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Filed pursuant to Rule 424(b)(3)
of The Securities Act of 1933
Registration No. 333-58797
PROSPECTUS
800,000 SHARES
FAMILY BARGAIN CORPORATION
COMMON STOCK, PAR VALUE $.01
We are offering to sell a total of 800,000 shares of our Common Stock, after
completion of a recapitalization, to holders of transferable rights ("Rights")
which we are distributing to our stockholders. Each Right entitles the holder to
purchase one share of post-Recapitalization Common Stock for $13.00. If our
stockholders do not approve a merger that will result in the recapitalization,
each Right will entitle the holder to purchase 3.75 shares of
pre-recapitalization Common Stock for $3.467 per share (a total of $13 per
Right). See "The Restructuring of Our Capitalization" on page 15. Holders who
exercise Rights will have the privilege to oversubscribe to purchase Common
Stock that is offered to holders of Rights, but not purchased because Rights are
not exercised. THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON
NOVEMBER 30, 1998, UNLESS WE EXTEND THE EXPIRATION TIME.
Our Common Stock is traded on the Nasdaq Small-Cap Market under the symbol
"FBAR". The last reported price at which our Common Stock was sold on October
15, 1998 was $1.844. We have applied to have the Rights quoted on the Nasdaq
Small-Cap Market under the symbol "FBARR."
SEE "RISK FACTORS", WHICH BEGINS ON PAGE 12, FOR A DISCUSSION OF SOME
IMPORTANT FACTORS YOU SHOULD CONSIDER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC COMMISSIONS COMPANY (1)
<S> <C> <C> <C>
Per Share...................................... $13.00(2) Not applicable $13.00(2)
Total.......................................... $10,400,000 Not applicable $10,400,000
</TABLE>
(1) Before deducting our expenses, estimated at approximately $300,000.
(2) If our stockholders do not approve a merger which will result in a
recapitalization, the per share price will be $3.467.
The date of this Prospectus is October 19, 1998.
<PAGE>
INFORMATION ABOUT US
This Proxy Statement/Prospectus incorporates important business and
financial information about us that is not included in or delivered with this
Proxy Statement/Prospectus. That is described under "Information Incorporated by
Reference."
We will provide the information incorporated into this Proxy
Statement/Prospectus without charge to stockholders upon written or oral
request, to the extent it does not already accompany this Proxy
Statement/Prospectus. Requests should be addressed to Jonathan Spatz, Chief
Financial Officer, Family Bargain Corporation, 4000 Ruffin Road, San Diego, CA
92123; Telephone No. (619) 627-1800; Facsimile No. (619) 637-4180. TO BE SURE OF
OBTAINING TIMELY DELIVERY, YOU MUST REQUEST THE INFORMATION BY NOVEMBER 20,
1998.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary..................................................................... 3
Summary Financial Information.......................................................... 7
The Offering........................................................................... 9
Risk Factors........................................................................... 12
The Company............................................................................ 15
The Restructuring of our Capitalization................................................ 15
Use of Proceeds........................................................................ 17
Capitalization......................................................................... 18
Stock Prices........................................................................... 19
Dividend Policy........................................................................ 19
Business............................................................................... 19
Management............................................................................. 24
Description of Capital Stock........................................................... 27
Legal Matters.......................................................................... 29
Experts................................................................................ 29
Information Incorporated by Reference.................................................. 29
</TABLE>
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SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. A PROSPECTIVE
PURCHASER OF COMMON STOCK SHOULD READ THE ENTIRE PROSPECTUS BEFORE REACHING AN
INVESTMENT DECISION.
THE COMPANY
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BUSINESS.......................... We operate chains of 124 Family Bargain Center and 38
Factory 2-U off-price retail apparel and housewares
stores in Arizona, California, New Mexico, Nevada,
Oregon, Texas and Washington.
RECAPITALIZATION.................. We are offering shares to holders of Rights as part of a
restructuring of our capitalization. When this
restructuring of our capitalization is completed, (1) we
will have restructured much of our debt and redeemed
part of it, (2) we will have sold Common Stock to
holders of Rights for slightly more than $10 million and
(3) if our stockholders give their approval, we will
have undergone a recapitalization by which, among other
things, all of our Series A Preferred Stock and Series B
Preferred Stock will have been converted into Common
Stock. If our stockholders do not approve the
recapitalization, we may cause our subsidiary, General
Textiles, Inc., to make an exchange offer to our
stockholders. If it does, at least a substantial portion
of our Common Stock and Series B Preferred Stock, and
possibly some of our Series A Preferred stock, will be
exchanged for General Textiles common stock and instead
of owning all of General Textiles (which operates our
two store chains), our only significant assets will be a
minority shareholding in General Textiles and
subordinated notes from General Textiles. See "The
Restructuring of our Capitalization."
If the recapitalization is approved by our stockholders,
it will be carried out by a merger of General Textiles,
Inc. into ourselves. As a result of that merger, each
share of Common Stock will be converted into .30133
shares of post-recapitalization Common Stock, each share
of Series A Preferred Stock will be converted into one
share of post-recapitalization Common Stock and each
share of Series B Preferred Stock will be converted into
173.33 shares of post-recapitalization Common Stock. As
a result of the merger, our name will be changed to
Factory 2-U Stores, Inc. The merger must be approved by
holders of a majority of our outstanding Common Stock
and Series B Preferred Stock, voting as a single class,
and by the holders of a majority of our outstanding
Series A Preferred Stock, voting separately.
Three funds ("Three Cities Investors") advised by Three
Cities Research, Inc. ("Three Cities"), which hold 15%
of our Common Stock and 63% of our Series B Preferred
Stock, have committed to vote in favor of the merger.
This will assure that the merger will be approved by the
holders of our Common Stock and Series B Preferred
Stock. However, there is no similar
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assurance that the merger will be approved by holders of
a majority of our Series A Preferred Stock. If the
merger is not approved by holders of a majority of the
Series A Preferred Stock, General Textiles may (but will
not be committed to) offer to issue its common stock in
exchange for any or all of our stock in essentially the
same ratios as those in the proposed merger. In response
to that exchange offer, the three Three Cities Investors
will exchange all their Common Stock and Series B
Preferred Stock for General Textiles common stock. That
will reduce our ownership of General Textiles to 74% or
less of its common stock, even if none of our
stockholders other than the three Three Cities Investors
exchange our stock for General Textiles common stock. We
will then exchange General Textiles stock that we own
for our stock which General Textiles acquires through
the exchange offer. The number of General Textiles
shares which we exchange for our stock will depend on
(i) the number and type of our shares which General
Textiles is holding and (ii) the extent to which the
existence of General Textiles subordinated notes we are
holding reduces the value of General Textiles shares
below what it would otherwise have been. The exchange
would reduce our ownership of General Textiles shares to
less than a majority.
PRINCIPAL OFFICE.................. Our principal office is at 4000 Ruffin Road, San Diego,
California 92123. Our telephone number is (619)
827-1800.
THE OFFERING
OFFERING OF COMMON STOCK.......... We are offering 800,000 shares of our
post-recapitalization Common Stock (or 3,000,000 shares
of our pre-recapitalization Common Stock) to people who
exercise Rights, including the oversubscription
privilege in the Rights.
THE RIGHTS........................ We issued the Rights to our stockholders. Each Right
entitles the holder to purchase one share of
post-recapitalization Common Stock for $13.00. Rights
are evidenced by Rights Certificates and are
transferable.
If our stockholders do not approve merger of General
Textiles, Inc. into us, each Right will entitle the
holder to purchase 3.75 shares of pre-recapitalization
Common Stock for $3.467 per share (a total of $13 per
Right).
EXPIRATION OF RIGHTS.............. The Rights will expire at 5:00 P.M., New York City time,
on November 30, 1998, unless we extend the period during
which Rights may be exercised.
OVERSUBSCRIPTION PRIVILEGE........ A holder who exercises all the Rights evidenced by a
Rights Certificate will have the privilege to
oversubscribe for Common Stock which is offered to
holders of Rights, but is not purchased through exercise
of Rights. There is no limit to the number of shares as
to which a holder may exercise the oversubscription
privilege. If the total number of shares as to which
holders exercise the oversubscription privilege exceeds
the total number
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of shares which are not otherwise purchased through
exercise of Rights, the available shares will be issued
to people who exercise the oversubscription privilege in
proportion to the respective numbers of shares as to
which they exercise the oversubscription privilege. The
three Three Cities Investors have committed to exercise
all the Rights issued to them, which will result in
their purchasing 305,490 shares of post-recapitalization
Common Stock (or 1,145,587 shares of
pre-recapitalization Common Stock), and to exercise the
oversubscription privilege as to all 494,510 shares of
post-recapitalization Common Stock (or 1,854,413 shares
of pre-recapitalization Common Stock) which are subject
to Rights issued to people other than the three Three
Cities Investors. Therefore, the entire 800,000 post-
recapitalization, or 3,000,000 pre-recapitalization,
shares being offered to holders of Rights will be sold,
even if no one other than the three Three Cities
Investors exercises Rights.
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<CAPTION>
NOT GIVING
EFFECT GIVING EFFECT
TO THE TO THE
RECAPITALIZATION RECAPITALIZATION
---------------- ---------------
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COMMON STOCK OUTSTANDING.................. Before the Offering 5,004,122 11,275,381
After the Offering N/A 12,075,381
After the Offering,
if the recapitalization
does not take place 8,004,122 N/A
USE OF PROCEEDS........................... $3,250,000 to redeem Subordinated Notes due 2003. The amount not used
for these purposes will be added to our working capital.
NASDAQ SMALL-CAP MARKET SYMBOLS........... Common Stock Purchase Rights FBARR
</TABLE>
RISK FACTORS
See "Risk Factors", which begins on page 12, for a discussion of some
important factors you should consider. Those factors include:
a) We have had net losses for most years in our history, and for the first
two fiscal quarters of the current year.
b) We had significant write-offs during the year ended January 31, 1997
c) We cannot be sure an active market for the Rights will develop.
d) The exercise price of the Rights is higher than the highest price at
which our Common Stock has traded for almost four years, even taking
account of the fact that the recapitalization could be viewed as
effecting a 1-for-3.75 reverse split of our Common Stock.
e) If holders of a majority of our Series A Preferred Stock do not approve
the merger which will result in the recapitalization, that merger (and,
therefore, the recapitalization) will not take place. If the merger does
not take place, our subsidiary, General Textiles, Inc. may make an
exchange offer, and General Textiles and we will take other steps, which
would reduce our holding of General Textiles shares to less than a
majority.
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f) We compete with large retail discount chains which could, if they wanted
to do so, target merchandise at our typical customers.
g) Our business is seasonal. This makes it particularly difficult to
predict our full year results on the basis of interim results during our
first and second fiscal quarters.
h) We have a Shareholder Rights Plan and there are other factors about us
(including the fact that Three Cities Investors own a majority in voting
power of our stock) which could deter or substantially delay possible
takeover attempts, even if they were favored by a majority of our
stockholders.
i) The Nasdaq Stock Market has told us we no longer meet the requirements
for continued listing. The recapitalization will cure the problem. If the
recapitalization is not approved, the sale of shares to holders of Rights
probably will cure the problem. However, if our stock price falls below
its current levels, we might fail to meet the requirement for continued
listing despite the sale of shares to holders of Rights.
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SUMMARY FINANCIAL INFORMATION
The following is a summary of financial information about us. It should be
read in conjunction with the financial statements and notes included in our
amended annual report on Form 10-K/A-2 and quarterly report on Form 10-Q, which
accompany this Prospectus. The financial information as of and for the year
ended January 31, 1998 has been derived from financial statements audited by
Arthur Andersen LLP, and the financial information as of and for the years ended
February 1, 1997, and January 27, 1996 has been derived from the financial
statements audited by KPMG Peat Marwick LLP, independent certified public
accountants. The financial information at and for the fiscal periods ended
August 1, 1998 and August 2, 1997 has not been audited. However, we believe it
contains all adjustments (which are only normal recurring accruals) which are
necessary so that it presents fairly our financial conditions and results of
operations. Those interim results do not necessarily indicate what our full year
results will be. See "Risk Factors--Seasonality."
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26 WEEKS ENDED FISCAL YEAR ENDED
---------------------- -------------------------------------
AUGUST 1, AUGUST 2, JANUARY 31, FEBRUARY 1, JANUARY 27,
1998 1997 1998 1997(1) 1996
---------- ---------- ----------- ----------- -----------
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(UNAUDITED)
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(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
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INCOME STATEMENT DATA
Net sales........................................ $ 139,951 $ 129,811 $ 300,592 $ 252,165 $ 179,820
Operating income (loss).......................... (1,396) (2,924) 5,097 (27,939) 5,153
Income (loss) from continuing operations......... (3,867) (5,530) (129) (36,564) 1,478
Net income (loss) before extraordinary item...... (3,867) (5,530) (129) (37,390) 978
Net income (loss)................................ (6,617) (5,530) (129) (37,390) 978
Dividends on Series A preferred stock............ (1,728) (1,728) (3,456) (3,509) (3,040)
Dividends on Series B preferred stock............ (1,431) (1,292) (2,661) -- --
Net loss applicable to common stock.............. (9,776) (8,550) (6,246) (40,899) (2,062)
Weighted average common shares outstanding (basic
and diluted)................................... 4,967 4,873 4,901 4,507 4,006
Net loss per common share from continuing
operations before extraordinary item........... (1.42) (1.75) (1.27) (8.89) (0.39)
Net loss per common share before extraordinary
item (1.42) (1.75) (1.27) (9.07) (0.51)
Net loss per common share(2)..................... (1.97) (1.75) (1.27) (9.07) (0.51)
Diluted net loss per common share(2)............. (1.97) (1.75) (1.27) (9.07) (0.51)
BALANCE SHEET DATA
Working capital (deficit)........................ 6,072 (2,749) (2,749) 248 4,314
Total assets..................................... 98,620 84,817 84,817 80,669 87,152
Long-term debt and revolving credit notes,
including current portion...................... 44,984 42,134 29,076 37,894 30,120
Stockholders' equity............................. 9,663 17,218 17,218 11,208 27,717
OPERATING DATA
Number of stores................................. 162 165 166 150 131
Total selling square footage..................... 1,722,000 1,673,000 1,788,000 1,567,000 1,367,000
Sales per square foot............................ 81 77 180 172 161
Comparable store sales growth.................... 4.5% 0.9% 3.4% 5.3% 2.8%
</TABLE>
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(1) 53 weeks.
(FOOTNOTES CONTINUED ON NEXT PAGE)
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(FOOTNOTES CONTINUED FROM PREVIOUS PAGE)
(2) In December 1997, we 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.
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THE OFFERING
We are offering 800,000 shares of our post-recapitalization Common Stock
(or, if our stockholders do not approve a merger which will result in the
recapitalization, 3,000,000 shares of our pre-recapitalization Common Stock) to
holders of Rights which we distributed to our stockholders. We are distributing
to our stockholders one Right for each 41.16 shares of Common Stock, one Right
for each 16.07 shares of Series A Preferred Stock and 12.7823 Rights for each
share of Series B Preferred Stock, except that we are not issuing fractional
Rights. The Rights are evidenced by Rights Certificates, which are being mailed
to our stockholders of record on October 5, 1998 (except as discussed under "The
Offering--Foreign Restrictions and Restrictions in Certain States").
A HOLDER OF RIGHTS MAY PURCHASE ONE SHARE OF POST-RECAPITALIZATION COMMON
STOCK FOR EACH RIGHT AT A SUBSCRIPTION PRICE OF $13.00 PER SHARE. If our
stockholders do not approve the merger which will result in a recapitalization
of our stock, a holder of Rights may purchase 3.75 shares of
pre-recapitalization Common Stock for each Right at a subscription price of
$3.467 per share (a total of $13 per Right). The Rights are transferable and may
be exercised at any time before 5:00 P.M., New York City time, on November 30,
1998, or on a later date if we extend the offer (the "Expiration Time"). At the
Expiration Time, all unexercised Rights will terminate and all Rights
Certificates will become void.
OVERSUBSCRIPTION PRIVILEGE
Any holder of Rights who exercises all the Rights evidenced by a Rights
Certificate will have the privilege to subscribe for additional shares which are
offered to holders of Rights but are not purchased through exercise of Rights.
There is no limit to the number of shares as to which a holder may
oversubscribe. If there are not sufficient shares to fill all oversubscriptions,
the shares which are available will be allocated among people who elect to
oversubscribe in proportion to the respective numbers of shares for which they
elect to oversubscribe. To exercise the oversubscription privilege, a person
must complete the appropriate block on the Rights Certificate. People who
exercise the oversubscription privilege will be notified by mail (or, if they
have provided facsimile numbers, by facsimile) of the numbers of shares of
Common Stock they have purchased through exercise of the oversubscription
privilege. Payments for those shares must be made within 10 days after the
notice is mailed (or sent by facsimile). If payment with regard to an
oversubscription is not received by the Subscription Agent by 5:00 P.M. New York
City time on the last day of that 10 day period, the oversubscription will be
canceled. Three funds ("Three Cities Investors") advised by Three Cities
Research, Inc. ("Three Cities") have agreed to purchase all shares which are the
subject of oversubscriptions which are canceled because payment is not made
within the 10 day period.
HOW TO EXERCISE RIGHTS
To exercise Rights, a person must mail or deliver to the Subscription Agent
a properly executed Rights Certificate, together with payment in full of the
exercise price of $13.00 per post-recapitalization share (or $13.00 per 3.75
pre-recapitalization shares) as to which Rights are exercised. Except as
described under "The Offering--Late Delivery of Rights," Rights Certificates
must arrive on or before the Expiration Date and we will not honor any
subscriptions received after the Expiration Date. A holder must pay the exercise
price in United States dollars in cash, by certified or bank cashier's check, or
by wire transfer of good funds, payable to the order of the Subscription Agent.
Once a holder has exercised a Right, the exercise is irrevocable. We will
deliver certificates representing the shares purchased upon exercise of Rights
as soon as practicable after the Expiration Date.
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The Subscription Agent is American Stock Transfer and Trust Company. The
address to which Rights Certificates and payments should be mailed or delivered
is:
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IF BY MAIL OR BY HAND: IF BY FACSIMILE:
- ------------------------------------------------ -------------------------
American Stock Transfer and Trust Company (for Eligible
40 Wall Street Institutions Only)
46th Floor 718-234-5001
New York, New York 10005
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The Subscription Agent's telephone number is: 1-800-937-5449, Attention:
Shareholder Services Department.
You should read the instructions in the Rights Certificate and follow them
carefully. Do not send Rights Certificates or payment to the Company. Except as
described under "The Offering--Late Delivery of Rights," no exercise of Rights
will be accepted until the Subscription Agent has received a duly executed
Rights Certificate and payment of the exercise price. You, not the Company or
the Subscription Agent, will bear the risk of delivery of Rights Certificates
and payments to the Subscription Agent. We recommend that, if you use the mail
to exercise Rights, you use insured, registered mail. You should direct any
questions or requests for assistance concerning the method of subscribing for
shares or for additional copies of this Prospectus to the Subscription Agent.
We will resolve all questions as to the validity, form, eligibility and
acceptance of any exercise of Rights, and our determination will be final. We
may waive any defect or irregularity, permit a defect or irregularity to be
corrected within such time as we may determine, or reject any exercise of a
Right which we determine to have been made improperly.
LATE DELIVERY OF RIGHTS
If on or before the Expiration Date, the Subscription Agent receives the
full exercise price of Rights together with a letter or telegraphic guaranty
from a bank, broker, dealer, credit union, savings association or other entity
that is a member in good standing of the Securities Transfer Agents Medallion
Program that the Rights Certificate evidencing the Rights will be delivered to
the Subscription Agent within three New York Stock Exchange trading days after
the Expiration Date, the exercise of Rights will be accepted, subject to receipt
of the properly executed Rights Certificate within the three New York Stock
Exchange trading days.
PURCHASE AND SALE OF RIGHTS
The Rights are transferable and are expected to be traded on the Nasdaq
SmallCap Market and in the over-the-counter market. If you want to sell Rights,
either you may sell them directly or you may deliver the Rights to the
Subscription Agent, who will sell them on your behalf at prevailing market
prices. Rights may be transferred at the office of the Subscription Agent. Prior
to this Offering, there has been no public market for the Rights.
FOREIGN RESTRICTIONS AND RESTRICTIONS IN CERTAIN STATES
Rights Certificates were not mailed to our stockholders whose record
addresses are outside the continental United States or Canada, or are APO or FPO
addresses. The Subscription Agent is holding the Rights to which those Rights
Certificates would have related for those stockholders' accounts until the
Subscription Agent receives instructions to sell or transfer the Rights. Unless
the Subscription Agent receives instructions from holders by 12:00 Noon New York
City time on November 18, 1998, the Subscription Agent will sell those
stockholders' Rights, together with the Rights of stockholders whose addresses
are not known by the Subscription Agent, and remit the net proceeds to the
stockholders (or hold them for stockholders whose addresses are not known).
The Subscription Agent will also retain the Rights Certificates which
otherwise would have been mailed to our stockholders who have addresses of
record in the state of California in which the Offering is
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not permitted to be made, and will hold the Rights to which those Rights
Certificates relate for the accounts of those stockholders until the
Subscription Agent receives instructions to sell or transfer the Rights. If the
Subscription Agent does not receive instructions from a stockholder by 12:00
Noon New York City time on November 18, 1998, the Subscription Agent will sell
that stockholder's Rights and will remit the net proceeds to the stockholder. If
we are subsequently permitted to make the Offering in that state, the
Subscription Agent will promptly mail the Rights Certificates to stockholders
with addresses in that state in which the Offering becomes permissible, unless
it has already sold their Rights. The Company will not accept exercises of
Rights by people with addresses in the state in which the Offering is not
permitted, and if any of those people presents Rights Certificates for exercise,
the Subscription Agent will retain the Rights Certificates and apply the
procedures set forth above to the Rights they represent.
EXERCISE PROCEEDS
The Subscription Agent will retain all funds it receives from the exercise
of Rights until the Expiration Time. If the Offering is cancelled or terminated
for any reason, the Subscription Agent will return to each person who exercised
Rights all funds it is holding for that person's account. No interest will be
paid on funds returned due to cancellation of the Offering. Funds the
Subscription Agent receives from exercises of the oversubscription privilege
will be paid to the Company as they are received.
TAX CONSEQUENCES
Rogers & Wells LLP has advised the Company that under the Internal Revenue
Code of 1986, as amended, and the Regulations under it, as currently in effect,
and applicable court decisions, the Federal income tax consequences to holders
of our stock with respect to the Offering will be as follows:
1. NEITHER THE DISTRIBUTION OF RIGHTS TO OUR STOCKHOLDERS NOR THE EXERCISE
OF RIGHTS BY THEM WILL BE TAXABLE TO OUR STOCKHOLDERS.
2. The basis of a Right will be (a) to a holder of our stock to whom the
Right is issued, a portion of the stockholder's basis in the shares with
regard to which the Right was issued determined by allocating that basis
between the shares and the Rights on the basis of their respective market
values immediately after the Rights are issued (except that, if the
market value of the Rights immediately after they are issued is less than
15% of the market value of the shares with respect to which they are
issued, none of the basis in the shares will be allocated to the Rights
and the basis in the Rights will be zero), and (b) to anyone who
purchases a Right in the market, the purchase price of the Right.
3. The holding period of a Right we issue to a holder of our stock will
include the period the stockholder held the stock with respect to which
the Right was issued. The holding period of a Right purchased in the
market will begin on the date of the purchase.
4. Any gain or loss on sale of a Right will be treated as a capital gain or
loss if the Right is a capital asset in the hands of the seller. A Right
issued with regard to our stock will be a capital asset in the hands of
the person to whom it is issued if our stock is a capital asset in the
hands of that person.
5. If a Right is exercised, the basis of the Common Stock issued to the
holder who exercises the Right will include the holder's basis in the
Right and the amount paid upon exercise of the Right.
6. If a Right is exercised, the holding period of the Common Stock acquired
by exercising the Right will begin on the day the Right is exercised.
What is said above is only a summary of the applicable Federal income tax
law. It does not discuss any state or local tax consequences or any consequences
under the law of any jurisdiction outside the United States. It also does not
discuss special tax considerations which may apply to particular taxpayers.
People who receive Rights or are considering exercising, acquiring or selling
Rights should consult their own tax advisors concerning the tax consequences of
doing so.
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RISK FACTORS
THERE ARE A NUMBER OF FACTORS ABOUT THE COMPANY OF WHICH A PERSON WHO IS
CONSIDERING EXERCISING RIGHTS SHOULD BE PARTICULARLY AWARE. THEY INCLUDE THE
FOLLOWING:
SIGNIFICANT NET LOSSES
We have incurred net losses most years since we were formed in 1994, and
General Textiles, our principal operating subsidiary, has incurred significant
losses since its inception in 1987. Those losses led General Textiles to
commence a proceeding under Chapter 11 of the Bankruptcy Code in 1992. We had
net losses of $40.9 million, $6.2 million and $9.8 million, after payment of
preferred stock dividends, in fiscal 1996 and 1997 and the twenty-six weeks
ended August 1, 1998. But see "Risk Factors--Seasonality." There is no assurance
that we will have profits in any future periods.
SIGNIFICANT WRITE-OFFS DURING YEAR ENDED FEBRUARY 1, 1997
During the year ended February 1, 1997 (our fiscal 1996), we had significant
write-offs and unusual charges. The largest of these was a $9.2 million charge
relating to termination of employment of our former senior management and
principal stockholders and benefits they received as a result of, or in
connection with, that termination of employment. Another $8.4 million was a
write-off of goodwill which had arisen when we acquired Factory 2-U, Inc.,
because subsequent operating results caused us to determine that goodwill was
impaired. Additional charges related to inventory, both because of obsolescence
and because of higher inventory shrinkage, which the Company believes was
related primarily to its integration of Factory 2-U. Also, there were charges of
$2.8 million to increase the liability for future payment of notes issued under
General Textiles' 1993 Plan of Reorganization (reflecting an acceleration of our
estimate of when the notes would be paid, and therefore, an increase in their
discounted value), $1.9 million to write-off capitalized costs of a public
offering which did not take place, $1.5 million as an allowance for store
closings and $0.5 million to write-off of capitalized store pre-opening costs.
MARKET FOR THE RIGHTS
We expect that the Rights will be traded on the Nasdaq SmallCap Market. We
cannot be sure an active market for Rights will develop.
EXERCISE PRICE OF THE RIGHTS EXCEEDS RECENT MARKET PRICE OF COMMON STOCK
The exercise price of the Rights was determined by our Board of Directors
based primarily upon its view of the value of our Common Stock. That price is
higher than the highest price at which our Common Stock has traded for almost
four years, even taking account of the fact that the recapitalization could be
viewed as effecting a 1-for-3.75 reverse split of our Common Stock. On June 1,
1998, which was the day before we announced the proposed merger with General
Textiles and resulting recapitalization, as well as the offering made by this
Prospectus, the last reported sale price of our Common Stock was $3.092 and 3.75
times that price would be $11.595. The last reported sale price of our Common
Stock on October 15, 1998 was $1.844, and 3.75 times that price would be $6.915.
Three of the seven members of our Board of Directors are (and were when the
exercise price of the Rights was determined) designees of Three Cities, which
advises investors which own 18% of our Common Stock and 88% of our Series B
Preferred Stock. Three of these investors (i.e., the three Three Cities
Investors), which own 15% of our Common Stock and 63.4% of our Series B
Preferred Stock, have committed to exercise all the Rights they will receive as
stockholders and to oversubscribe so they will acquire all the shares offered to
other holders of Rights, to the extent those shares are not purchased through
exercise of Rights or exercise by persons in addition to the three Three Cities
Investors of the oversubscription privilege included in Rights. While this
indicates that Three Cities believes the exercise price of the Rights represents
at least a fair price to pay for our Common Stock, it is nonetheless possible
that the trading price of our Common Stock will continue to be less than the
exercise price of the Rights. If that is the case, it would be less expensive
for someone who
12
<PAGE>
wanted to acquire our Common Stock (or increase the person's holding of our
Common Stock) to buy our Common Stock in the market than to obtain it by
exercising Rights.
POSSIBILITY THAT THE GENERAL TEXTILES MERGER WILL NOT TAKE PLACE
Our merger with General Textiles must be approved both by holders of a
majority of our Common Stock and Series B Preferred Stock, voting together as a
single class, and by holders of a majority of our Series A Preferred Stock,
voting as a separate class. Because the three Three Cities Investors have
committed to vote in favor of the merger, approval by the holders of our Common
Stock and Series B Preferred Stock is assured. However, approval by the holders
of our Series A Preferred Stock is not assured, and if holders of a majority of
the outstanding Series A Preferred Stock do not vote in favor of the merger, the
merger will not take place. In addition to owning all General Textiles'
outstanding stock, we own General Textiles Subordinated Notes with a current
principal balance of $11.8 million. If we merge with General Textiles, the
Subordinated Notes we own will, in effect, be eliminated. If that merger does
not take place, the General Textiles stock and Subordinated Notes we own will
continue to be outstanding. See "Capitalization." However, General Textiles may
offer to exchange its common stock for any or all of our outstanding stock and
the three Three Cities Investors, have said they will exchange all their Common
Stock and Series B Preferred Stock for General Textiles common stock. The
exchange by the three Three Cities Investors alone would reduce our ownership of
General Textiles to 74% or less of its outstanding common stock. The percentage
of the General Textiles common stock we own would be even less than that to the
extent stockholders in addition to the three Three Cities Investors exchange our
stock for General Textiles common stock, or to the extent the three Three Cities
Investors increase their holdings of our Common Stock through exercise of the
over-subscription privilege. Also, if our merger with General Textiles does not
take place, and therefore General Textiles makes an exchange offer for our
stock, we will exchange some of our General Textiles stock for our stock which
General Textiles acquires through the exchange offer. That will probably reduce
our holding of General Textiles common stock to less than a majority. See "The
Restructuring of our Capitalization".
COMPETITION
Our stores compete with large discount retail chains (such as Wal-Mart,
K-Mart, Mervyn's and Target) and regional off-price chains (such as
MacFrugal's), many of which are better known and have substantially greater
resources than our two chains. While our off-price marketing strategy differs
from the strategy of most of our competitors, many of our competitors could, if
they wanted to do so, compete directly with us in offering merchandise targeted
at the typical Family Bargain Center and Factory 2-U customers. See
"Business--Operations--Competition."
SEASONALITY
Our business is seasonal in nature, with its highest levels of sales in the
"Back-to-School" (August and September) and Christmas (November and December)
seasons. Because of this, our working capital requirements fluctuate during the
year and are highest between mid-summer and the beginning of the Christmas
season. The seasonality of our business makes it particularly difficult to
predict our full year results on the basis of interim results during our first
and second fiscal quarters.
POTENTIAL ANTI-TAKEOVER EFFECTS OF RIGHTS PLAN AND CLASSIFIED BOARD OF
DIRECTORS; POSSIBLE ISSUANCES OF PREFERRED STOCK
We have a Shareholder Rights Plan which could substantially dilute the
holdings of anyone who acquires 15% or more of our Common Stock without approval
of our Board of Directors. This may deter or substantially delay mergers, tender
offers or other possible takeover attempts, even if they are favored by a
majority of our stockholders. See "Description of Capital Stock--Shareholder
Rights Plan." Also, our Board of Directors is "classified," with only one-third
of the directors coming up for election each year. The existence of a classified
board may deter or delay mergers, tender offers or other possible takeover
13
<PAGE>
attempts favored by holders of a majority of our stock. In addition, our Board
of Directors can authorize us, without stockholder action, to issue preferred
stock with whatever rights and preferences (and subject to whatever limitations)
the Board may determine. The Board could authorize the issuance of a preferred
stock at a time, and with terms, which would discourage a tender offer or other
takeover attempt. Finally, investors advised by Three Cities own a majority in
voting power of our stock, and therefore it would be difficult or impossible for
anyone to acquire us if the investors advised by Three Cities (or most of them)
did not favor the acquisition. Anything which makes an acquisition of us more
difficult could reduce the price investors will be willing to pay for our Common
Stock.
FAILURE TO MEET NASDAQ LISTING REQUIREMENT
The Nasdaq Stock Market has told us that we do not meet the requirement for
continued listing on the Nasdaq SmallCap Market. The recapitalization resulting
from the merger will cure this by raising our market capitalization to well
above $35 million. Even if the merger does not take place, at the current prices
of our Common Stock and Series A Preferred, after the Offering, our market
capitalization will be above $35 million, and we will be eligible for continued
listing on the Nasdaq SmallCap Market. However, if our stock prices should fall
significantly below their current levels, our market capitalization might fall
below $35 million despite the sale of shares in the Offering. If that occurred,
our Nasdaq SmallCap Market listing probably would be terminated. If our Common
Stock is not listed on the Nasdaq SmallCap Market, any trades will have to take
place in the over the counter market or in other markets (such as the Nasdaq
Over-the-Counter Bulletin Board or regional securities exchanges), if any, in
which our Common Stock may be traded.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of the Offering, the shares issued to holders of Rights
will be freely tradeable without restriction under the Securities Act of 1933,
except for shares acquired by "affiliates," as that term is defined in Rule 144
under the Securities Act. Under Rule 144, each affiliate will be permitted to
sell in ordinary brokerage transactions in any three month period a number of
shares of Common Stock equal to the greater of one percent of the outstanding
Common Stock or the average weekly trading volume in our Common Stock during the
four weeks preceding notice to the Securities and Exchange Commission that the
affiliate intends to sell some of our Common Stock, subject to certain
limitations and other requirements of Rule 144. Sales of substantial amounts of
our Common Stock, or the perception that such sales could occur, could adversely
affect the market price of our Common Stock and could impair our ability to
raise capital through the sale of additional equity securities.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus, or in documents incorporated into
this Prospectus, are forward-looking statements. Those forward-looking
statements are subject to uncertainties that may cause the actual results to
differ from the results anticipated by the forward-looking statements. Factors
which may cause actual results to differ from those anticipated by forward
looking statements include, among others, general economic and business
conditions, both nationally and in the regions in which we operate; government
regulations (including regulations regarding temporary immigration of
agricultural workers and minimum wages of agricultural and other workers);
claims asserted against us; competition; changes in our business strategy or
development plans; difficulties attracting and retaining qualified personnel;
and the other factors described under the caption "Risk Factors," or in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections of our Annual Report on Form 10-K and our Quarterly Report
on Form 10-Q.
14
<PAGE>
THE COMPANY
We operate a chain of 112 Family Bargain Center off-price retail apparel and
housewares stores in California, Nevada, New Mexico, Oregon, and Washington and
a similar chain of 51 Factory 2-U off-price retail apparel and housewares stores
in Arizona, Nevada, New Mexico and Texas.
We acquired General Textiles (the predecessor of our principal operating
subsidiary) in 1993, while it was operating under Chapter 11 of the Bankruptcy
Code. At that time, General Textiles was operating only the Family Bargain
Center chain. Between December 31, 1992 and March 1, 1998, the Family Bargain
Center chain expanded from 108 stores in four states to 124 stores in six
states. In November 1995, we acquired Factory 2-U, Inc. and began to coordinate
the purchasing, warehousing and delivery operations for the Family Bargain
Center and Factory 2-U chains. Between November 1995 and March 1998, the Factory
2-U chain increased from 33 stores in three states to 38 stores in three states.
Subsequently, we have converted a number of Family Bargain Center stores into
Factory 2-U stores. On September 1, 1998, we had 112 Family Bargain Center
stores in six states and 51 Factory 2-U stores in five states. We expect
increasingly to focus on the Factory 2-U chain. In July 1998, we merged General
Textiles and Factory 2-U, Inc. into a new General Textiles, Inc., which now
operates both chains.
Family Bargain Center and Factory 2-U stores both sell primarily first
quality, in-season clothing for men, women and children and homegoods at prices
which generally are lower than the prices of competing discount and regional
off-price stores. The price of most items in our stores is below $35. The two
chains sell merchandise at bargain prices by purchasing in-season, excess
inventory and close-out merchandise at substantial discounts from normal
wholesale prices and by setting retail prices which pass along the savings to
their customers.
Both Family Bargain Center stores, which average 12,000 square feet, and
Factory 2-U stores, which average 17,350 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. Store atmosphere is enhanced by the playing of locally
popular music, the use of brightly colored pennants and occasional festive
outdoor promotions.
Our target market consists primarily of 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.
Our principal office is at 4000 Ruffin Road, San Diego, CA 92123. Our
telephone number is 619-627-1800.
THE RESTRUCTURING OF OUR CAPITALIZATION
Our offer to sell Common Stock to holders of Rights is one step in a
restructuring of our capitalization, the results of which have been, or will be,
to (1) cause all our business activities to be conducted by a single operating
company, (2) exchange $22,235,098 of notes which had been issued in 1993 as part
of General Textiles' reorganization plan, and which could absorb a substantial
portion of General Textiles' cash flow, for $20,585,098 of fixed payment notes
plus Common Stock and warrants, (3) provide approximately $10,100,000 of net
stock sale proceeds, which will be used to redeem $3,250,000 of the fixed
payment notes before they begin to require substantial interest payments, to pay
the costs of the recapitalization and to increase our working capital, and (4)
if our stockholders give necessary approvals, cause our Series A Preferred Stock
and Series B Preferred Stock to be converted into Common Stock while, in effect,
carrying out a reverse split of our Common Stock. If our stockholders do not
approve the transaction which will convert the Series A Preferred Stock and
Series B Preferred Stock into Common Stock, we may cause our subsidiary, General
Textiles, Inc., to make an exchange offer to our stockholders
15
<PAGE>
which will result in at least a substantial portion of our Common Stock, Series
A Preferred Stock and Series B Preferred Stock being exchanged for General
Textiles common stock. The steps in this restructuring and recapitalization,
some of which have already been completed are as follows:
- - On April 30, 1998, General Textiles issued (i) $3,250,000 principal amount of
Subordinated Notes due 2003 in satisfaction of $4,900,000 principal amount
of Subordinated Reorganization Notes, and (ii) $17,335,097.65 principal
amount of Junior Subordinated Notes due 2005, as well as 75,000 shares of
our Common Stock and warrants entitling the holders to purchase 274,418
shares of our pre-recapitalization Common Stock for $6.00 per share, in
satisfaction of $17,335,097.65 principal amount Junior Subordinated
Reorganization Notes.
- - On July 31, 1998, we merged Factory 2-U, Inc. and the corporation that was
then General Textiles into a new Delaware corporation, General Textiles,
Inc., in a transaction in which we, as the sole stockholder of both Factory
2-U, Inc. and General Textiles, received all the shares of General Textiles,
Inc.
- - We are distributing to our stockholders transferrable Rights entitling
holders to purchase a total of 800,000 shares of our post-recapitalization
(i.e., post-merger with General Textiles, Inc.) Common Stock for $13.00 per
share (or 3,000,000 shares of our pre-recapitalization Common Stock for
$3.75 per share if our stockholders do not approve a merger of General
Textiles, Inc. into us) on or before November 30, 1998, or a later date if
we extend the offer. This Prospectus relates to the offering of Common Stock
to holders of Rights. Our stockholders are receiving one Right for each
41.16 shares of Common Stock, one Right for each 16.67 shares of Series A
Preferred Stock and 12.7823 Rights for each share of Series B Preferred
Stock. The Rights provide that any holder who exercises the Rights evidenced
by a Rights Certificate may "oversubscribe" to purchase, in addition to the
shares as to which the Rights are exercised, up to any specified number of
shares of Common Stock which are offered to holders of Rights but are not
purchased through exercise of Rights, with the total number of shares as to
which Rights are not exercised to be allocated among people who exercise the
oversubscription privilege on the basis of the respective numbers of shares
as to which they exercise the oversubscription privilege. The three Three
Cities Investors, which have received Rights to purchase 305,490
post-recapitalization (or 1,145,587 pre-recapitalization) shares of Common
Stock, have committed to exercise the Rights they received, and to exercise
their oversubscription privilege as to 494,510 post-recapitalization (or
1,854,413 pre-recapitalization) shares of Common Stock (the entire number of
shares subject to Rights which are being issued to our stockholders other
than the three Three Cities Investors). Therefore, all 800,000
post-recapitalization (or 3,000,000 pre-recapitalization) shares of Common
Stock which are being offered to holders of Rights will be purchased, even
if no one but the three Three Cities Investors exercises Rights.
- - At a meeting to be held on November 23, 1998, our stockholders will be asked
to vote upon a merger of General Textiles, Inc. (the current General
Textiles) into us, in which, among other things, (i) each outstanding share
of our pre-recapitalization Common Stock will be converted into .30133
shares of post-recapitalization Common Stock, (ii) each outstanding share of
our Series A Preferred Stock will be converted into one share of
post-recapitalization Common Stock, and (iii) each outstanding share of our
Series B Preferred Stock will be converted into 173.33 shares of
post-recapitalization Common Stock. These conversion ratios are essentially
the same as though (a) each share of pre-recapitalization Common Stock were
converted into 1.13 shares of Common Stock, (b) each share of Series A
Preferred Stock were converted into 3.75 shares of Common Stock, (c) each
share of Series B Preferred Stock were converted into 650 shares of Common
Stock and (d) there were a 1-for-3.75 reverse split of the Common Stock. The
merger will also change our name to Factory 2-U Stores, Inc. The merger must
be approved by the holders of a majority in voting power of our Common Stock
and Series B Preferred Stock, voting as a single class, and by the holders
of a majority of the outstanding Series A Preferred Stock voting as a
separate class. If the merger is approved, it will take place on or shortly
after the day of the meeting at which it is approved.
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<PAGE>
- - If the merger with General Textiles Inc. is not approved by our stockholders:
- Each Right will entitle the holder to purchase 3.75 shares of
pre-recapitalization Common Stock for $3.467 per share (a total of $13 per
Right).
- General Textiles may (but will not be committed to) make an exchange offer
in which holders of all three classes or series of our stock will be given
the opportunity to exchange their Family Bargain stock for General
Textiles common stock, at the rate of .30133 shares of General Textiles
common stock for each share of our Common Stock, one share of General
Textiles common stock for each share of our Series A Preferred Stock and
173.33 shares of General Textiles common stock for each share of our
Series B Preferred Stock. If General Textiles makes the exchange offer,
the three Three Cities Investors will exchange all their Family Bargain
Common Stock and Series B Preferred Stock for a total of 4,303,923 shares
of General Textiles common stock (or a higher number of shares if the
three Three Cities Investors purchase additional shares of our Common
Stock by exercising the oversubscription privilege in their Rights). If no
shares of our stock owned by anyone other than the three Three Cities
Investors were exchanged, the issuance of General Textiles common stock to
the three Three Cities Investors as a result of the exchange offer would
reduce our ownership of General Textiles to 74% or less of its common
stock. Any exchanges of our stock by other stockholders would further
reduce our percentage ownership of General Textiles. Our interest in
General Textiles and $11.8 million of Subordinated Notes from General
Textiles (which are carried at their discounted value of $11.25 million)
would be our only significant assets. Because it is unlikely General
Textiles will pay dividends on its common stock which are sufficient to
provide the funds we need to meet our obligations with regard to our debts
and expenses and pay dividends on the Series A Preferred Stock which is
not exchanged (to do so, General Textiles would have to pay the same per
share dividend with regard to the shares we do not own as it pays to us),
our principal (and perhaps our only) source of funds with which to meet
our obligations with regard to our debts and expenses, and with regard to
the Series A Preferred Stock, would be payments we receive under the
General Textiles Subordinated Notes, and if they are not sufficient,
proceeds of sales of some of our General Textiles stock.
- If General Textiles makes the exchange offer, as promptly as possible
after the exchange offer terminates, we will hold a stockholders meeting
at which our stockholders will (x) elect new directors (who will not
include anyone affiliated with Three Cities) and (y) be asked to vote upon
a proposal to exchange shares of General Textiles which we own for the
shares of our stock which General Textiles acquired through the exchange
offer. In the exchange of shares, we would give General Textiles, in
exchange for all our shares which General Textiles owns, a number of
shares of General Textiles stock equal to (i) the number of shares General
Textiles issues as a result of the exchange offer to acquire the shares it
transfers back to us and (ii) a number of shares of General Textiles stock
which reflects the extent to which the existence of the General Textiles
Subordinated Notes we hold reduces the value of General Textiles common
stock below what it would be if those Subordinated Notes were not
outstanding. At the stockholders meeting, General Textiles would vote its
Common Stock and Series B Preferred Stock pro rata with our other
stockholders with regard to the election of directors, but would vote all
our stock which it owns in favor of the proposal to exchange some of our
General Textiles common stock for our stock which General Textiles owns.
That exchange would eliminate the interlocking relationship in which we
may own as much as 74% of General Textiles common stock and General
Textiles would own at least 53.3% in voting power of our Common Stock and
Series B Common Stock. However, it would reduce our ownership of General
Textiles to less than 50%.
USE OF PROCEEDS
We will receive estimated net proceeds of $10,100,000 from the sale of
Common Stock to people who exercise Rights (including the oversubscription
privilege). We will use $3,250,000 of that amount to redeem our Subordinated
Notes due 2003. We will add the remainder of the net proceeds to our working
capital.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of August 1, 1998, and
as adjusted to give effect to (a) either (i) the conversion of
pre-recapitalization Common Stock, Series A Preferred Stock and Series B
Preferred Stock, into post-recapitalization Common Stock, and the sale of
800,000 shares of Common Stock on exercise of Rights, if the Merger with General
Textiles is approved or (ii) the sale of 3,000,000 shares of Common Stock on
exercise of Rights, if the Merger with General Textiles is not approved and (b)
application of a portion of the proceeds of sale of the Common Stock to redeem
our Subordinated Notes due 2003 as described under "Use of Proceeds."
<TABLE>
<CAPTION>
(UNAUDITED; IN THOUSANDS)
-------------------------------------
ACTUAL AS ADJUSTED AS ADJUSTED
AUGUST 1, WITH WITHOUT
1998 GT MERGER GT MERGER
----------- ----------- -----------
<S> <C> <C> <C>
DEBT:
Revolving credit notes.................................................. $ 26,991 $ 26,991 $ 26,991
Long-term debt, including current maturities............................ 17,993 14,743 14,743
Capital lease and other long-term obligations........................... 6,172 6,172 6,172
----------- ----------- -----------
Total debt............................................................ 51,156 47,906 47,906
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value, 4,500,000 shares
authorized, 3,638,690 shares issued and outstanding (aggregate
liquidation preference of $36,387).................................... 36 -- 36
Series B junior convertible, exchangeable preferred stock, $.01 par
value, 40,000 shares authorized, 35,360 shares issued and outstanding
(aggregate liquidation preference of $43,360)......................... -- -- --
Common Stock, $.01 par value, 80,000,000 shares authorized, 5,004,122,
12,075,381, and 8,004,122 shares issued and outstanding............... 50 121 80
Additional paid-in capital.............................................. 89,618 99,773 99,778
Stock subscription notes receivable..................................... (4,087) (4,087) (4,087)
Accumulated deficit..................................................... (75,954) (75,954) (75,954)
----------- ----------- -----------
Total stockholders' equity............................................ 9,663 19,853 19,853
----------- ----------- -----------
Total debt and stockholders' equity................................... $ 60,819 $ 67,759 $ 67,759
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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STOCK PRICES
Our Common Stock and our Series A Preferred Stock are both quoted in the
Nasdaq Small-Cap Market. The following table sets forth information about the
high and low sale prices for our Common Stock and our Series A Preferred Stock
reported on the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
SERIES A
COMMON PREFERRED
-------------------- --------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
--------- --------- --------- ---------
FISCAL 1996
First Quarter.................................................................. $ 3.22 $ 1.56 $ 8.50 $ 5.63
Second Quarter................................................................. $ 3.13 $ 1.75 $ 8.38 $ 6.88
Third Quarter.................................................................. $ 2.56 $ 1.38 $ 7.44 $ 6.75
Fourth Quarter................................................................. $ 2.34 $ 1.31 $ 8.38 $ 6.13
FISCAL 1997
First Quarter.................................................................. $ 3.09 $ 2.00 $ 9.38 $ 7.75
Second Quarter................................................................. $ 2.75 $ 1.63 $ 9.00 $ 8.00
Third Quarter.................................................................. $ 1.94 $ 0.50 $ 8.44 $ 6.69
Fourth Quarter................................................................. $ 1.75 $ 1.00 $ 7.94 $ 6.25
FISCAL 1998
First Quarter.................................................................. $ 3.19 $ 1.28 $ 9.75 $ 7.13
Second Quarter................................................................. $ 3.34 $ 2.31 $ 10.13 $ 8.13
Third Quarter (through September 30)........................................... $ 2.88 $ 1.81 $ 8.50 $ 6.56
</TABLE>
On October 15, 1998, the last reported sale price of our Common Stock was
$1.844 and of our Series A Preferred Stock was $6.25.
DIVIDEND POLICY
We have never paid dividends with regard to our Common Stock. We have been
paying required dividends of $.95 per share per year with regard to our Series A
Preferred Stock. In fiscal 1997, those dividends totalled $3.5 million.
Beginning in 2002, we will be required to pay dividends of $60 per share per
year with regard to our Series B Preferred Stock, increasing by $20 each year
until 2005, after which the annual dividend will remain at $120 per share. The
need to pay dividends with regard to the Series A Preferred Stock and the Series
B Preferred Stock will be eliminated if the merger with General Textiles, Inc.
takes place. We have no current plans to pay dividends with regard to our Common
Stock. Whether we will pay cash dividends with regard to our Common Stock at any
time in the future will be determined by our Board of Directors on the basis of
our earnings, financial condition and cash requirements and any other factors
the Board of Directors deems relevant.
BUSINESS
We operate chains of 112 Family Bargain Center and 51 Factory 2-U off-price
retail apparel and housewares stores in Arizona, California, Nevada, New Mexico,
Oregon, Texas and Washington.
We acquired General Textiles, which was operating the Family Bargain Centers
chain, in 1993, while it was the subject of a proceeding under Chapter 11 of the
Bankruptcy Code. Between December 31, 1992 and March 1, 1998, the Family Bargain
Center chain expanded from 108 stores in four states to 124 stores in six
states. In November 1995, we acquired Factory 2-U, Inc., which operated the
Factory 2-U chain, and began to coordinate the purchasing, warehousing and
delivery operations for the Family Bargain Center and Factory 2-U chains.
Between November 1995 and March 1998, the Factory 2-U chain increased from 33
stores in three states to 38 stores in three states. Subsequently, we converted
a number of Family Bargain Center Stores to Factory 2-U stores. At September 1,
1998, we were operating 112 Family Bargain
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Center stores in six states and 51 Factory 2-U stores in five states. We expect
increasingly to focus on the Factory 2-U chain. In July 1998, we merged General
Textiles and Factory 2-U into a new General Textiles, Inc., so now both chains
are operated by the same entity.
Family Bargain Center and Factory 2-U stores both sell primarily first
quality, in-season clothing for men, women and children and housewares at prices
which generally are lower than the prices of competing discount and regional
off-price stores. Our stores sell merchandise at bargain prices by purchasing
in-season, excess inventory and close-out merchandise at substantial discounts
from wholesale prices and by setting retail prices which pass along the savings
to our customers.
Family Bargain Centers Stores, which average 12,000 square feet, and Factory
2-U stores, which average 17,350 square feet, both 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. Store atmosphere is enhanced by the playing of locally
popular music, the use of brightly colored pennants and occasional festive
outdoor promotions.
OPERATING STRATEGY
We seek to be the leading off-price apparel and housewares retailer to lower
income customers in the markets we serve. The major elements of our operating
strategy include:
PROVIDE FIRST QUALITY MERCHANDISE AT BARGAIN PRICES: Our stores sell first
quality merchandise at bargain prices by purchasing in-season, excess inventory
and close-out merchandise at substantially less than normal wholesale prices and
by setting retail prices which pass along the savings to our customers.
TARGET UNDER-SERVED MARKET SEGMENTS, INCLUDING THE HISPANIC MARKET: Our
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 minority groups. Our store merchandise selection is a product of
purchasing and marketing programs tailored to the purchasing patterns of
customers in each store.
MAXIMIZE INVENTORY TURNS: We emphasize inventory turn in our 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.
LOW OPERATING COSTS: Our stores maintain low operating costs primarily
through their self-service formats, use of part-time labor, selection of
suitable locations with low rental expenses and overall focus on cost controls.
EXPANSION PLANS
OPENING OF NEW STORES: We plan to increase our store count by 6 to 168
stores in the fiscal year ending January 30, 1999 (fiscal 1998). All the new
stores will be in markets in which we currently operate. During fiscal 1997, we
opened 23 new stores and closed 7 stores. Average store opening expenses for
equipment, fixtures, leasehold improvements and grand opening 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: We plan to continue a program of
renovating stores and relocating stores as superior sites become available in
their markets. Store renovations generally include
20
<PAGE>
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, we renovated twenty stores and relocated one store.
CUSTOMERS
Our primary customers are families with annual household incomes of under
$25,000, many of whom are employed in the agricultural sector or are blue collar
workers. A significant portion of our customers are of Hispanic origin or
members of other minority ethnic groups, including African-Americans, Asians and
Native Americans. We estimate that approximately 50% to 55% of our customers are
of Hispanic origin. Bureau of the Census projections predict that through 2020
the Hispanic population in the seven states where our stores are located
(Arizona, California, Nevada, New Mexico, Oregon, Texas and Washington) will
grow at approximately twice the rate of the total population.
PURCHASING
We purchase merchandise from a large number of domestic manufacturers,
jobbers, importers and other vendors. Payment terms are typically net 30 days.
The 10 largest vendors supply approximately 12% of our merchandise. We
continually add new vendors and do not maintain long-term or exclusive purchase
commitments or agreements with any vendor. We have generally not had difficulty
locating and purchasing appropriate apparel for our stores. Our management
believes there are a substantial number of additional sources of supply of first
quality, off-price apparel goods and expects that we will be able to meet our
increased inventory needs as we grow. Our general merchandise manager, four
merchandise managers and eleven buyers, who average over 10 years of apparel and
housewares industries experience, seek to purchase in-season goods and first-run
and last-run merchandise at substantial discounts to normal wholesale pricing.
IN-SEASON GOODS. Unlike traditional department stores and discount
retailers, which primarily purchase merchandise in advance of a selling season
(for example, back-to-school clothing is purchased by March), we purchase
approximately 70% of our merchandise in-season (i.e., during the applicable
selling season). In-season purchases generally represent close-outs of vendors'
inventories which remain after the traditional wholesale selling season,
sometimes due to retailers' order cancellations. This merchandise is typically
available at prices below normal wholesale. Our management believes our
in-season buying practices are well suited to our customers, who tend to make
purchases on an as-needed basis during a season. Our in-season buying practices
are facilitated by our ability to process and ship merchandise through our
distribution center to our stores, usually within two or three days after we
receive it from the vendor, and to process a large number of relatively small
purchase orders. Our management believes we are a desirable customer for vendors
seeking to liquidate inventory, because we can take immediate delivery of large
quantities of in-season goods. Furthermore, we rarely request 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 our purchases
consist of "first-run" and "last-run" merchandise. To ensure product
consistency, manufacturers typically produce a preliminary "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 or keep machinery in use. Manufacturers
sometimes designate first and last runs as "irregulars" to differentiate the
goods from full price merchandise or to indicate that the merchandise may
contain minor imperfections (which do not affect the wearability of the items).
Typically this merchandise can be purchased at prices below normal wholesale.
Manufacturers ship goods directly to our San Diego warehouse and
distribution center or, in the case of East Coast vendors, to us through our
East Coast freight consolidator. We use independent trucking
21
<PAGE>
companies to ship goods from our warehouse to our stores. We generally do not
store goods at our warehouse from season to season.
MERCHANDISING AND MARKETING
Our merchandise selection, pricing practices and store formats are designed
to reinforce the concept of value and maximize customer enjoyment of the
shopping experience. Our 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 the stores' merchandise carries brand name labels,
including nationally recognized brands. For the Family Bargain Center chain,
women's and children's apparel each account for approximately 30% of sales and
men's apparel accounts for approximately 25% of sales, with the remaining
approximately 15% consisting of footwear, domestic items, housewares and toys.
For the Factory 2-U chain, men's, women's and children's apparel each accounts
for approximately 20% of sales and domestic items account for approximately 22%
of sales, with the remaining approximately 18% of sales consisting of footwear,
home goods and toys.
We deliver new merchandise to our stores at least once each week to
encourage frequent shopping trips by our customers and to maximize the rate of
inventory turn. As a result of our purchasing practices, store inventory may not
always include a full range of colors, sizes and styles in a particular item.
Our management believes, however, that price, quality and product mix are more
important to our customers than the availability of a specific item at a
particular time.
We emphasize inventory turn in our 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. We believe the pace of our inventory turn leads to increased profits,
reduced inventory markdowns, efficient use of capital and customer urgency to
make purchase decisions.
Our administrative headquarters receives daily store sales and inventory
information from point-of-sale computers located at each of our stores. This
data is reported by stock keeping unit (or "SKU") and helps our management to
tailor purchasing and distribution decisions. A chain-wide computer network also
facilitates communications between the administrative headquarters and stores,
enabling our central management to provide store management with immediate
pricing and distribution information.
Our 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 Spanish and English and are
staffed with bilingual store personnel. Stores have "gala" grand openings and,
on occasion, feature outdoor sidewalk promotions with live music and other
festive activities. Our major advertising vehicle is full-color print tabs
showing actual photos of our merchandise. Print advertising is delivered as
newspaper inserts and marriage-mail drops. Other advertising programs include
radio, television and outdoor promotional activities.
Our stores emphasize customer satisfaction to develop customer loyalty and
generate repeat sales. If a customer is not completely satisfied with any
purchase, our store will make a full refund or exchange. Most sales are for
cash, although checks and credit cards are accepted. We do not issue our own
credit card, but we do offer a layaway program. The layaway program is an
important means for our customers, many of whom do not possess credit cards, to
purchase goods over time.
Approximately 60% of our sales occur in our third and fourth fiscal
quarters, during the back-to-school (August and September) and Christmas
(November and December) seasons.
22
<PAGE>
THE STORES
We currently operate 163 stores 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. September 1, 1998 store
locations were as follows:
<TABLE>
<CAPTION>
STATE STRIP CENTER DOWNTOWN OTHER
- ------------------------------------------------------------------------- --------------- --------------- -----------
<S> <C> <C> <C>
California............................................................... 70 14 6
Arizona.................................................................. 28 4 0
Washington............................................................... 9 2 2
New Mexico............................................................... 8 0 1
Nevada................................................................... 7 0 0
Oregon................................................................... 7 0 1
Texas.................................................................... 3 1 0
-- --
---
132 21 10
-- --
-- --
---
---
<CAPTION>
STATE TOTAL
- ------------------------------------------------------------------------- -----
<S> <C>
California............................................................... 90
Arizona.................................................................. 32
Washington............................................................... 13
New Mexico............................................................... 9
Nevada................................................................... 7
Oregon................................................................... 8
Texas.................................................................... 4
---
163
---
---
</TABLE>
Family Bargain Centers range in size from 5,000 square feet to 34,850 square
feet, averaging 12,000 square feet. Factory 2-U stores range in size from 8,065
square feet to 28,000 square feet, averaging 17,350 square feet. Our management
continually reviews the ability of stores to provide positive contributions to
our operating results and may elect to close stores which do not meet
performance criteria. Costs associated with closing a store, consisting
primarily of recognition of any remaining lease obligations and provisions to
re-value assets to net realizable value, are charged to operations during the
fiscal year in which the decision is made to close the store.
Our 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. We often
promote experienced assistant store managers to fill open manager positions.
Our store managers participate in a bonus plan under which they are awarded
bonuses upon achieving specified objectives. We believe the bonus program is an
important incentive for our key employees, helps reduce employee turnover and
lowers costs.
Our management believes our store opening and operating costs are low
compared to those of similar retailers due to our use of low rent store
locations, a self-service format, use of basic fixtures and use of part-time
employees whenever possible. We generally lease previously occupied sites on
terms which we believe are more favorable than those available for newly
constructed facilities. After we sign 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. We select a store site 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.
We maintain commercial liability, fire, theft, business interruption and
other insurance policies.
COMPETITION
We operate in a highly competitive marketplace. Our 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 we do. Our stores also compete with
independent and small chain retailers and flea markets (also known as "swap
meets") which serve the same low and
23
<PAGE>
low-middle income market as we do. Our management believes the principal
competitive factors in our markets are price, quality and site location and that
we are well positioned to compete on the basis of these factors.
EMPLOYEES
At June 22, 1998 we were employing 3,049 people, of whom 2,772 were store
employees and store field management (1,785 of whom were part-time), 197 were
executives and administrative employees and 80 were warehouse employees. None of
our employees is subject to collective bargaining agreements and our management
considers our relations with our employees to be good.
TRADEMARKS
Except for the trade names "Family Bargain Center" and "Factory 2-U," which
are federally registered trademarks, we do not use any material trademarks. We
are not aware of any infringing uses which could materially impair the use of
our trademarks.
GOVERNMENT REGULATION
Our operations are subject to various federal, state and local laws,
regulations and administrative requirements, including laws and regulations
regarding equal employment and minimum wages. We believe we are in substantial
compliance with all material federal, state and local laws and regulations
governing our operations and that we have all material licenses and permits
required for the operation of our business. We do not believe the burdens of
complying with applicable laws and regulations, or risks imposed by them, have
had a material adverse effect on us or our business.
LEGAL PROCEEDINGS
We are involved in various legal proceedings in the normal course of our
business, most of which are covered in whole or in part by insurance. We do not
believe the ultimate disposition of these legal proceedings will have a material
adverse effect on our financial position or the results of our operations.
MANAGEMENT
DIRECTORS
The following table contains information regarding our directors.
<TABLE>
<CAPTION>
EXPIRATION OF
TERM AS
NAME AGE POSITION DIRECTOR
- -------------------------------------------- --- -------------------------------------------- ---------------
<S> <C> <C> <C>
James D. Somerville......................... 56 Chairman of the Board 2000
John J. Borer III........................... 41 Director 1999(1)
Peter V. Handal............................. 55 Director 1998
Ira Neimark................................. 76 1999(1)
Ronald Rashkow.............................. 56 Director 1998(1)
Michael Searles............................. 49 Director, President and Chief Executive 1998
Officer of General Textiles, Inc.
J. William Uhrig............................ 36 Director 1998(1)
H. Whitney Wagner........................... 42 Director 2000
Thomas G. Weld.............................. 36 Director 2000
</TABLE>
- ------------------------
(1) Messrs. Handal and Rashkow, and Wm. Robert Wright II, have been nominated
for election at the Company's Annual Meeting to be held on November 23, 1998
for terms expiring at the 2001 Annual Meeting and Mr. Searles has been
nominated for election for a term expiring at the 1999 Annual Meeting. J.
William Uhrig is not seeking re-election, and Wm. Robert Wright II, who is a
Principal with Three Cities (of which Mr. Uhrig is a Managing Director) has
been nominated to replace him.
24
<PAGE>
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 Ohio Caliper,
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 Rodman and Renshaw, Inc.
terminated its operations in March 1998, Mr. Borer has been a Senior Managing
Director of R&R Capital Group, an investment banking firm. Rodman & Renshaw,
Inc. and its parent commenced proceedings under Chapter 7 of the Bankruptcy Code
on March 18, 1998.
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 Boards of Cole
National Corporation, Jos. A. Bank Clothiers and Perry Ellis International.
IRA NEIMARK became a director of the Company in August 1998. From 1975 to
1992, he held various positions with Bergdorf Goodman & Co., most recently as
Chairman of the Board and Chief Executive Officer. Since 1992, he has been a
consultant on retailing activities. Currently, he is an advisor to Mitsukushi
Department Stores of Japan and to Three Cities. Mr. Neimark is a director of
Garden Ridge Corporation (a specialty retailing company) and of Hermes of Paris,
as well as a director of The Fashion Institute Foundation.
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 to that, he
served as Chief Executive Officer and Chairman of the Board of Directors 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. 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.
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.
J. WILLIAM UHRIG has been a director of the Company since January 1997. Mr.
Uhrig has been a Managing Director of Three Cities since 1991. Mr. Uhrig joined
Three Cities in 1984. From January 1993 to January 1998, Mr. Uhrig served on the
board of directors of MLX Corp., a holding company.
H. WHITNEY WAGNER has been a director of the Company since January 1997. He
has been a Managing Director of Three Cities since 1989. He joined Three Cities
in 1983 and was elected a Vice President in 1986. Mr. Wagner also serves on the
boards of directors of Garden Ridge and of Pameco Corporation a
25
<PAGE>
(distributor of heating and air conditioning equipment). From January 1993 to
January 1998, Mr. Wagner served on the Board of Directors of MLX Corp.
THOMAS G. WELD has been a director of the Company since January 1997. Mr.
Weld has been a Managing Director of Three Cities since 1993. From 1988 until
1993, Mr. Weld was an associate with McKinsey and Company, a management
consulting firm.
WM. ROBERT WRIGHT II has been employed by Three Cities since 1992, except
for a period from July 1993 to August 1995 when he was in a graduate program at
Harvard University. He has been a Principal of Three Cities since 1998. Before
joining Three Cities, Mr. Wright worked for Marriott International in its
strategic planning department. He is our Secretary (but not our employee).
EXECUTIVE OFFICERS
The following table contains information about our executive officers who
are not directors.
<TABLE>
<CAPTION>
NAME POSITION AGE AN OFFICER SINCE
- ---------------------------------------------------------- ------------------------------ --- -----------------
<S> <C> <C> <C>
B. Mary McNabb............................................ Executive Vice 49 1990
President--Merchandising for
General Textiles, Inc.
William F. Cass........................................... Executive Vice 48 1996
President--Operations for
General Textiles, Inc.
Jonathan W. Spatz......................................... Executive Vice President and 42 1997
Chief Financial Officer
Denis LeClair............................................. Vice President--Divisional 48 1991
Merchandise Manager for
General Textiles, Inc.
</TABLE>
B. MARY MCNABB has been the Executive Vice President--Merchandising of the
Company since 1990.
WILLIAM F. CASS has been the Executive Vice President of Operations for
General Textiles since March 1996. He held the same position with Factory 2-U,
Inc. until it was merged with General Textiles in July 1998. Prior to joining
the Company, Mr. Cass held positions as Managing Director, Director of New
Business Development and Senior Vice President of Merchandising at Clothestime.
JONATHAN W. SPATZ is our Executive Vice President and Chief Financial
Officer. Mr. Spatz joined us in June 1997. Prior to joining us, from July 1994
to June 1997, Mr. Spatz was the Chief Financial Officer of Strouds.
DENIS LECLAIR has been employed by General Textiles in merchandising
capacities since 1991.
COMMITTEES OF THE BOARD
Our Board of Directors has five committees. The committees, their functions
and their members are described below.
The Executive Committee is authorized to take such action as the Board of
Directors may from time to time direct. Its members are Messrs. Searles,
Somerville and Wagner.
The Compensation Committee reviews and approves compensation arrangements
for top management and employee compensation programs. The Board of Directors
determines the compensation of our executive officers based on recommendations
from the Compensation Committee. The Compensation Committee consists of Messrs.
Borer, Rashkow, Somerville and Weld.
26
<PAGE>
The Stock Option Committee administers our Employee Stock Option Plan. Its
members are Messrs. Weld and Rashkow.
The Audit Committee reviews and evaluates the results and scope of the audit
and other services provided by our independent accountants, as well as our
accounting principles and system of internal accounting controls. Our By-laws
provide that transactions with affiliates and acquisitions of businesses not
within certain SIC Codes (primarily covering wholesale apparel trade, retail
stores, and apparel stores) must be unanimously approved by the Audit Committee;
except that if at any time there are no remaining shares of Series A Preferred
Stock outstanding, acquisitions of businesses not within the SIC Codes will
require approval only by a majority of the Audit Committee. The members of the
Audit Committee are Messrs. Borer, Handal and Wagner.
The Nominating Committee considers potential nominees for election to the
Board of Directors by either incumbent directors or stockholders. Its members
are Messrs. Handal, Somerville and Wagner.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 80 million shares of Common Stock and 7,500,000
shares of preferred stock, of which our Board has authorized us to issue
4,500,000 shares of Series A Preferred Stock and 40,000 shares of Series B
Preferred Stock. On August 1, 1998, we had 5,004,122 outstanding shares of
Common Stock and 3,674,050 shares of preferred stock, of which 3,638,690 shares
were Series A Preferred Stock and the remaining 35,360 shares were Series B
Preferred Stock.
COMMON STOCK
Each share of Common Stock is entitled to one vote on all matters to be
voted upon by the common stockholders. All shares of Common Stock will share
equally and rateably in dividends and in distributions if we are liquidated.
Holders of Common Stock do not have preemptive rights and are not entitled to
cumulative voting in the election of directors. Because of that, the holders of
a majority in voting power of the shares of Common Stock and Series B Preferred
Stock present at a meeting can elect all the directors, and the holders of the
remaining shares will not be able to elect any directors.
PREFERRED STOCK
The Board of Directors may authorize the issuance of preferred stock in
series, each of which will have whatever rights and preferences, and will be
subject to whatever limitations, the Board of Directors may determine when it
authorizes creation of a series of preferred stock. Because of that, the Board
of Directors could, without shareholder approval, issue series of preferred
stock with voting or conversion rights which could adversely affect the voting
power of the common shareholders. Currently, the only series of preferred stock
which the Board of Directors has authorized and of which there are outstanding
shares are the Series A Preferred Stock and the Series B Preferred Stock.
SERIES A PREFERRED STOCK
The Board of Directors has authorized us to issue 4,500,000 shares of Series
A Preferred Stock. At August 1, 1998, we had 3,638,690 outstanding shares of
Series A Preferred Stock.
The Series A Preferred Stock ranks senior to the Series B Preferred Stock
and to the Common Stock with respect to the payment of dividends and
distribution of assets if we are liquidated. Holders of Series A Preferred Stock
will be entitled to receive $10 per share if we are liquidated. They are
entitled to receive dividends at the rate of $.95 per share per year, payable
quarterly on the last Friday of each January, and on each April 30, July 31 and
October 31, when and if the dividends are declared by our Board of Directors.
The right to dividends is cumulative.
27
<PAGE>
Series A Preferred Stock may be converted into Common Stock at the rate
which, on August 1, 1998, was $3.905 liquidation preference of Series A
Preferred Stock per share of Common Stock, subject to adjustment to prevent
dilution. We have the option to redeem all, but not less than all, the
outstanding Series A Preferred Stock on 30 days' notice for $10 per share, plus
any accumulated and unpaid dividends, at any time (but only at a time) when the
last reported price of our Common Stock has, for 20 consecutive trading days
ending no more than 10 days before we notify the holders that the Series A
Preferred Stock has been called for redemption, is at least 137.5% of the
conversion price then in effect. In addition, we may at any time redeem all or
any of the Series A Preferred Stock at the following per share prices:
<TABLE>
<CAPTION>
YEAR ENDING JULY 20, REDEMPTION PRICE
- ---------------------------------------------------------------------------- -----------------
<S> <C>
1999........................................................................ $ 10.70
2000, 2001.................................................................. $ 10.50
2002, 2003.................................................................. $ 10.30
2004 and subsequent......................................................... $ 10.00
</TABLE>
Holders of Series A Preferred Stock do not have voting rights, other than as
required by Delaware law, except that (a) at any time when dividends have not
been paid on four dividend payment dates (whether or not consecutive), the
holders of the Series A Preferred Stock will vote together with the holders of
the Common Stock on all matters, with the holders of the Series A Preferred
Stock being entitled to one vote per share, (b) if there is a vote upon a
proposal for us to consolidate into or merge with another corporation, or to
sell all or substantially all of our assets, the holders of the Series A
Preferred Stock will be entitled to vote together with the holders of the Common
Stock, with the holders of the Series A Preferred Stock being entitled to one
vote per share and (c) if we propose to take any action, directly or indirectly,
or through a merger or consolidation with another corporation, which would (i)
create, or increase the authorized number of shares of, a class or series of our
stock which ranks prior to or on a parity with the Series A Preferred Stock as
to dividends or upon liquidation, (ii) change any provision of our Certificate
of Incorporation or By-laws, or of the resolutions which authorized the issuance
of the Series A Preferred Stock, in a manner which would adversely affect the
Series A Preferred Stock, (iii) authorize a reclassification of the Series A
Preferred Stock, (iv) require the exchange of Series A Preferred Stock for other
securities or assets or (v) increase the number of shares of Series A Preferred
Stock which we may issue, that action will have to be approved by the
affirmative vote of holders of a majority of the outstanding shares of Series A
Preferred Stock.
SERIES B PREFERRED STOCK
The Board of Directors has authorized us to issue 40,000 shares of Series B
Preferred Stock. On August 1, 1998, we had 35,360 outstanding shares of Series B
Preferred Stock.
The Series B Preferred Stock ranks junior to the Series A Preferred Stock,
but senior to the Common Stock, with respect to dividends and to distributions
of assets if we are liquidated. Holders of Series B Preferred Stock will be
entitled to $1,000 per share if we are liquidated. Under most circumstances,
they are not entitled to dividends until January 2002. Beginning then, holders
of Series B Preferred Stock will be entitled to dividends totalling $60 per
share in 2002, increasing by $20 per share every year after that until (and
including) 2005, during and after which the dividend will be $120 per share per
year. Dividends will be paid when and if declared by the Board of Directors.
Holders' rights to dividends are cumulative. Dividends may be required prior to
2002, or may be greater than otherwise would have been required after 2002, if
we default on our revolving credit facilities or declare dividends on our Common
Stock.
The Series B Preferred Stock may be converted into Common Stock at the rate
of $1.900804 liquidation preference of Series B Preferred Stock per share of
Common Stock, beginning (a) on the 30th day after there is no outstanding Series
A Preferred Stock, or (b) when there is a change of control of us (which occurs
if (i) anyone acquires 30% or more of our Common Stock, (ii) we are a party to a
merger or consolidation, unless holders of our Common Stock or preferred stock
which is convertible into Common
28
<PAGE>
Stock at the time of the merger or consolidation own at least 66 2/3% of the
outstanding Common Stock after the transaction, or (iii) a majority of the
members of our Board are persons who are not elected, or nominated for election,
to the Board for the first time by a majority of the directors who had served on
the Board at the time of the election or nomination for at least 12 months).
The shares of Series B Preferred Stock vote together with our Common Stock
on all matters, with the holders of Series B Preferred Stock receiving a number
of votes equal to the number of shares of Common Stock into which their shares
can be converted (or could have been converted if the Series B Preferred Stock
were convertible at the time).
We may redeem all, but not less than all, the outstanding Series B Preferred
Stock for $1,000 per share at any time when there no longer is any outstanding
Series A Preferred Stock. Also, if at any time the holders of Series B Preferred
Stock become entitled to dividends because we are in default under a loan
agreement, we may redeem all, but not less than all, the Series B Preferred
Stock by issuing to the holders three year 8% convertible subordinated notes in
the principal amount per share of Series B Preferred Stock equal to $1,000 plus
all accumulated or accrued but unpaid dividends.
LEGAL MATTERS
Rogers & Wells LLP, New York, New York, has passed upon legal matters
relating to the validity of the shares offered by this Prospectus and certain
legal matters with respect to United States federal income tax considerations.
EXPERTS
The consolidated financial statements, as of and for the year ended January
31, 1998, incorporated by reference in this registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm or, as experts in accounting and auditing in giving said
report.
The consolidated financial statements of the Company and its subsidiaries as
of February 1, 1997 and for the years ended February 1, 1997 and January 27,
1996, have been incorporated by reference herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
INFORMATION INCORPORATED BY REFERENCE
As required by the Securities Exchange Act of 1934, as amended, we file
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any materials we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information about the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. We file our reports and proxy statements with
the SEC electronically. The SEC maintains an Internet site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including us. The address of that
site is http:\\www.sec.gov.
The following documents, which we have previously filed with the Securities
and Exchange Commission, are incorporated by reference into this Prospectus:
1. Our amended annual report on Form 10-K/A-2 for the fiscal year ended January
31, 1998 (a copy of which accompanies this Prospectus).
2. Our amended quarterly report on Form 10-Q/A-1 for the fiscal quarter ended
August 1, 1998 (a copy of which accompanies this Prospectus).
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In addition, each report or other document we file pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between the
date of this Prospectus and termination of the offering will be incorporated
into this Prospectus and will be a part of it beginning on the date we file it
with the Securities and Exchange Commission. If anything in a subsequently filed
document which becomes a part of this Prospectus is different from anything in
this Prospectus, this Prospectus will be deemed to be modified by that
subsequently filed document.
If, before the offering to which this Prospectus relates terminates, we file
a Form 10-Q for a period ending after August 1, 1998, we will include a copy of
that Form 10-Q with each copy of this Prospectus which we deliver after we file
the Form 10-Q.
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