islands
Kennedy Capital Management, Inc.(8)............... 8.6
10829 Olive Blvd.
St. Louis, MO 63141
Wynnefield Group(9)............................... 1.2
c/o Mr. Nelson Obus
One Penn Plaza--Suite 4720
New York, NY 10119
Bank of New York(10).............................. 5.2
as Trustee for
Employees Retirement Plan of
Brooklyn Union Gas Co.
</TABLE>
- ------------------------
(1) Except as otherwise indicated, the address of the Beneficial Owners is c/o
Three Cities Research, Inc., 135 East 57 Street, New York, NY 10022. For
information concerning the beneficial ownership of shares by Messrs. J.
William Uhrig, H. Whitney Wagner and Thomas G. Weld, see the following table
concerning Security Ownership of Directors, et al.
(2) The percent of the class is calculated pursuant to Rule 13d-3 ("Rule 13d-3")
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), based on 4,929,122 shares outstanding on January 31, 1998.
(3) The percent of the class is calculated pursuant to Rule 13d-3, based on
33,714 shares outstanding on January 31, 1998.
(4) The percent of aggregate voting power is equal to a fraction, the numerator
of which is the sum of (a) the number of outstanding shares of Common Stock
held by such Beneficial Owner and (b) the number of votes attributable to
the shares of Series B Preferred held by such Beneficial Owner (calculated
by multiplying the number of such shares by 526.093), and the denominator of
which is the sum of (a) the number of shares of Common Stock outstanding and
(b) the total number of votes attributable to the 33,714 shares of Series B
Preferred outstanding (calculated by multiplying the number of such shares
by 526.093).
(5) Information obtained from Schedule 13D/A, filed with the Securities and
Exchange Commission (the "SEC") on April 7, 1997 by Three Cities Fund II
L.P. ("Fund II"), TCR Associates L.P. ("TCR Associates"), Willem F.P. de
Vogel and Thomas G. Weld. All shares are held by Fund II. TCR Associates, as
general partner of Fund II, and Mr. de Vogel, as general partner of TCR
Associates, are each deemed, pursuant to Rule 13d-3, to have beneficial
ownership of all shares held by Fund II. Fund
28
<PAGE>
II, TCR Associates and Mr. de Vogel all report shared voting power and
shared dispositive power with respect to such shares. With regard to
information concerning the beneficial ownership of shares of Mr. Thomas G.
Weld, see the following table concerning Security Ownership of Directors, et
al.
(6) Information obtained from Schedule 13D/A, filed with the SEC on April 4,
1997 by Three Cities Offshore II C.V. ("Offshore II"), TCR Offshore
Associates L.P. ("Offshore Associates"), J. William Uhrig and H. Whitney
Wagner. All shares are held by Offshore II. Offshore Associates as general
partner of Offshore II is deemed, pursuant to Rule 13d-3, to have beneficial
ownership of all shares held by Offshore II. Offshore II and Offshore
Associates report shared voting power and shared dispositive power with
respect to such shares. With regard to information concerning the beneficial
ownership of shares by Messrs. J. William Uhrig and H. Whitney Wagner, see
the following table concerning Security Ownership of Directors, et al.
(7) Information obtained from Schedule 13D, filed with the SEC on March 9, 1998
by Quilvest American Equity, Ltd. ("QAE"). The ownership of the Common Stock
includes 538,440 shares of Common Stock issuable upon conversion of 210,000
shares of Series A Preferred at a rate of conversion of 2.564 shares of
Common Stock for each share of Series A Preferred.
(8) The ownership of the Common Stock includes 248,708 shares of Common Stock
issuable upon conversion of 97,000 shares of Series A Preferred.
(9) Information obtained from Schedule 13D, filed with the SEC on November 7,
1997 by Wynnefield Partners Small Cap Value, L.P. (the "Partnership"),
Wynnefield Small Cap Value Offshore Fund, Ltd. (the "Fund") and Wynnefield
Partners Small Cap Value, L.P. I (the "Partnership I", and, collectively
with the Partnership and the Fund, the "Wynnefield Group"). Wynnefield
Capital Management, LLC, a New York limited liability company ("WCM"), is
the general partner of the Partnership and the Partnership I. Messrs. Nelson
Obus, Joshua Landes and Robert Melnick are the managing members of WCM and
the principal executive officers of Wynnefield Capital, Inc., the investment
manager of the Fund. Pursuant to Rule 13d-4, Messrs. Obus, Landes and
Melnick disclaim beneficial ownership of any shares owned by the Wynnefield
Group and disclaim membership in the Wynnefield Group with respect to the
shares for the purposes of Sections 13(d) and 13(g) of the Exchange Act.
(10) Information obtained from Exhibits 3 and 4 of Schedule 13D/A filed with the
SEC by Terfin International, Ltd. on April 4, 1997. Bank of New York's
address is not specified in such filing.
29
<PAGE>
(b) Security Ownership of Directors, Named Executive Officers and Executive
Officers and Directors as a Group.
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE
VOTING POWER
COMMON STOCK SERIES B PREFERRED OF
------------------------- ------------------------ COMMON STOCK
NAME OF NUMBER PERCENT NUMBER PERCENT AND
DIRECTOR/OFFICER OF SHARES OF CLASS(1) OF SHARES OF CLASS(2) SERIES B PREFERRED(3)
- --------------------------------------------------- ---------- ------------- ----------- ----------- -----------------------
<S> <C> <C> <C> <C> <C>
John J. Borer III.................................. 255,569 (4) 4.9 90 *
1.3
William F. Cass.................................... -- -- 50 * *
Peter V. Handal.................................... 41,697 (5) * 250 * *
Denis LeClair...................................... -- -- -- -- --
B. Mary McNabb..................................... 12,500 * 200 * *
William W. Mowbray(6).............................. -- -- 500 1.5 *
Ronald Rashkow..................................... 101,900 (7) 2.0 350 (8)
1.0 1.3
James D. Somerville................................ 19,000 * 750 2.2 *
Jonathan W. Spatz.................................. -- -- 250 * *
Michael Searles(9)................................. -- -- -- -- --
J. William Uhrig(10)(11)........................... 399,952 8.1 11,272 33.4 27.9
H. Whitney Wagner(10).............................. 390,978 7.9 11,272 33.4 27.9
Thomas G. Weld(12)................................. 238,890 4.8 6,665 19.9 16.5
Officers and Directors as a Group.................. 1,069,508 (13) 20.1 20,377
60.4 51.1
</TABLE>
- ------------------------
* Less than 1%.
(1) The percent of the class is calculated pursuant to Rule 13d-3, based on
4,929,122 shares outstanding on January 31, 1998.
(2) The percent of the class is calculated pursuant to Rule 13d-3, based on
33,714 shares outstanding on January 31, 1998.
(3) The percent of the aggregate voting power is equal to a fraction, the
numerator of which is the sum of (a) the number of outstanding shares of
Common Stock held by such Director or Officer and (b) the number of votes
attributable to the shares of Series B Preferred held by such Director or
Officer (calculated by multiplying the number of such shares by 526.093),
and the denominator of which is the sum of (a) the number of shares of
Common Stock outstanding and (b) the total number of votes attributable to
the 33,714 shares of Series B Preferred outstanding (calculated by
multiplying such number of shares by 526.093).
(4) Includes 23,750 shares which Mr. Borer has a right to acquire within 60 days
through the exercise of stock options; 15,896 shares of Common Stock
issuable upon conversion of 6,200 shares of Series A Preferred; and 212,812
shares issuable upon conversion of 83,000 shares of Series A Preferred which
Mr. Borer has the right to acquire within 60 days through the exercise of a
warrant.
(5) Includes 3,750 shares which Mr. Handal has a right to acquire within 60 days
through the exercise of stock options and 37,947 shares issuable upon
conversion of 14,800 shares of Series A Preferred held by Mr. Handal.
(6) Mr. Mowbray resigned from his position as President and Chief Executive
Officer of the Company in August 1, 1997.
30
<PAGE>
(7) Includes 11,000 shares of Common Stock held by members of Mr. Rashkow's
family; 64,612 shares of Common Stock issuable upon conversion of 25,200
shares of Series A Preferred held by Mr. Rashkow; 11,538 shares of Common
Stock issuable upon conversion of 4,500 shares of Series A Preferred held by
members of Mr. Rashkow's family; and 3,750 shares which Mr. Rashkow may
acquire within 60 days through the exercise of stock options.
(8) Includes 250 shares of Series B Preferred held by members of Mr. Rashkow's
family.
(9) Mr. Searles was appointed Chief Executive Officer of General Textiles and
Factory 2-U in March 1998.
(10) Information obtained from Schedule 13D/A, filed with the SEC on April 4,
1997 by Offshore II, Offshore Associates, and Messrs. Uhrig and Wagner. All
shares are held by Offshore II. Messrs. Uhrig and Wagner, in their capacity
as general partners of Offshore Associates, the general partner of Offshore
II, are deemed, pursuant to Rule 13d-3, to have beneficial ownership of all
shares held by Offshore II. Messrs. Uhrig and Wagner both report shared
voting power and shared dispositive power with respect to such shares.
(11) Mr. Uhrig's beneficial ownership also includes 8,974 shares issuable upon
conversion of 3,500 shares of Series A Preferred held directly by Mr. Uhrig.
(12) Information obtained from Schedule 13D/A, filed with the SEC on April 7,
1997 by Fund II, TCR Associates and Messrs. de Vogel and Weld. All shares
are held by Fund II. Mr. Weld, in his capacity as general partner of TCR
Associates, the general partner of Fund II, is deemed, pursuant to Rule
13d-3, to have beneficial ownership of all shares held by Fund II. Mr. Weld
reports shared voting power and shared dispositive power with respect to
such shares. Mr. Weld's beneficial ownership also includes 7,692 shares
issuable upon conversion of 3,000 shares of Series A Preferred held directly
by Mr. Weld.
(13) Includes 31,250 shares of Common Stock which Officers and Directors of the
Company have the right to acquire within 60 days through the exercise of
stock options; 146,660 shares of Common Stock issuable upon conversion of
57,200 shares of Series A Preferred held by Officers and Directors of the
Company; and 212,812 shares of Common Stock issuable upon conversion of
83,000 shares of Series A Preferred which Mr. Borer has a right to acquire
within 60 days through the exercise of a warrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 20, 1997 and June 16, 1997, the Company sold 1,865 shares and 250
shares, respectively, of Series B Preferred to its senior employees and officers
(of which 1000 were sold to the Named Executive Officers) at a purchase price of
$1,000 per share, which was paid in the form of full-recourse notes receivable
secured by the issued stock. The notes accrue interest at 8% per annum and
require principal payments equivalent to 16.25% of the annual bonus of each
purchaser and a balloon payment of the unpaid principal and interest at
maturity. The notes mature in March 2002.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
The following is an index of the financial statements and exhibits included
in this report or incorporated herein by reference.
1) Financial Statements; the financial statements filed as part of this
report are listed in the index to financial statements on page 22.
2) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1 Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code of FBS Holdings,
Inc. and General Textiles, d/b/a Family Bargain Centers (Family Bargain) included in First Amended
Disclosure Statement (2-Exhibit 2.1)
2.3 Stock Purchase Agreement, dated June 10, 1993, by and between Diversified Retail Services, Inc.
(Retail) and MKI Holding Corp. (4-Exhibit 2)
2.4 Securities Purchase Agreement dated December 30, 1996 among Family Bargain Corporation and the
Purchasers (11-Exhibit 2.4)
3.1 Restated Certificate of Incorporation of the Registrant (1-Exhibit 3.1)
3.2 Amendments to the Restated Certificate of Incorporation of the Registrant (6-Exhibit 3.2)
3.3 Amended and Restated By-Laws of the Registrant (6-Exhibit 3.4)
4.1 Form of Certificate of Designation of Series A 9% Cumulative Preferred Stock (6- Exhibit 4.1)
4.2 Special Series A 9% Cumulative Convertible Preferred Stock (6-Exhibit 4.3)
4.3 Specimen Common Stock Certificate (1-Exhibit 4.2)
4.4 Specimen Class C Redeemable Common Stock Purchase Warrant Certificate (1-Exhibit 4.3)
4.5 Specimen Class D Redeemable Common Stock Purchase Warrant Certificate (1-Exhibit 4.4)
4.6 Certificate of Designations of the Series C Convertible Preferred Stock (6- Exhibit 4.8(a))
4.7 Certificate of Correction of the Certificate of Designations of the Series C Convertible Preferred
Stock (6-Exhibit 4.8(b))
4.8 Certificate of Designations of the Series D Convertible Preferred Stock (6- Exhibit 4.9(a))
4.9 Certificate of Correction of the Certificate of Designations of the Series D Convertible Preferred
Stock (6-Exhibit 4.9(b))
4.10 Indenture, dated as of May 1993, between General Textiles and IBJ Schroder Bank & Trust Company
(included in Exhibit 2.1 above)
4.11 General Textiles Subordinated Notes Due 2003 (included in Exhibit 2.1 above)
4.12 Subordinated Reorganization Note Agreement, dated as of May 28, 1993, among General Textiles,
Berkeley Atlantic Income Limited, Govett American Endeavor Fund Limited and London Pacific Life &
Annuity Company (included in Exhibit 2.1 above)
4.13 Junior Subordinated Reorganization Note Agreement, dated as of May 1993, among General Textiles,
Berkeley Atlantic Income Limited, Govett American Endeavor Fund Limited and London Pacific Life &
Annuity Company (included in Exhibit 2.1 above)
4.14 Rights Agreement dated as of November 27, 1995 between the Registrant and Corporate Stock Transfer,
Inc. (8-Exhibit 1)
4.15 Certificate of Designations of the Series A Junior Participating Preferred Stock (included in Exhibit
4.14 above)
4.16 Certificate of Designations of Series B Junior Convertible, Exchangeable Preferred Stock. (11-Exhibit
4.16)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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))
10.6 Consulting Agreement, dated January 1, 1996, between Joel Mandel and General Textiles (10-Exhibit
10.6)
10.7 Employment Agreement, dated as of August 1, 1995, between General Textiles and William Mowbray
(10-Exhibit 10.7)
10.7(a) Separation Agreement, dated as of August 1, 1997, between General Textiles and William Mowbray
(13-Exhibit 10.4)
10.8 Employment Agreement, dated as of August 21, 1995, between General Textiles and Kevin P. Frabotta
(10-Exhibit 10.8)
10.8(a) Advisory Agreement dated as of November 1, 1995 between the Registrant and H. Jurgen Schlichting
(10-Exhibit 10.8(a))
10.9(a) Management Agreement, dated May 28, 1993, among DRS Apparel, Inc., General Textiles and Transnational
Capital Ventures, Inc. (6-Exhibit 10.9 (a))
10.9(b) Assignment (of Management Agreement), dated January 28, 1994, among DRS Apparel, Inc., General
Textiles and Transnational Capital Ventures, Inc. (6-Exhibit 10.9(b))
10.10(a) Amended and Restated Loan and Security Agreement, dated as of October 14, 1993, between General
Textiles and Guilford Investments, Inc. (6-Exhibit 10.10(a))
10.10(b) First Amendment to Amended and Restated Loan and Security Agreement (6-Exhibit 10.10(b))
10.11 Option Agreement, dated January 28, 1994, between Registrant and Guilford Investments, Inc.
(6-Exhibit 10.11)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.12 Agreement, dated January 28, 1994, between Registrant and Guilford Investments, Inc. (6-Exhibit
10.12)
10.13 Federal Income Tax Allocation Agreement, dated May 28, 1993, between Registrant and General Textiles
(6-Exhibit 10.13)
10.14 Amended and Restated Loan and Security Agreement, dated as of October 14, 1993 Westinghouse Electric
Corporation and General Textiles (6-Exhibit 10.14)
10.15 Loan and Security Agreement, dated as of October 14, 1993, between General Textiles and Greyhound
Financial Capital Corporation (6-Exhibit 10.15)
10.15(a) Amendment No. 1 to Loan and Security Agreement, dated as of July 14, between General Textiles and
Greyhound Financial Capital Corporation (7-10.15(3))
10.15(b) Amendment No. 5 to Loan and Security Agreement, dated April 18, between General Textiles and Finova
Capital Corporation (10-10.15(b))
10.15(c) Amendment No. 6 to Loan and Security Agreement, dated July 10, 1996, between General Textiles and
Finova Capital Corporation (11-Exhibit 10.15(c))
10.15(d) Amendment No. 7 to Loan and Security Agreement, dated December 31, 1996, between General Textiles and
Finova Capital Corporation (11-Exhibit 10.15(d))
10.15(e) Amendment No. 8 to Loan and Security Agreement, dated April 23, 1997, between General Textiles and
Finova Capital Corporation (12-Exhibit 10.2(a))
10.15(f) Amendment No. 9 to Loan and Security Agreement, dated May 30, 1997, between General Textiles and
Finova Capital Corporation (12-Exhibit 10.2(b))
10.15(g) Amendment No. 10 to Loan and Security Agreement, dated September 24, 1997, between General Textiles
and Finova Capital Corporation (13-Exhibit 10.2)
10.16 Second Amended and Restated Senior Secured Term Note (6-Exhibit 10.16)
10.17 Amended and Restated Revolving Credit Note, dated October 14, 1993 from General Textiles in favor of
Westinghouse Electric Corporation (6-Exhibit 10.17)
10.18 Intercreditor, Standstill and Subordination Agreement, dated as of October 14, 1993, among Greyhound
Financial Capital Corporation, Westinghouse Electric Corporation, Guilford Investments Inc. and
General Textiles (6-Exhibit 10.18)
10.19 Stock Pledge Agreement, dated as of October 14, 1993, between DRS Apparel, Inc. and Greyhound
Financial Corporation (6-Exhibit 10.19)
10.20 Purchase and Sale Agreement, dated as of December 28, 1993, between Guilford Investments, Inc. and
Westinghouse Electric Corporation (6-Exhibit 10.20)
10.21 Assignment and Assumption Agreement, dated December 29, 1993, between Guilford Investments, Inc. and
Westinghouse Electric Corporation (6-Exhibit 10.21)
10.22(a) Stock Option Agreement, dated September 20, 1991, among Transnational Capital Ventures, Inc. (TCV),
the Selzer Group, Inc. (TSG) and the stockholders of Mandel-Kahn (3-Exhibit 10.14(a))
10.22(b) Consent, dated as of December 11, 1991, among TCV, TSG and the stockholders of Mandel-Kahn (3-Exhibit
10.14(b))
10.22(c) First Amendment to Stock Option Agreement, effective as of January 7,1992, among TCV, TSG and the
stockholders of Mandel-Kahn (3-Exhibit 10.14(c))
10.22(d) Assignment of Contract, dated June 15, 1992, from TCV and TSG to MKI Acquisition (5-Exhibit 4)
10.22(e) Amendment No. 2 to Stock Option Agreement, dated as of June 16, 1992, among TCV, TSG, Mandel-Kahn and
the stockholders of Mandel-Kahn (5-Exhibit 5)
10.22(f) Notice of Exercise, dated June 16, 1992, from MKI Acquisition to the stockholders of Mandel-Kahn
(5-Exhibit 6)
10.23 Stock Purchase Agreement, dated June 10, 1993, between Registrant and MKI Holding Corp. (6-Exhibit
10.23)
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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)
10.30(a) Loan and Security Agreement dated November 13, 1995 between Factory 2-U and Finova Capital
Corporation (10-Exhibit 10.30(a))
10.30(b) Amendment No. 1 to Loan and Security Agreement, dated April 18, 1996, between Factory 2-U, Inc. and
Finova Capital Corporation (10-Exhibit 10.30(b))
10.30(c) Amendment No. 2 to Loan and Security Agreement, dated April 22, 1996between Factory 2-U and Finova
Capital Corporation (11-Exhibit 10.3(c))
10.30(d) Amendment No. 3 to Loan and Security Agreement, dated July 10, 1996between Factory 2-U and Finova
Capital Corporation (11-Exhibit 10.3(d))
10.30(e) Amendment No. 4 to Loan and Security Agreement, dated December 31, 1996between Factory 2-U and Finova
Capital Corporation (11-Exhibit 10.3(e))
10.30(f) Amendment No. 5 to Loan and Security Agreement, dated April 23, 1997between Factory 2-U and Finova
Capital Corporation (12-Exhibit 10.1(a))
10.30(e) Amendment No. 6 to Loan and Security Agreement, dated May 30, 1997between Factory 2-U and Finova
Capital Corporation (12-Exhibit 10.1(b))
10.30(f) Amendment No. 7 to Loan and Security Agreement, dated May 30, 1997between Factory 2-U and Finova
Capital Corporation (13-Exhibit 10.1)
10.30(g) Modifications to Loan and Security Agreement, dated August 28, 1997between Finova Capital Corporation
and both General Textiles and Factory 2-U (12-Exhibit 10.6)
10.33 Acknowledgement and Reaffirmation (Re: Affiliate Debt, Management Fees, Intercreditor Agreement)
dated as of April 23, 1997, between Family Bargain Corporation and Finova Capital Corporation
(12-Exhibit 10.3(a))
10.33(a) Acknowledgement and Reaffirmation (Re: Affiliate Debt, Management Fees, Intercreditor Agreement)
dated as of May 30, 1997, between Family Bargain Corporation and Finova Capital Corporation
(12-Exhibit 10.3(b))
10.33(b) Acknowledgement and Reaffirmation (Re: Affiliate Debt, Management Fees, Intercreditor Agreement)
dated as of September 24, 1997, between Family Bargain Corporation and Finova Capital Corporation
(13-Exhibit 10.3)
10.40 Subordination and Standill Agreement (Re: $6.35 MM Debt), dated as of May 30, 1997, between Family
Bargain Corporation and Finova Capital Corporation (12-Exhibit 10.4)
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.50 Subordinated Promissory Note ($6.35 MM), dated as of April 30, 1997 between General Textiles and
Family Bargain Corporation (12-Exhibit 10.5)
11.1 Computation of per share loss
21 List of the Registrant's Subsidiaries (10-Exhibit 21)
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1, No. 33-47645 filed with the Commission on September 16, 1992.
(2) Incorporated by reference to the Registrant's Form 10-K for fiscal year
ended April 30, 1993.
(3) Incorporated by reference to the Registrant's Form 10-K for fiscal year
ended December 31, 1991.
(4) Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on June 23, 1993.
(5) Incorporated by reference to the Registrant's Form 8-K filed with the
Commission in July 1992.
(6) Incorporated by reference to the Registrant's Registration Statement on Form
S-1, No. 33-77488 filed with the Commission on April 7, 1994.
(7) Incorporated by reference to General Textiles' Registration Statement on
Form S-4, No. 33-92176 filed with the Commission on May 11, 1995.
(8) Incorporated by reference to the Registrant's Form 8-K and 8-K/A dated
November 28, 1995.
(9) Incorporated by reference to the Registrant's Form 8-K dated November 27,
1995.
(10) Incorporated by reference to the Registrant's Form 10-K/A for fiscal year
ended January 27, 1996.
(11) Incorporated by reference to the Registrant's Form 10-K for fiscal year
ended February 1, 1997.
(12) Incorporated by reference to the Registrant's Form 10-Q for the 13 weeks
ended August 2, 1997 (2nd Quarter).
(13) Incorporated by reference to the Registrant's Form 10-Q for the 13 weeks
ended November 1, 1997 (3rd Quarter).
(b) Reports on Form 8-K.
The Registrant filed a Form 8-K dated May 14, 1997. A Form 8-K/A-1 filed May
23, 1997 amended it in its entirety. The reports on Form 8K and 8K/A-1 reported
on a change in certifying accountants filed pursuant to Section 13 of the
Securities Act of 1934.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Amendment to be signed on
its behalf by the undersigned, hereunto duly authorized.
FAMILY BARGAIN CORPORATION
BY: /S/ JONATHAN W. SPATZ
-----------------------------------------
Jonathan W. Spatz
EXECUTIVE VICE PRESIDENT
Dated: October 1, 1998
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Family Bargain Corporation:
We have audited the accompanying consolidated balance sheet of Family
Bargain Corporation (a Delaware corporation) and subsidiaries as of January 31,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated
financial statements of Family Bargain Corporation and subsidiaries as of
February 1, 1997 and January 27, 1996 were audited by other auditors whose
report dated April 11, 1997 expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Family
Bargain Corporation and subsidiaries as of January 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
March 18, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Family Bargain Corporation:
We have audited the accompanying consolidated balance sheet of Family
Bargain Corporation and subsidiaries as of February 1, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended February 1, 1997 and January 27, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Family
Bargain Corporation and subsidiaries as of February 1, 1997, and the results of
their operations and their cash flows for the years ended February 1, 1997 and
January 27, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Diego, California
April 11, 1997
F-2
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................................................. $ 3,167 $ 3,261
Merchandise inventory................................................................. 29,820 29,118
Prepaid expenses and other............................................................ 727 939
Total current assets................................................................ 33,714 33,318
Leasehold improvements and equipment, at cost, net of accumulated depreciation and
amortization (Note 5)................................................................. 15,066 10,714
Other assets (Note 6)................................................................... 3,326 2,323
Excess of cost over net assets acquired, less accumulated amortization of $6,935 and
$5,332 at January 31, 1998 and February 1, 1997, respectively (Note 2)................ 32,711 34,314
Total assets........................................................................ $ 84,817 $ 80,669
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital leases (Notes 8 and 10).............. $ 4,873 $ 5,748
Accounts payable...................................................................... 19,003 17,491
Accrued expenses (Note 7)............................................................. 12,587 9,831
Total current liabilities......................................................... 36,463 33,070
Revolving credit notes (Note 8)......................................................... 12,657 17,887
Long-term debt (Note 8)................................................................. 12,922 14,422
Capital lease and other long-term obligations (Note 10)................................. 3,306 1,984
Deferred rent (Note 10)................................................................. 2,251 2,098
Total liabilities................................................................. 67,599 69,461
Commitments and contingencies (Notes 4, 8, 10, 11 and 15)
Stockholders' equity (Notes 11 and 12):
Series A convertible preferred stock, $0.01 par value, 4,500,000 shares authorized,
3,638,690 and 3,727,415 shares issued and outstanding (aggregate liquidation
preference of $36,387 and $37,274) at January 31, 1998 and February 1, 1997,
respectively........................................................................ 36 37
Series B junior convertible, exchangeable preferred stock, $0.01 par value, 40,000
shares authorized, 33,714 and 22,000 shares issued and outstanding (aggregate
liquidation preference of $33,714 and $22,000) at January 31, 1998 and February 1,
1997, respectively.................................................................. -- --
Common stock, $0.01 par value, 80,000,000 shares authorized, 4,929,122 shares and
4,693,337 shares issued and outstanding at January 31, 1998 and February 1, 1997,
respectively........................................................................ 49 47
Stock subscription notes receivable................................................... (2,115) --
Additional paid-in capital............................................................ 85,427 71,057
Accumulated deficit................................................................... (66,179) (59,933)
Total stockholders' equity........................................................ 17,218 11,208
Total liabilities and stockholders' equity........................................ $ 84,817 $ 80,669
</TABLE>
The accompanying notes are an integral part to these consolidated financial
statements.
F-3
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JANUARY 31, FEBRUARY 1, JANUARY 27,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................................................... $ 300,592 $ 252,165 $ 179,820
Cost of sales............................................................... 195,010 170,857 117,188
Gross profit.............................................................. 105,582 81,308 62,632
Selling and administrative expenses......................................... 96,497 87,806 56,097
Amortization of intangibles................................................. 2,238 1,966 1,382
Special charges (Note 3).................................................... 1,750 9,172 --
Provision for goodwill impairment (Note 2).................................. -- 8,380 --
Write off of deferred offering costs (Note 3)............................... -- 1,923 --
Operating income (loss)................................................... 5,097 (27,939) 5,153
Interest expense (Note 8)................................................... 5,226 8,625 3,675
Income (loss) from continuing operations before income taxes................ (129) (36,564) 1,478
Income taxes (Note 9)....................................................... -- -- --
Discontinued operations (Notes 4 and 15):
Loss on disposal, net of income tax benefit............................... -- (826) (500)
Net income (loss)......................................................... (129) (37,390) 978
Preferred stock dividends:
Series A (Note 11)........................................................ (3,456) (3,509) (3,040)
Series B (Note 11)........................................................ (2,661) -- --
Net loss applicable to common stock......................................... $ (6,246) $ (40,899) $ (2,062)
----------- ----------- -----------
Loss per common share (basic and diluted):
Loss from continuing operations........................................... $ (1.27) $ (8.89) $ (0.39)
Net loss applicable to common stock....................................... (1.27) (9.07) (0.51)
Weighted average common shares outstanding (basic and diluted).............. 4,901 4,507 4,006
</TABLE>
The accompanying notes are an integral part to these consolidated financial
statements.
F-4
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON
SERIES A SERIES B STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1995................... 3,200,000 $ 32 -- $ -- 4,506,981 $ 45
Series A Preferred stock dividends (Note 11).. -- -- -- -- -- --
Purchase of treasury shares................... -- -- -- -- (22,916) --
Cancellation of incentive shares.............. -- -- -- -- (498,672) (5)
Net income.................................... -- -- -- -- -- --
Balance at January 27, 1996................... 3,200,000 $ 32 -- $ -- 3,985,393 $ 40
---------- --- ----------- ----- ---------- ---
Series A Preferred stock dividends (Note 11).. -- -- -- -- -- --
Issuance of preferred stock in settlement of
lawsuit (Notes 4 and 11).................... 60,000 1 -- -- -- --
Issuance of preferred stock in a private
placement (Note 11)......................... 726,000 7 -- -- -- --
Conversion of preferred stock to common
stock....................................... (258,585) (3) -- -- 710,644 7
Issuance of preferred stock in a private
placement (Note 11)......................... -- -- 22,000 -- -- --
Correction of unsplit units................... -- -- -- -- (2,700) --
Net loss...................................... -- -- -- -- -- --
Balance at February 1, 1997................... 3,727,415 $ 37 22,000 $ -- 4,693,337 $ 47
---------- --- ----------- ----- ---------- ---
Series A preferred stock dividends (Note 11).. -- -- -- -- -- --
Series B preferred stock dividend accretion
(Note 11)................................... -- -- -- -- -- --
Conversion of preferred stock to common
stock....................................... (88,725) (1) -- -- 235,785 2
Issuance of preferred stock in a private
placement (Note 11)......................... -- -- 9,599 -- -- --
Issuance of preferred stock to management for
notes (Note 11)............................. -- -- 2,115 -- -- --
Common stock rights redemption................ -- -- -- -- -- --
Net loss...................................... -- -- -- -- -- --
Balance at January 31, 1998................... 3,638,690 $ 36 33,714 $ -- 4,929,122 $ 49
---------- --- ----------- ----- ---------- ---
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ------------ ---------
<S> <C> <C> <C>
Balance at January 28, 1995................... $ 46,707 $ (16,972) $ 29,812
Series A Preferred stock dividends (Note 11).. -- (3,040) (3,040)
Purchase of treasury shares................... (33) -- (33)
Cancellation of incentive shares.............. 5 -- --
Net income.................................... -- 978 978
Balance at January 27, 1996................... $ 46,679 $ (19,034) $ 27,717
----------- ------------ ---------
Series A Preferred stock dividends (Note 11).. -- (3,509) (3,509)
Issuance of preferred stock in settlement of
lawsuit (Notes 4 and 11).................... 359 -- 360
Issuance of preferred stock in a private
placement (Note 11)......................... 2,849 -- 2,856
Conversion of preferred stock to common
stock....................................... (4) -- --
Issuance of preferred stock in a private
placement (Note 11)......................... 21,174 -- 21,174
Correction of unsplit units................... -- -- --
Net loss...................................... -- (37,390) (37,390)
Balance at February 1, 1997................... $ 71,057 $ (59,933) $ 11,208
----------- ------------ ---------
Series A preferred stock dividends (Note 11).. -- (3,456) (3,456)
Series B preferred stock dividend accretion
(Note 11)................................... 2,661 (2,661) --
Conversion of preferred stock to common
stock....................................... (1) -- 0
Issuance of preferred stock in a private
placement (Note 11)......................... 9,600 -- 9,600
Issuance of preferred stock to management for
notes (Note 11)............................. -- -- --
Common stock rights redemption................ (5) -- (5)
Net loss...................................... -- (129) (129)
Balance at January 31, 1998................... $ 83,312 $ (66,179) $ 17,218
----------- ------------ ---------
</TABLE>
The accompanying notes are an integral part to these consolidated financial
statements.
F-5
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31, FEBRUARY 1, JANUARY 27,
1998 1997 1996
----------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations........................... $ (129) $ (36,564) $ 1,478
Adjustments to reconcile income (loss) to net cash provided by
(used in) continuing operations:
Depreciation..................................................... 3,505 2,253 1,603
Amortization of intangibles...................................... 2,238 1,966 1,382
Amortization of debt discount.................................... 2,168 4,376 1,555
Provision for goodwill impairment................................ -- 8,380 --
Gain on revaluation of subordinated notes........................ -- -- (822)
(Increase) decrease in assets:
Merchandise inventory.......................................... (702) (3,244) 124
Prepaid expenses and other..................................... (1,359) 924 (7,647)
Increase (decrease) in liabilities:
Accounts payable............................................... 1,512 (1,269) 5,365
Accrued expenses............................................... 3,655 2,282 946
Other............................................................ 587 1,827 292
Net cash provided by (used in) continuing operations................. 11,475 (19,069) 4,276
Discontinued operations:
Loss from discontinued operations.................................. -- (826) (500)
Decrease in net liabilities........................................ -- (581) (287)
Net cash used in discontinued operations............................. -- (1,407) (787)
Cash flows from investing activities:
Purchase of leasehold improvements and equipment................... (5,865) (4,635) (3,889)
Investment in Factory 2-U, net of cash acquired.................... -- (230) (520)
Proceeds from sale of real property and equipment.................. -- 4,570 --
Net cash used in investing activities................................ (5,865) (295) (4,409)
Cash flows from financing activities:
Borrowings on revolving credit notes............................... 335,053 315,156 210,613
Payments on revolving credit notes................................. (340,283) (312,428) (207,022)
Payments of long-term debt and capital lease obligations........... (6,218) (3,945) (1,565)
Cash payments of preferred stock dividends......................... (3,456) (3,509) (3,040)
Proceeds from issuance of Series B Preferred Stock................. 9,595 -- --
Proceeds from issuance of preferred stock, net..................... -- 24,030 --
Proceeds from issuance of notes payable............................ -- 3,100 1,500
Payment of deferred debt issuance costs............................ (320) (330) (40)
Purchase of subordinated notes, stock and warrants................. (75) -- (90)
Net cash (used in) provided by financing activities................ (5,704) 22,074 356
Net increase (decrease) in cash.................................... (94) 1,303 (564)
Cash at the beginning of the period................................ 3,261 1,958 2,522
Cash at the end of the period...................................... $ 3,167 $ 3,261 $ 1,958
-------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................................... $ 2,948 $ 3,299 $ 1,783
Income taxes..................................................... $ -- $ -- $ --
Supplemental disclosures of non-cash investing and financing
activities:
Acquisition of equipment financed by capital leases
(Note 10)........................................................ $ 2,173 $ 125 $ 123
Issuance of Series B preferred stock for notes..................... $ 2,115 $ -- $ --
Series B preferred stock dividend accretion........................ $ 2,661 $ -- $ --
Issuance of notes payable for non-compete agreement (Note 3)....... $ -- $ 1,750 $ --
Issuance of preferred stock in return for consulting agreement
(Notes 4 and 11)................................................. $ -- $ 360 $ --
Issuance of and adjustments to notes payable to former stockholders
of Factory 2-U (Notes 2 and 8)................................... $ -- $ 600 $ 625
Issuance of note payable for Mandel-Kahn settlement (Notes 4, 8 and
15).............................................................. $ -- $ -- $ 1,000
</TABLE>
The accompanying notes are an integral part to these consolidated financial
statements.
F-6
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Family Bargain Corporation and subsidiaries ("the Company") operates
off-price retail apparel and home goods stores in the western United States. At
January 31, 1998, the Company operated 166 stores in seven states under the
names Family Bargain and Factory 2-U.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Family Bargain
Corporation and its wholly-owned subsidiaries, General Textiles and Factory 2-U,
Inc. All significant intercompany accounts have been eliminated in
consolidation.
FISCAL YEAR
The Company's fiscal year is based on a 52/53 week year ending on the
Saturday nearest January 31. Fiscal years ended January 31, 1998 and January 27,
1996 included 52 weeks and the fiscal year ended February 1, 1997 included 53
weeks. The Company defines its fiscal year by the calendar year in which most of
the activity occurs (e.g. the year ended January 31, 1998 is referred to as
fiscal 1997).
MERCHANDISE INVENTORY
Merchandise inventory is stated at the lower of cost or market determined
using the retail inventory method on a first-in, first-out flow assumption. In
addition, consistent with industry practice, the Company capitalizes certain
buying, warehousing, storage and transportation costs. At January 31, 1998 and
February 1, 1997, such costs included in inventory were approximately $1,300,000
and $1,353,000, respectively.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost. Equipment under
capital leases is stated at the present value of minimum lease payments at the
date of acquisition. Depreciation and amortization are calculated using the
straight-line method over the shorter of the estimated useful lives of the
related asset or the lease term, generally five to seven years.
OTHER ASSETS
Other assets consist principally of rental deposits on leased stores,
deferred debt issuance costs and a covenant not to compete. Deferred debt
issuance costs are amortized using the effective interest method over the terms
of the related debt. Noncompete agreements are amortized ratably over the life
of the agreement.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired (goodwill) is amortized on a
straight-line basis over the expected periods to be benefited, generally 25
years. The Company assesses the recoverability of this intangible asset by
determining whether the goodwill balance can be recovered from undiscounted
future operating cash flows. The impairment if any is measured based on
estimated fair values. Goodwill recovery may be impacted if estimated future
operating cash flows are not achieved (Note 2).
F-7
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSET IMPAIRMENT
Effective March 3, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets (Note 2).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of all receivables, payables and accrued balances
approximate fair value due to the short-term nature of such instruments. The
carrying amount of the revolving credit notes approximates fair value due to the
floating rate on such instruments. The carrying value of long-term debt with
fixed payment terms approximates fair value. Long-term debt subject to
contingent principal payments is evaluated each year based on expected debt
repayment (Note 8). It is not practicable to estimate the fair value of such
instruments due to the potential volatility in repayment amounts
LEASES
Rent expense is recorded on a straight-line basis over the life of the
lease. Deferred rent represents the difference between base rentals paid under
operating lease agreements and rent expense recognized (Note 10).
STORE PREOPENING AND CLOSING COSTS
In fiscal 1996, the Company changed its method of accounting for preopening
costs (costs of opening new stores including grand opening promotions, training,
store set-up and other direct incremental store opening costs) to charging such
costs to expense as incurred. Prior to fiscal 1996, the Company capitalized and
amortized preopening costs using the straight-line method over the first twelve
months of operation. The impact of the change was not material to the Company's
consolidated financial statements.
Costs associated with closing stores, consisting primarily of lease
obligations and provisions to reduce assets to net realizable value, are charged
to operations upon the commitment to close a store.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date (Note 9).
F-8
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
Prior to January 28, 1996, the Company accounted for stock options issued to
directors and employees in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. As such, compensation expense would be recorded
under the intrinsic value method. Under the intrinsic value method, compensation
expense is recognized only in the event that the exercise price of options
granted is less than the market price of the underlying stock on the date of
grant. On January 28, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation,
which permits entities to measure compensation expense related to stock options
using either the intrinsic value method or a fair value method. The fair value
method generally requires entities to recognize compensation expense over the
vesting period of options based on the estimated fair value of the options
granted. The Company has elected to apply the intrinsic value method of
measuring stock based compensation and provide the pro forma disclosure
requirements of SFAS No. 123 (Note 12).
The Company has only issued options with exercise prices above or equivalent
to market price on the grant date. Accordingly, the Company has recognized no
compensation expense related to stock options in the accompanying consolidated
financial statements.
EARNINGS (LOSS) PER COMMON SHARE
In December 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". The statement specifies the
computation, presentation, and disclosure requirements for earnings per share
(EPS) and diluted earnings per share (DEPS). The statement requires retroactive
adoption for all prior periods presented.
Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision and (c) revising the
contingent share provisions and the supplemental EPS data requirements.
The computation of diluted EPS is similar to the computation of basic EPS
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. In addition, in computing the dilutive effect of
convertible securities, the numerator is adjusted to add back (a) any
convertible preferred dividends and (b) the after-tax amount of interest
recognized in the period associated with any convertible debt.
For fiscal years 1997, 1996 and 1995 potential dilutive securities include
stock options, warrants, and convertible preferred stock and had such potential
common shares been outstanding, the effect on earnings per share would have been
anti-dilutive. Therefore, the exercise or conversion of such securities is not
assumed for purposes of calculating diluted earnings per share. Basic and
diluted are equal in each period presented.
F-9
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIVIDEND ACCRETION
The Company's Series B preferred stock has an increasing rate dividend
feature (Note 11). Accordingly, dividends on Series B preferred stock are
recorded using the effective interest method to recognize the dividends ratably
over the estimated period in which the stock will be outstanding.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. Advertising expense
for the fiscal years ended January 31, 1998, February 1, 1997 and January 27,
1996 was $9,289,000, $8,633,000 and $7,364,000, respectively.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform their
presentation to fiscal 1997 consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted SFAS No. 129, "Disclosure of
Information about Capital Structure". This Statement establishes standards for
disclosing information about an entity's capital structure. This Statement is
effective for financial statements for periods ending after December 15, 1997.
The adoption of SFAS No. 129, in fiscal 1997 did not have a material effect on
the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 131 requires reporting certain
information about operating segments in condensed financial statements of
interim periods issued to shareholders. Both standards are required to be
adopted during fiscal 1998. Management does not expect the adoption of these
standards to have a material effect on the Company's financial position or
results of operations.
2. ACQUISITION OF FACTORY 2-U
On November 13, 1995, the Company acquired all of the common stock of Capin
Mercantile Corporation, an off-price clothing and home goods retailer operating
in the southwestern United States, for $1,675,000 in cash (including acquisition
expenses) and $1,225,000 in notes payable to former
F-10
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF FACTORY 2-U (CONTINUED)
stockholders (Note 8). Immediately following the acquisition, the name of Capin
Mercantile Corporation was changed to Factory 2-U, Inc. (Factory 2-U).
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Factory 2-U have been included in
these consolidated financial statements from November 11, 1995, the end of the
accounting period closest to the acquisition date.
All acquired assets and liabilities of Factory 2-U were recorded at
estimated fair market values on November 10, 1995, with the excess of cost over
fair market value allocated to acquired goodwill. Subsequently, adjustments to
goodwill were recorded to finalize allocations of fair value for certain assets
and liabilities as follows:
<TABLE>
<S> <C>
IN THOUSANDS
Goodwill as originally recorded................................... $ 14,670
Contingent payment resulting from sale of building................ 600
Write down of phone system asset.................................. 153
Additional sales tax payable...................................... 96
Additional acquisition costs...................................... 163
Write down of inventory........................................... 894
-----------
Adjusted goodwill................................................. 16,576
Adjustments to recognize impairment............................... (8,380)
-----------
Balance at February 1, 1997....................................... $ 8,196
-----------
-----------
</TABLE>
The contingent payment was an addition to the purchase price of Factory 2-U
required under the purchase agreement because a building was sold for its book
value of $4.5 million. The write down of the phone system asset (which increased
the amount by which the purchase price exceeded the net assets acquired)
resulted from a decision that a phone system included in the acquired assets
could not economically be moved and therefore should be abandoned. The
additional sales tax and additional acquisition costs both reflected amounts by
which costs exceeded the sums estimated at the time of the transaction. The
write down of inventory was to correct errors recording inventory transfers made
at the time of the Factory 2-U acquisition. The adjustment to recognize
impairment of goodwill was made because operating results during the year ended
January 31, 1997 made it appear unlikely that Factory 2-U's discounted future
cash flows would be sufficient to recover the entire goodwill.
The following table sets forth the Company's pro forma unaudited
consolidated statement of operations for fiscal year ended January 27, 1996. The
pro forma consolidated statement of operations gives effect to the consolidation
of Factory 2-U, elimination of sales and cost of sales related to Factory 2-U
stores no longer in operation, elimination of Factory 2-U general and
administrative expenses, the adjustment of interest expense and financing fees
to reflect the debt structure of the consolidated entity,
F-11
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF FACTORY 2-U (CONTINUED)
and the recognition of the amortization of the excess of cost over the fair
value of assets acquired with all transactions treated as though the acquisition
had occurred at January 29, 1995.
<TABLE>
<CAPTION>
PRO FORMA
1995
-----------
<S> <C>
IN THOUSANDS EXCEPT PER SHARE DATA
Net sales......................................................................... $ 220,084
Net loss.......................................................................... $ (4,020)
Loss applicable to common stock................................................... $ (7,060)
Loss per common share (basic and diluted)......................................... $ (1.76)
</TABLE>
FAS 121 "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of" requires the calculation of the present
value of anticipated future cash flows to determine any impairment of such
assets, including goodwill. The operating results of Factory 2-U during the year
after acquisition were significantly below the projections the Company had used
when Factory 2-U was acquired. As a result, the Company adjusted its estimate of
future cash flows for Factory 2-U. The revised estimated cash flows were
insufficient to recover the recorded value of goodwill. Because of this, the
Company recorded a charge of $8,380,000 to reduce goodwill arising from the
Factory 2-U acquisition to its unimpaired value (i.e., the amount that could be
recovered through the revised estimated future cash flows).
3. SPECIAL CHARGES
In August 1997, the Company recorded special charges to operations in the
amount of $1,750,000 pertaining to the separation from the Company of the former
President and CEO.
In connection with the sale of a controlling interest in the Company to a
new investor group in January 1997 (Note 11), the Company moved its executive
offices from New York City to San Diego, CA and entered into a separation
agreement with three former executives (the Former Executives). As a result of
these actions, the Company recognized special charges in the amount of
$9,172,000 in fiscal 1996. The special charges included $7,081,000 to settle the
existing employment and benefit agreements of the Former Executives and
$2,091,000 to cancel certain contracts and expenses related to the separation of
the Former Executives and closure of the New York office.
The Company withdrew a securities offering in January 1997. In conjunction
with this withdrawal, the Company wrote-off $1,923,000 in deferred offering
costs.
4. DISCONTINUED OPERATIONS
The Company divested its distribution business (the Former Distribution
Business), which was comprised of the operations of MKI Acquisition,
Mandel-Kahn, CB/Camelot and CB/Murray, prior to April 30, 1993. The estimation
and settlement of the residual net liabilities of the Former Distribution
Business have been accounted for as discontinued operations in these
consolidated financial statements.
In January 1996, the Company settled the remaining claims related to the
Former Distribution Business by agreeing to pay the former owners of Mandel-Kahn
Industries, Inc. a combination of $230,000 in cash, an interest bearing
installment note of $1,000,000 and a consulting arrangement consisting of
aggregate cash payments of $750,000 and 60,000 shares of Series A Preferred
Stock (Note 11). In 1997, the
F-12
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DISCONTINUED OPERATIONS (CONTINUED)
Company determined that it did not intend to employ the services required of the
consultant under the settlement and accordingly charged all remaining
prepayments and future payments related to the consulting agreement to loss on
disposal of discontinued operations. The Company recognized a loss, net of
taxes, on disposal of discontinued operations in the amount of $826,000 and
$500,000 in fiscal 1996 and 1995, respectively, to reflect the costs to litigate
and settle claims and the cost of consulting services that it does not intend to
use. The Company does not anticipate any future expenses related to the Former
Distribution Business.
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
IN THOUSANDS
Furniture, fixtures and equipment....................................................... $ 15,272 $ 10,740
Leasehold improvements.................................................................. 4,797 3,492
Transportation and equipment............................................................ 114 174
Equipment under capital leases.......................................................... 2,883 741
Construction in progress................................................................ -- 330
----------- -----------
23,066 15,477
Less accumulated depreciation and amortization.......................................... (8,000) (4,763)
----------- -----------
$ 15,066 $ 10,714
----------- -----------
----------- -----------
</TABLE>
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
IN THOUSANDS
Deferred debt issuance costs............................................................ $ 257 $ 189
Rent and other deposits................................................................. 989 533
Noncompete agreements................................................................... 2,756 1,800
----------- -----------
4,002 2,522
Less accumulated amortization........................................................... (676) (199)
----------- -----------
$ 3,326 $ 2,323
----------- -----------
----------- -----------
</TABLE>
In August 1997, the former President and CEO entered into an agreement not
to compete with the Company until January 2001 in return for payments totaling
$970,000. In January 1997, the Company entered into an agreement not to compete
with the Former Executives in favor of the Company until June 2000 in return for
$1.8 million in secured promissory notes that were paid in January 1998.
F-13
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
IN THOUSANDS
Accrued compensation and related costs.................................................. $ 3,153 $ 2,924
Sales tax payable....................................................................... 3,432 1,035
Other accrued expenses.................................................................. 6,002 5,872
----------- -----------
$ 12,587 $ 9,831
----------- -----------
----------- -----------
</TABLE>
8. LONG-TERM DEBT AND REVOLVING CREDIT NOTES
Long-term debt and revolving credit notes at January 31, 1998 and February
1, 1997 consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
IN THOUSANDS
Revolving credit note, interest at prime plus 2.0% till June 1997 then prime plus 0.75%
(9.25% at January 31, 1998 and 10.25% at February 1, 1997) payable monthly, principal
due in November 1999.................................................................. $ 9,473 $ 12,967
Revolving credit note, interest at prime plus 2% till June 1997 then prime plus 0.75%
(9.25% at January 31, 1998 and 10.25% at February 1, 1997) payable monthly, principal
due in November 1999.................................................................. 3,184 4,920
Installment note payable to a finance company, interest at prime plus 2% (10.5% at
January 31, 1998 and 10.25% at February 1, 1997) payable monthly, principal payable in
monthly in installments of $37,750, final balloon payment of $216,500 due in April
1998.................................................................................. 292 745
Installment note payable to a finance company, interest at prime plus 2% (10.5% at
January 31, 1998 and 10.25% at February 1, 1997) payable monthly, principal payable
monthly in installments of $30,556, final payment due in May 1999..................... 489 856
Installment note payable to a finance company, interest at prime plus 3% (11.5% at
January 31, 1998 and 11.25% at February 1, 1997) payable monthly, principal payable
monthly in installments of $33,333, final payment due in July 2001.................... 1,400 1,800
Subordinated notes, non-interest bearing, discounted at rates ranging from 6.0% to 25%,
principal payments based on excess cash flow, as defined.............................. 13,042 13,158
Installment note payable to a finance company, interest at 8%, principal and interest
payable in installments of $13,648, final balloon payment of $304,000 due in December
1998.................................................................................. 414 549
Installment note payable to former stockholders of Factory 2-U, interest at 8.75%,
principal payments of $45,455 plus accrued interest payable quarterly beginning in May
1996, final payment due in October 1998 (Note 4)...................................... 182 364
Note payable to former stockholders of Factory 2-U, interest at 8.75%, principal and
accrued interest due in October 1998 (Note 4)......................................... 600 600
</TABLE>
F-14
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT AND REVOLVING CREDIT NOTES (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
IN THOUSANDS
<S> <C> <C>
Installment note payable to the Commerce and Economic Development Commission of Arizona,
interest at 6%, principal and interest payable in monthly installment of $4,232. Note
paid in full in fiscal 1997........................................................... -- 136
Installment note payable to the Economic Development Administration of Arizona, interest
at 5%, principal and interest payable in monthly installments of $1,992. Note paid in
full in fiscal 1997................................................................... -- 49
Secured promissory notes payable to Former Executives, interest at 5.6%, principal and
accrued interest due January 1998 (Note 2). Note paid in full in fiscal 1997.......... -- 1,750
----------- -----------
Total long-term debt.................................................................... 29,076 37,894
Less current maturities................................................................. (3,497) (5,585)
----------- -----------
Long-term debt and revolving credit notes, net of current maturities.................... $ 25,579 $ 32,309
----------- -----------
----------- -----------
</TABLE>
REVOLVING CREDIT NOTES
At January 31, 1998 the Company may borrow up to $50,000,000 under its
revolving credit facilities (the Facilities) at the prime rate plus 0.75%.
Advances under the Facilities are subject to limitations based on inventory
levels, as defined. The Facilities expire in November 1999 but are subject to
one year automatic renewal periods, unless terminated by the Company or its
lender. The balances owed under the Facilities fluctuate based on working
capital requirements. The Company pays fees ranging from .25% to .50% on the
unused portions of the Facilities.
The installment notes payable in the amounts of $2,181,000 and $3,401,000 at
January 31, 1998 and February 1, 1997, respectively, and the Facilities are
secured by substantially all the assets of General Textiles and Factory 2-U and
the common stock of General Textiles.
The Company was not in compliance with the current ratio covenant in the
Facilities as of January 31, 1998. The lender has waived that requirement at
January 31, 1998. In March 1998, the Company and its lender agreed to amend
certain terms and conditions of the Facilities. As a result, the Company's
covenants and financial ratios will be reset to reflect anticipated earnings,
capital expenditures and cash flow of the Company during fiscal 1998.
SUBORDINATED NOTES
At January 31, 1998 and February 1, 1997, the Company owed $22,945,000 and
$25,269,000, respectively, face value of subordinated notes (the Sub Notes)
issued in settlement of certain pre-bankruptcy claims of General Textiles. The
Sub Notes are comprised, in order of seniority, of New Subordinated Notes (due
no later than April 2003), Subordinated Reorganization Notes (due no later than
November 2003) and Junior Subordinated Reorganization Notes (due no later than
May 2005). The Sub Notes are non-interest bearing, except for certain contingent
interest payments (described below), and are subject to minimum principal
payment requirements based on the annual excess cash flows (Excess Cash Flows)
of General Textiles as defined in the Plan of Reorganization (the Plan) under
which General Textiles has
F-15
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT AND REVOLVING CREDIT NOTES (CONTINUED)
operated since emerging from bankruptcy in May 1993. Accordingly, the Sub Notes
have been discounted to carrying values reflected on the accompanying
consolidated balance sheets based on estimated future cash flows of General
Textiles at discount rates ranging from 6% to 25%.
The discount rates applied in determining the carrying values of the Sub
Notes were established when General Textiles emerged from bankruptcy in May 1993
and, under generally accepted accounting principles, may not be adjusted to
reflect changes in market rates of debt with similar characteristics.
Accordingly, the fair values of the Sub Notes may differ substantially from the
carrying values reflected in the accompanying consolidated balance sheets. The
Company does not consider estimation of the fair values of the Sub Notes to be
practicable given the uncertainty regarding the timing and amounts of future
payments.
The aggregate unamortized discount related to the Sub Notes was $9,903,000
and $12,111,000 at January 31, 1998 and February 1, 1997, respectively. The
discount is amortized to interest expense as a non-cash charge until the notes
are paid in full. The impact of changes in estimates of future Excess Cash Flows
on expected amounts and timing of payments are reflected in current earnings as
an adjustment to interest expense. To the degree General Textiles experiences
actual Excess Cash Flows that differ in amounts or timing from those currently
projected, or to the degree General Textiles changes its projections of Excess
Cash Flows in future periods, the Company may experience significant adjustments
to interest expense to reflect such changes.
The Junior Subordinated Reorganization Notes are subject to interest
payments contingent upon the annual adjusted earnings (EBITDA) of General
Textiles as defined in the Plan (Contingent Payments). A Contingent Payment
accrues when the EBITDA of General Textiles exceeds $10 million in a given year
and is payable when Excess Cash Flows are available. Contingent Payments, if
accrued, must be made prior to any other payments in respect of the Subordinated
Reorganization Notes or the Junior Subordinated Reorganization Notes but rank
junior to the New Subordinated Notes and certain debt of General Textiles held
by Family Bargain Corporation. The contingent payment obligation may not exceed
6% of the outstanding face amount of the notes. The face amount of the Junior
Subordinated Reorganization Notes at January 31, 1998 and February 1, 1997 was
$17,335,000. No Contingent Payments have been accrued or disbursed to date.
The Subordinated Reorganization Notes are subject to a schedule of annual
increases in principal payment requirements. As such, adjustments to interest
expense can occur when the timing of projected payments changes from period to
period.
F-16
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT AND REVOLVING CREDIT NOTES (CONTINUED)
The future maturities of long-term debt include estimated principal payments
on the Sub Notes based on management's estimates of projected Excess Cash Flows
of General Textiles. The future maturities at January 31, 1998 are as follows:
<TABLE>
<CAPTION>
IN
THOUSANDS
-----------
<S> <C>
Fiscal year ending:
January 30, 1999.................................................................. $ 3,497
January 29, 2000.................................................................. 1,040
February 3, 2001.................................................................. 6,926
February 2, 2002.................................................................. 13,920
February 1, 2003.................................................................. 939
Thereafter........................................................................ --
-----------
26,322
Less portion representing interest................................................ (9,903)
-----------
16,419
Less current maturities........................................................... (3,497)
-----------
$ 12,922
-----------
-----------
</TABLE>
F-17
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The principal temporary differences that give rise to significant portions
of the consolidated deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
IN THOUSANDS
Deferred tax assets
Net operating loss carryforwards.................................. $ 7,562 $ 9,454
Compensated absences and bonuses.................................. 1,184 1,376
Deferred rent..................................................... 1,118 1,049
Closed store accrual.............................................. 1,158 671
Excess of tax over book inventory................................. 341 544
Restructuring costs............................................... 121 325
Other............................................................. 497 826
Discontinued operations accruals.................................. 48 52
----------- -----------
Total gross deferred tax assets................................... 12,029 14,297
Less valuation allowance............................................ (9,901) (11,452)
----------- -----------
Net deferred tax assets........................................... 2,128 2,845
----------- -----------
Deferred tax liabilities
Subordinated notes................................................ 481 1,363
Inventory reserves and prepaid expenses........................... 151 164
Leasehold improvements and equipment, principally due to
differences in depreciation recognized on fixed assets.......... 598 607
Other............................................................. 898 711
----------- -----------
Deferred tax liabilities.......................................... 2,128 2,845
----------- -----------
Net deferred taxes................................................ $ -- $ --
----------- -----------
----------- -----------
</TABLE>
The Company has established a valuation allowance due to lack of historical
earnings and annual limitations on the usage of net operating loss
carryforwards.
F-18
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The difference between the expected income tax expense (benefit) computed by
applying the U.S. federal income tax rate of 34% to net income from continuing
operations for fiscal 1997, 1996 and 1995 and actual expense is a result of the
following:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1, JANUARY 27,
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
IN THOUSANDS
Computed "expected" tax expense (benefit).................................. $ (44) $ (12,432) $ 503
Amortization of goodwill................................................... 638 668 470
Change in valuation allowance.............................................. (1,551) 5,950 64
Provision for goodwill impairment.......................................... -- 2,849 --
Impact of purchase accounting adjustments.................................. -- -- (603)
Debt forgiveness permanent difference...................................... -- -- (279)
State income taxes, net of federal income tax benefit...................... -- -- --
Limitation of net losses due to change in control.......................... -- 2,988 --
Other, net................................................................. 957 (23) (155)
----------- ----------- -----
$ -- $ -- $ --
----------- ----------- -----
----------- ----------- -----
</TABLE>
At January 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $24.6 million that expire between
2006 and 2012.
10. LEASE COMMITMENTS
The Company operates retail stores, warehouse facilities and administrative
offices under various operating leases. Total rent expense was $17,313,000,
$14,987,000 and $10,128,000, including contingent rent expense of $128,000,
$89,000 and $63,000, for fiscal years ended January 31, 1998, February 1, 1997
and January 27, 1996, respectively.
For financial statement purposes, rent expense is recorded on a
straight-line basis over the life of the lease. Generally, lease payments are
lower in the early years of the lease term and, as a result, financial statement
expense is greater than the cash payments. For fiscal 1997, 1996 and 1995, rent
expense charged to operations exceeded cash payment requirements by $153,000,
$452,000 and $202,000, respectively, and resulted in an increase to the deferred
rent liability for the same amount.
The Company is also obligated under various capital leases for leasehold
improvements and equipment that expire at various dates during the next three
years. Leasehold improvements and equipment and related accumulated amortization
recorded under capital leases are as follows:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -------------
<S> <C> <C>
IN THOUSANDS
Leasehold improvements.............................................. $ 340 $ 291
Equipment........................................................... 2,543 450
----------- -----
2,883 741
Less accumulated amortization....................................... (531) (255)
----------- -----
$ 2,352 $ 486
----------- -----
----------- -----
</TABLE>
F-19
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LEASE COMMITMENTS (CONTINUED)
At January 31, 1998, the future minimum lease payments under capital leases
and operating leases with remaining noncancelable terms and are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
IN THOUSANDS
Fiscal year ending:
January 30, 1999......................................................... $ 1,445 $ 13,348
January 29, 2000......................................................... 267 11,746
February 3, 2001......................................................... 214 8,813
February 2, 2002......................................................... 171 7,161
February 1, 2003......................................................... 20 4,811
Thereafter............................................................... -- 9,233
--------- -----------
Total minimum lease payments............................................. 2,117 $ 55,112
-----------
-----------
Less amount representing interest (rates ranging from 9.0% to 14.8%)..... (144)
---------
Present value of capital lease obligation................................ 1,973
Less current maturities.................................................. (1,377)
---------
Long-term capital lease obligation....................................... $ 596
---------
---------
</TABLE>
11. STOCKHOLDERS' EQUITY
The Company has 7,500,000 shares of preferred stock authorized, of which
4,500,000 have been allocated to Series A 9 1/2% Cumulative Convertible
Preferred Stock (the Series A Preferred Stock) and 40,000 have been allocated to
Series B Junior Convertible, Exchangeable Preferred Stock (the Series B
Preferred Stock).
SERIES A PREFERRED STOCK
The Series A Preferred Stock ranks senior to the Series B Preferred Stock
and the common stock with respect to the payment of dividends and distribution
of net assets upon liquidation, dissolution or winding up. Cumulative dividends
are payable quarterly at the rate of $.95 per year on April 30, July 31, October
31, and the last Friday in January if, as and when declared by the Board of
Directors.
Series A Preferred Stock is convertible, prior to redemption, at the option
of the holder, into shares of common stock at a conversion price subject to
adjustment under certain circumstances pursuant to anti-dilution provisions. At
January 31, 1998 each share of Series A Preferred is convertible into 2.561
shares of common stock. If the Company fails to declare and pay dividends on the
Series A Preferred Stock within 90 days after a quarterly divided date, the
conversion price is reduced by $.50 per share in each instance but not below the
par value of the stock.
In March 1996, the Company issued 726,000 shares of its Series A Preferred
Stock in a private placement to foreign investors under Regulation S of the
Securities Act of 1933. The Company received aggregate proceeds, before
commissions and expenses of the private placement, of $3,539,000. Net proceeds
from this offering were $2,856,000 after payment of $319,000 in placement agent
commissions and $364,000 in offering expenses. As additional compensation in
connection with the private placement,
F-20
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
the Company issued to the placement agent and its designees warrants to purchase
up to an aggregate of 181,500 shares of the Company's common stock at an
exercise price of $1.88 per share (Note 12).
In March 1996, the Company issued 60,000 shares of Series A Preferred Stock
valued at the then market value of $360,000 in partial settlement of a lawsuit
(Note 4).
At January 31, 1998, warrants to purchase 320,000 shares of Series A
Preferred Stock were outstanding with an exercise price of $16.50 per share and
an expiration date of July 1999.
SERIES B PREFERRED STOCK
On January 10, 1997, the Company issued 22,000 shares of Series B Preferred
Stock in a private placement to an investor group. The Company received
aggregate proceeds of $22,000,000 and recognized a charge to additional paid-in
capital of $826,000 for expenses of the private placement. The net proceeds of
the private placement were used to pay costs related to the Unusual Charges
(Note 3) and for general working capital purposes.
During fiscal 1997, the Company placed an additional 11,715 shares of its
Series B Preferred Stock for aggregate cash proceeds of $9,600,000 with private
investors and notes receivable in the amount of $2,115,000 from management of
the Company (the Management Group Notes). The Management Group Notes are due in
March 2002, accrue interest at 8% per annum and require annual principal
payments equivalent to 16.25% of the annual bonus of each purchaser and a
balloon payment of the unpaid principal and accrued interest at maturity. The
notes are full-recourse notes secured by the Series B Preferred Stock issued in
return for the notes.
In April 1997, concurrent with the Series B issuance, the Company
effectively redeemed all rights outstanding under its Shareholders' Rights
Agreement. The Company paid each holder of common stock $0.001 per share
totaling $4,930.
The Series B Preferred Stock ranks junior to the Series A Preferred Stock
and senior to the common stock with respect to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up. The Series B
Preferred Stock is convertible, at the option of the holder, only after all the
Series A Preferred Stock is converted or redeemed. The conversion price per
share is subject to adjustment under certain circumstances pursuant to
anti-dilution provisions. At January 31, 1998 each share of Series B Preferred
Stock is convertible into 526.09 shares of common stock. Each share of Series B
Preferred Stock is entitled to voting rights equivalent to the number of common
shares into which it is convertible.
The Series B Preferred Stock pays no dividend until January 2002. Beginning
in 2002, the Company is obligated to pay a dividend to holders of the Series B
Preferred Stock in the amount of $60 per share subject to increases of $20 per
share every year thereafter until 2005 up to a maximum of $120 per share. In
recognition of the increasing rate feature of Series B preferred stock, the
Company accreted non-cash dividends of $2,661,000 in fiscal 1997. Annual cash
dividends may be required prior to 2002 or in amounts greater than otherwise
required prior to or after 2002 in the event the Company defaults on its
revolving credit facilities or declares a dividend on its common stock.
F-21
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS AND WARRANTS
At January 31, 1998, warrants to purchase 331,106 common shares were
outstanding. Of these warrants, 15,000 are exercisable at the common stock
market price and expire by December 1998, 150,941 have exercise prices ranging
from $9.00 to $10.50 and expiration dates ranging from August 1998 to December
1998 and 165,165 have an exercise price of $1.88 and expire in March 2001 (the
$1.88 Warrants). The $1.88 Warrants were issued in March 1996 in connection with
a private placement of Series A Preferred Stock (Note 11). Had the Company
measured the estimated fair value of the warrants issued in March 1996, there
would have been no impact on the consolidated financial statements due their
being treated as an expense of the private placement.
The Company's Board of Directors has granted stock options to members of the
Board and to Company management. The following table summarizes common stock
option plan activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OF EXERCISE
SHARES PRICES
---------- -----------------
<S> <C> <C>
Outstanding at January 29, 1995................................ 558,333 12.49
Granted........................................................ 560,833 1.38
Canceled (including repriced options).......................... (264,582) 12.48
----------
Outstanding at January 27, 1996................................ 854,584 2.14
Granted........................................................ 37,417 1.38
Canceled....................................................... (502,834) 1.38
----------
Outstanding February 1, 1997................................... 389,167 3.05
Granted........................................................ 3,016,450 2.15
Canceled....................................................... (317,917) 3.43
----------
Outstanding January 31, 1998................................... 3,087,700 2.13
Exercisable at January 31, 1998................................ 1,476,206 2.09
Exercisable at February 1, 1997................................ 385,834 3.07
</TABLE>
In fiscal 1995, the Board of Directors repriced 235,417 options formerly
granted at an exercise price of $12.48 to an exercise price of $1.38. All
options have been granted or repriced at the closing market price of the
underlying stock at the date of grant or the date of repricing. Options
outstanding at January 31, 1998 had exercise prices ranging from $1.38 to $2.34
and a weighted average remaining contractual life of 4.3 years.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" under which no compensation cost has
been recognized. If the Company had elected to recognize compensation costs
based on the fair value on the date of grant for awards in fiscal years 1997 and
1996, consistent with the provisions of SFAS No. 123, net loss and net loss per
share would have been increased to the following amounts:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE
DATA
Pro forma net loss............................................................... ($ 7,114) ($ 40,933) ($ 2,278)
Pro forma net loss per share (basic and diluted)................................. ($ 1.45) ($ 9.08) ($ 0.56)
</TABLE>
F-22
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
The pro forma effect on net loss for fiscal years 1997 and 1996 may not be
representative of the pro forma effect on net loss of future years because the
SFAS No. 123 method of accounting for pro forma compensation expense has not
been applied to options granted prior to fiscal 1996.
The weighted-average fair values at date of grant for options granted during
fiscal 1997 and 1996 were between $0.90 and $1.85 and were estimated using the
Black-Scholes option pricing model. The following assumptions were applied: (i)
expected dividend yield of 0%, (ii) expected volatility rates of 1.388 and 0.83
for fiscal years 1997 and 1996, respectively, (iii) expected life of three to
five years for fiscal 1997 and eight years for fiscal 1996, (iv) risk free
interest rates ranging from 5.45% to 6.88%.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. Because the Company's employee stock-based compensation plan has
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, the Company believes that the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of awards from
those plans.
13. EMPLOYEE BENEFITS
The Company sponsors a defined contribution plan, qualified under Internal
Revenue Code Section 401(k), for the benefit of employees who have completed
twelve months of service and who work a minimum of 1,000 hours during that
twelve month period. The Company makes a matching contribution equal to 20% of
participating employees' voluntary contributions. Participants may contribute
from 1% to 15% of their compensation annually, subject to IRS limitations. The
Company contributed $132,000, $111,000 and $116,000 in fiscal 1997, 1996 and
1995, respectively.
14. RELATED PARTY TRANSACTIONS
During fiscal 1996, the Company paid $1,100,000 in fees and expense
reimbursements related to its withdrawn securities offering and advisory fees
related to the private placement of Series B Preferred Stock to an investment
banking firm for which a director of the Company serves as a managing director
(Notes 3 and 11). This same director was appointed to the Board of Directors
following the successful completion of the initial public offering of Series A
Preferred Stock in July 1994.
The Company also paid a $250,000 finder's fee to a newly appointed director
in respect of advisory services rendered to the Company in connection with the
private placements of Series B Preferred Stock (Note 11).
In January 1997, the Company paid $96,000 to former directors of the Company
pursuant to the cancellation of their stock options and warrants.
In March 1996, a director of the Company was a managing director of the
investment-banking firm that served as the placement agent for the Company's
private placement of 726,000 shares of Series A Preferred Stock (Note 11).
At January 27, 1996, an accounts receivable balance of approximately
$170,000 was outstanding from an affiliate of the Former Executives. This
receivable was forgiven in connection with the settlements with the Former
Executives and is included in the unusual charges recorded in fiscal 1996 (Note
3).
F-23
<PAGE>
FAMILY BARGAIN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
The Company is at all times subject to pending and threatened legal actions
that arise out of the normal course of business. In the opinion of management,
based in part on the advice of legal counsel, the ultimate disposition of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
F-24
<PAGE>
EXHIBIT 11.1
FAMILY BARGAIN CORPORATION
COMPUTATION OF NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED FEBRUARY 1, JANUARY 27,
JANUARY 31, 1998 1997 1996
---------------- ----------- -----------
<S> <C> <C> <C>
The computation of net (loss) available & adjusted shares outstanding
follows:
Income (loss) from continuing operations........................... $ (129) $ (36,564) $ 1,478
Discontinued operations Loss on disposal, net of income tax
benefit.......................................................... $ -- $ (826) $ (500)
Net income (loss).................................................. $ (129) $ (37,390) $ 978
Less: Preferred stock dividends.................................... $ (6,117) $ (3,509) $ (3,040)
Net (loss) used for basic and diluted computation.................. $ (6,246) $ (40,899) $ (2,062)
---------------- ----------- -----------
Weighted average number of common shares outstanding............... 4,901,268 4,507,340 4,006,420
Add:
Assumed exercise of those options that are common stock
equivalents...................................................... -- -- --
Assumed exercise of convertible preferred stock.................... -- -- --
Adjusted shares outstanding, used for basic & diluted computation.... 4,901,268 4,507,340 4,006,420
---------------- ----------- -----------
Loss from continuing operations...................................... $ (1.27) $ (8.89) $ (0.39)
Net loss applicable to common stock per.............................. $ (1.27) $ (9.07) $ (0.51)
</TABLE>
