-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LDXlth8Xe+H5JgUUv4dXJnDWXyIfQ43Z6AKBRhglQ2qyFi5W7/fk5n0IdeAMkBsW noafHEIm83B1RdPR0zHeCQ== 0000813775-98-000003.txt : 19980504 0000813775-98-000003.hdr.sgml : 19980504 ACCESSION NUMBER: 0000813775-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980501 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAMILY BARGAIN CORP CENTRAL INDEX KEY: 0000813775 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 510299573 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10089 FILM NUMBER: 98607258 BUSINESS ADDRESS: STREET 1: 4000 RUFFIN ROAD STREET 2: 6TH FLR CITY: SAN DIEGO STATE: CA ZIP: 92123-1866 BUSINESS PHONE: 6196271800 MAIL ADDRESS: STREET 1: 4000 RUFFIN ROAD CITY: SAN DIEG STATE: CA ZIP: 92123-1866 FORMER COMPANY: FORMER CONFORMED NAME: DRS INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LONGWOOD GROUP LTD DATE OF NAME CHANGE: 19920527 10-K 1 ANNUAL REPORT FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal period ended January 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to__________ Commission File number 0-16309 FAMILY BARGAIN CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 51-0299573 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 4000 Ruffin Road San Diego, California 92123 (Address of Principal Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (619) 627-1800 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $0.01 par value None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title of Class) Series A 9 1/2% Cumulative Convertible Preferred Stock, $0.01 par value (Title of Class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or fore such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to be best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X NO ___ At April 17, 1998 the aggregate market value of the voting stock of the Registrant held by non-affiliates was approximately $12,336,000. At April 17, 1998 the Registrant had outstanding 4,929,122 shares of Common Stock, $0.01 par value per share. 2 FORM 10-K INDEX PART I Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 12 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23 PART III Item 10. Directors and Executive Officers of the Registrant 24 Item 11. Executive Compensation 24 Item 12. Security Ownership of Certain Beneficial Owners and Management 24 Item 13. Certain Relationships and Related Transactions 24 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 25 3 PART I Item 1. Business THE COMPANY Through its wholly-owned subsidiaries, General Textiles and Factory 2-U, Inc. ("Factory 2-U"), Family Bargain Corporation (the "Company"), at January 31, 1998, operated 166 off-price retail apparel and home goods stores under the names Family Bargain Center and Factory 2-U in Arizona, California, Nevada, New Mexico, Oregon, Texas and Washington. The Company acquired General Textiles in 1993, while General Textiles was operating under Chapter 11 of the U.S. Bankruptcy Code. The Company purchased Factory 2-U in November 1995. The Company's 127 Family Bargain Center and 39 Factory 2-U stores sell primarily first quality, in-season clothing for men, women and children and home goods at retail prices which generally are lower than the prices of competing discount and regional off-price stores. The Company's stores sell merchandise at bargain prices by purchasing in-season, excess inventory and close-out merchandise at substantially discounted wholesale prices and by setting retail prices which pass along the savings to customers. Typical customers of the Company's stores are low-income families, including agricultural, service and other blue-collar workers, a significant portion of whom are of Hispanic origin or members of other ethnic groups. The Company's store merchandising selection, everyday low price strategy and store format are designed to reinforce the concept of value and enhance the customers' shopping experience while maximizing inventory turns. Family Bargain Centers, which average 11,950 square feet, and Factory 2-U stores, which average 17,357 square feet, are designed in a self-service format that affords easy access to merchandise displayed on bargain tables, hanger racks and open shelves. Stores are stocked with new merchandise at least weekly. Prices are clearly marked, often with a comparable retail price. Most stores display signs in English and Spanish and are staffed with bilingual personnel. The playing of locally popular music, the use of brightly colored pennants and occasional festive outdoor promotions enhance store atmosphere. OPERATIONS Operating Strategy The Company seeks to be the leading off-price apparel and home goods retailer to lower income customers in the markets it serves. The major elements of its operating strategy include: Provide First Quality Merchandise at Bargain Prices: The Company's stores sell first quality merchandise at bargain prices by purchasing in-season, excess inventory and close-out merchandise at substantially discounted wholesale prices and by setting retail prices which pass along the savings to customers. Target Under-Served MarketSegments, Including the Hispanic Market: The Company's stores target customers who are under-served in many markets. Typical customers are low-income families, including agricultural, service and other blue collar workers, a significant portion of whom are of Hispanic origin or members of other ethnic groups. The Company's store merchandise selection is a product of purchasing and marketing programs tailored to the purchasing patterns of customers in each store. Maximize Inventory Turns: General Textiles and Factory 2-U emphasize inventory turn in their merchandise and marketing strategies. Merchandise presentation, an everyday low price strategy, frequent store deliveries, and advertising programs all target rapid inventory turn, which management believes leads to increased profits and efficient use of capital. 4 Low Operating Costs: The Company's stores maintain low operating costs primarily through their self-service formats, use of part-time labor, selection of suitable locations with low rental expenses and an overall focus on cost controls. Expansion Plans Opening of New Stores: The Company plans to increase its store count by 3 to 169 stores in the fiscal year ending January 30, 1999 (fiscal 1998). The new stores will be opened in markets in which the Company currently operates. During fiscal 1997, the Company opened 23 new stores and closed 7 stores. During the period from January 31, 1998 through April 4, 1998, four stores closed and no new stores were opened. Average store opening expenses for equipment, fixtures, leasehold improvements and preopening costs are approximately $195,000. Average initial inventory for a new store is approximately $275,000. Generally, during the two to three month grand opening period, a new store achieves sales in excess of sales of an average comparable mature store and, within six months, generates sales consistent with comparable mature store levels. Renovation and Relocation Program: The Company plans to renovate and relocate stores; relocation will be considered as superior sites become available in their markets. Store renovations generally include installing new fixtures, redesigning layouts and refurbishing floors and walls. The cost to renovate or relocate a store is approximately $50,000. During fiscal 1997, the Company renovated twenty stores and relocated one store. Customers The Company's primary customers are families with annual household income of under $25,000, many of whom are employed in the agricultural sector or are blue-collar workers. A significant portion of the Company's customers is of Hispanic origin or members of other minority ethnic groups including African-Americans, Asians and Native Americans. The Company estimates, that approximately 50% to 55% of its customers are of Hispanic origin. According to the U.S. Bureau of the Census, the Hispanic population in the states where the Company's stores are located (Arizona, California, Nevada, New Mexico, Oregon, Texas and Washington) grew from 5.7 million in 1980 to 9.4 million in 1990, a 65% increase. The overall population for these states grew by 24% in the same period. The Hispanic population in the states where the Company's stores are located is projected to grow by 25%, from 10.6 million to 13.2 million, in the period from 1993 to 2000 (according to the U.S. Bureau of the Census). The overall population for these states is projected to grow by 12% in the same period. The Census projections through 2020 reflect the Hispanic population in these states continuing to grow at approximately twice the rate of the total population. Purchasing The Company purchases merchandise from domestic manufacturers, jobbers, importers and other vendors. Payment terms are typically net 30 days. The 10 largest vendors supply approximately 12% of the Company's merchandise. The Company continually adds new vendors and does not maintain long-term or exclusive purchase commitments or agreements with any vendor. The Company has generally not had difficulty locating and purchasing appropriate apparel for its stores. Management believes that there are a substantial number of additional sources of supply of first quality, off-price apparel goods and expects that it will be able to meet its increased inventory needs as the Company grows. The Company's general merchandise manager, merchandise managers and buyers, who average over 10 years of apparel and home goods industries experience, seek to purchase in-season goods and first-run and last-run merchandise at substantial discounts to normal wholesale pricing. In-Season Goods. Unlike traditional department stores and discount retailers, which primarily purchase merchandise in advance of the selling season (for example, back-to-school clothing is purchased by March), the Company purchases approximately 70% of its merchandise in-season. 5 In-season purchases generally represent closeouts of vendors' excess inventories remaining after the traditional wholesale selling season and are often created by other retailers' order cancellations. Such merchandise is typically available at prices below wholesale. Management believes that such in-season buying practices are well suited to the Company's customers, who tend to make purchases on an as-needed basis later into a season. The Company's in-season buying practice is facilitated by its ability to process and ship merchandise through its distribution center to its stores, usually within two or three days of receipt from the vendor, and to process a large number of relatively small purchase orders. Management believes that General Textiles and Factory 2-U are desirable customers for vendors seeking to liquidate inventory because they can take immediate delivery of large quantities of in-season goods. Furthermore, the Company rarely requests markdown concessions, advertising allowances or special shipping and packing procedures, insisting instead on the lowest possible price. First-run and Last-run Merchandise. Approximately 10% of the Company's purchases consist of "first-run" and "last-run" merchandise. To ensure product consistency, manufacturers typically produce a preliminary or "first run" of an item. Additionally, manufacturers will produce "last runs" of certain items to fill out production schedules, maintain stock for potential customer reorders, convert excess fabric to finished goods and keep machinery in use. Manufacturers occasionally designate such first and last runs as "irregulars" to differentiate such goods from full price merchandise or to indicate that such merchandise may contain minor imperfections (which do not affect the wear-ability of the items), and typically such merchandise may be purchased at prices below wholesale. Manufacturers ship goods directly to the Company's San Diego distribution center or, in the case of East Coast vendors, to the Company through its East Coast freight consolidator. Goods received at the Company's warehouse are generally shipped to its stores using independent trucking companies within two to three days of their arrival. The Company generally does not store goods from season to season at its warehouse. Merchandising and Marketing The Company's merchandise selection, pricing practices and store formats are designed to reinforce the concept of value and maximize customer enjoyment of the shopping experience. The Company's stores offer their customers a diverse selection of primarily first quality, in-season merchandise at prices which generally are lower than those of competing discount and regional off-price stores in their local markets. Nearly all of their merchandise carries brand name labels, including nationally recognized brands. The Company uses an everyday low price strategy. For the Family Bargain Center chain, women's and children's apparel each account for approximately 30% of sales, men's apparel accounts for approximately 25% of sales, with the remainder, approximately 15%, consisting of footwear, domestic items, home goods and toys. For the Factory 2-U chain, men's, women's and children's apparel each account for approximately 20% of sales, domestic items account for approximately 22% of sales, with the remainder, approximately 18% of sales, consisting of footwear, home goods and toys. The Company delivers new merchandise to its stores at least once per week to encourage frequent shopping trips by its customers and to maximize the rate of inventory turn. As a result of its purchasing practices, store inventory may not always include a full range of colors, sizes and styles in a particular item. Management believes, however, that price, quality and product mix is more important to the Company's customers than the availability of a specific item at a given time. The Company emphasizes inventory turn in its merchandising and marketing strategy. Merchandise presentation, everyday low prices, frequent store deliveries, staggered vendor shipments, promotional advertising, store-tailored distribution and prompt price reductions on slow moving items all target rapid inventory turn. The Company believes that the pace of its inventory turn leads to increased profits, reduced inventory markdowns, efficient use of capital and customer urgency to make purchase decisions. 6 The Company's administrative headquarters receives daily store sales and inventory information from point-of-sale computers located at each of its stores. This data is reported by stock keeping unit (or "SKU"), permitting management to tailor purchasing and distribution decisions. A chain-wide computer network also facilitates communications between the administrative headquarters and stores, enabling management to provide store management with immediate pricing and distribution information. The Company's stores are characterized by easily accessible merchandise displayed on bargain tables, hanger racks and open shelves, brightly colored pennants and signs and the playing of locally popular music. Prices are clearly marked, usually displayed in whole dollars. A comparative retail-selling price is often noted on price tags. Many stores display signs in English and Spanish and are staffed with bilingual store personnel. Stores have "gala" grand openings and, on occasion, feature outdoor sidewalk promotions with live music and other festive activities. The Company's major advertising vehicle is the use of a full-color print tab showing actual photos of its merchandise. Print media is delivered to the consumers in newspaper inserts and marriage-mail drops. Other advertising programs include radio, television and outdoor promotional activities. The Company's stores emphasize customer satisfaction to develop customer loyalty and generate repeat sales. If a customer is not completely satisfied with any purchase, the Company's stores will make a full refund or exchange. Most sales are for cash, although checks and credit cards are accepted. The Company does not issue its own credit card, but does offer a layaway program. The layaway program is an important means for the Company's customers, many of who do not possess credit cards, to purchase goods over time. Approximately 60% of the Company's sales occur in its third and fourth quarters, during the back-to-school (August and September) and Christmas (November and December) seasons. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Seasonality and Quarterly Fluctuations." The Stores As of April 4, 1998 the Company operated 162 stores located in seven western states. Stores are primarily located in rural and lower income suburban communities and, to a lesser extent, in metropolitan areas. Most stores are located in strip shopping centers, where occupancy costs are most favorable. As of January 31, 1998, the number of store locations was as follows:
Strip State Center Downtown Other Total - ----- ------ -------- ----- ----- California 71 15 6 92 Arizona 29 4 0 33 Washington 9 2 2 13 New Mexico 8 0 1 9 Nevada 7 0 0 7 Oregon 7 0 1 8 Texas 3 1 0 4 --- -- -- --- 134 22 10 166 === == == ===
Family Bargain Centers range in size from 4,500 square feet to 34,846 square feet, averaging 11,950 square feet. Factory 2-U stores range in size from 8,064 square feet to 40,567 square feet, averaging 17,357 square feet. Management continually reviews the ability of stores to provide positive contributions to the Company's operating results and may elect to close stores that do not meet performance criteria. Costs associated with closing stores, consisting primarily of the recognition of remaining lease obligations and provisions to re-value assets to net realizable value, are charged to operations during the fiscal year in which the commitment is made to close a store. 7 The Company's stores typically employ one store manager, two assistant store managers, and seven to ten sales associates, most of whom are part-time employees. New store managers are trained in all aspects of store operations through a management-training program. Other store personnel are trained on site. The Company often promotes experienced assistant store managers to fill open manager positions. The Company's store managers participate in a bonus plan in which they are awarded bonuses upon achieving plan objectives. The Company believes that the bonus program is an important incentive for its key employees, helps reduce employee turnover and lowers costs. Management believes store opening and operating costs are low compared to those of similar retailers due to the selection of low rent store locations, a self-service format, use of basic fixtures and use of part-time employees whenever possible. The Company generally leases previously occupied sites on terms that it believes are more favorable than those available for newly constructed facilities. After signing a store lease, a store opening team prepares the store for opening by installing fixtures, signs, bargain tables, racks, dressing rooms, checkout counters, cash register systems and other items. The district manager and store manager arrange the merchandise according to the standard store layout and train new personnel before and after the store is opened. The Company selects store sites based on demographic analysis of the market area, sales potential, local competition, occupancy expense, operational fit and proximity to existing store locations. Store opening preparations generally take up to two weeks. The Company, General Textiles and Factory 2-U maintain commercial liability, fire, theft, business interruption and other insurance policies. Competition The Company operates in a highly competitive marketplace. The Company's stores compete with large discount retail chains such as Wal-Mart, K-Mart, Target and Mervyn's, and with regional off-price chains, such as MacFrugal's, some of which have substantially greater resources than the Company. They also compete with independent and small chain retailers and flea markets (also known as "swap meets") which serve the same low and low-middle income market as the Company. Management believes that the principal competitive factors in the Company's markets are price, quality and site location and that the Company is well positioned to compete on the basis of these factors. Employees As of April 4, 1998 the Company employed 3,023 people, of whom 2,773 were store employees and store field management (1,760 of whom were part-time), 192 were executives and administrative employees and 58 were warehouse employees. None of the Company's employees is subject to any collective bargaining agreements and management considers its relations with its employees to be good. Trademarks Except for the trade names "Family Bargain Center" and "Factory 2-U", which are federally registered trademarks, the Company, General Textiles and Factory 2-U do not use any other material trademarks.The Company is not aware of any infringing uses that could materially impair the use of its trademarks. Government Regulation The Company's operations are subject to various federal, state and local laws, regulations and administrative practices affecting its business, and the Company must comply with provisions regulating various matters, including equal employment and minimum wages. The Company believes it is in substantial compliance with all material federal, state and local laws and regulations governing its operations and has obtained all material licenses and permits required for the operation of its business. The Company believes that the compliance burdens and risks relating to such laws and regulations do not have a material adverse effect on the Company. 8 Item 2. Properties As of April 4, 1998 the Company operated 162 retail stores located in Arizona, California, Nevada, New Mexico, Oregon, Texas and Washington, under various operating leases with third parties. The leases are separately negotiated and are generally not uniform. The store locations include strip centers, downtown business districts, and stand alone sites. Typical lease terms are for five years with renewal options in five year increments. Approximately two-thirds of the leases are "triple net leases" under which the Company is required to reimburse landlords for insurance, real estate taxes and common area maintenance costs. Some leases require the Company to pay a minimum monthly rent and a percentage of sales in excess of a certain sales level. The current estimated annual rent expense for the 166 stores open at January 31, 1998 is approximately $17.3 million. The Company's headquarters are located in a 269,000 square foot facility at 4000 Ruffin Road, San Diego, California. This facility consists of 37,000 square feet of office space, an 8,000 square foot retail store and a 224,000 square foot warehouse and distribution center. This facility is leased for a term of 12 years expiring in September 2005. The lease provides for annual base rent at an average of approximately $1.5 million over the lease term. Item 3. Legal Proceedings The Company is at all times subject to pending and threatened legal actions that arise out of the normal course of business. In the opinion of management, based in part on the advice of legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders of the Company during the fourth quarter. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock and Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") are quoted on the Nasdaq SmallCap Market. The table below sets forth certain information with respect to the high and low closing bid prices (rounded to the nearest hundredth) of the Company's Common Stock and Series A Preferred Stock during the years ended January 31, 1998 (fiscal 1997) and February 1, 1997 (fiscal 1996), and the subsequent interim period, as quoted by Nasdaq. These quotations represent inter-dealer prices without retail markups, markdowns or commissions and may not be representative of actual transactions. SERIES A COMMON STOCK PREFERRED STOCK
High Low High Low Fiscal 1996 First Quarter $3.22 $1.56 $8.50 $5.63 Second Quarter $3.13 $1.75 $8.38 $6.88 Third Quarter $2.56 $1.38 $7.44 $6.75 Fourth Quarter $2.34 $1.31 $8.38 $6.13 Fiscal 1997 First Quarter $3.09 $2.00 $9.38 $7.75 Second Quarter $2.75 $1.63 $9.00 $8.00 Third Quarter $1.94 $0.50 $8.44 $6.69 Fourth Quarter $1.75 $1.00` $7.94 $6.25 Fiscal Year Ending January 30, 1999 First Quarter (through April 17 , 1998) $3.09 $1.28 $9.63 $7.13
The closing bid prices of the Common Stock and the Series A Preferred Stock on April 17, 1998 as reported on the Nasdaq SmallCap Market were $3.09 per share and $9.63 per share, respectively. As of January 31, 1998, the number of record holders of Common Stock and Series A Preferred Stock were approximately 341 and 88, respectively. These numbers do not include an indeterminate number of stockholders whose shares are held by financial institutions in "street name." The Company has estimated beneficial holders of its Common Stock to be more than 3,000 and the beneficial holders of its Series A Preferred Stock to be more than 350. The Company paid quarterly dividends on its Series A Preferred Stock aggregating $3.5 million for fiscal 1997. The Company has never paid cash dividends on its Common Stock and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The declaration and payment of any cash dividends on its Common Stock in the future will be determined by the Board of Directors in light of conditions then existing, including the Company's earnings, financial condition and cash requirements. On February 20, and March 13, 1997, the Company issued 5,000 and 4,600 shares, respectively, of its Series B Junior Convertible, Exchangeable Preferred Stock (the "Series B Preferred Stock") for aggregate proceeds of $9.6 million. On March 20, 1997 and June 16, 1997, the Company issued 1,865 and 250 shares, respectively, of Series B Preferred Stock to certain members of management in return for $2.1 million aggregate principal amount of full-recourse notes collateralized by the stock. Each of the issuances was made in reliance on the exemption from the registration requirement of the Securities Act of 1933, as amended contained in Section 4(2) of that Act for a "transaction by an issuer not involving any public offering." 10 Although the Series B Preferred Stock is entitled to participate in any dividends paid to holders of the Company's common stock, it is not entitled to a preferential dividend until January 2002. Beginning in 2002, the Company is obligated to pay a dividend to holders of the Series B Preferred Stock in the amount of $60 per share subject to increases of $20 per share every year thereafter until 2005 up to a maximum of $120 per share. Annual cash dividends may be required prior to 2002 or in amounts greater than otherwise required prior to or after 2002 in the event the Company defaults on its revolving credit facilities or declares a dividend on its common stock. The Company recorded non-cash dividends on the Series B preferred stock using the effective interest method to recognize the dividend ratably over the estimated period in which the Series B preferred stock will be outstanding. For fiscal 1997, such accreted dividends totaled approximately $2.7 million. See Note 11 to Financial Statements. 11 Item 6. Selected Financial Data Set forth below are selected financial data for the Company and its subsidiaries. In January 1994, the Company changed its fiscal year end to the Saturday closest to January 31 to conform its fiscal year end to that of General Textiles. All of the selected financial data, except for Operating Data, are derived from audited financial information. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data." Fiscal Year Ended ---------------------------------------------------------------- January 31, February 1, January 27, January 28, January 29, 1998 1997(2) 1996 1995 1994(1) (in thousands, except per share and operating data)
Statement of Operations Data - ---------------------------- Net sales $ 300,592 $ 252,165 $ 179,820 $ 146,520 $ 96,496 Operating income (loss) 5,097 (27,939) 5,153 2,608 4,547 Income (loss) from continuing operations (129) (36,564) 1,478 (354) 1,113 Net income (loss) (129) (37,390) 978 2,656 1,882 Dividends on series A preferred stock 3,456 3,509 3,040 2,030 200 Dividends on series B preferred stock 2,661 - - - - Net income (loss) applicable to (6,246) (40,899) (2,062) 626 1,682 common stock Weighted average shares outstanding 4,901 4,507 4,006 4,008 3,070 Net income (loss) from continuing operations applicable to common stock (1.27) (8.89) (0.39) (0.59) 0.30 Net income (loss) per common share(3) (1.27) (9.07) (0.51) 0.16 0.55 Diluted net income (loss) per common share(3) (1.27) (9.07) (0.51) 0.07 0.47 Operating Data - -------------- Number of stores 166 150 131 97 81 Total selling square footage 1,788,000 1,567,000 1,367,000 867,000 702,000 Sales per square foot 180 172 161 187 133 Comparable store sales growth 3.4% 5.3% 2.8% 0.9% 17.2% Balance Sheet Data - ------------------ Working capital (deficit) $ (2,749) $ 248 $ 4,314 $ 10,098 $ 5,731 Total assets 84,817 80,669 87,152 59,905 52,279 Long-term debt and revolving credit notes, including current portion 29,076 37,894 30,120 17,267 30,491 Stockholders' equity 17,218 11,208 27,717 29,812 10,089
Notes to Selected Financial Data (1) 39 weeks. (2) 53 weeks. (3) In December 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The statement specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) and diluted earnings per share (DEPS). The statement requires retroactive adoption for all prior periods presented. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision and (c) revising the contingent share provisions and the supplemental EPS data requirements. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the information set forth under "Selected Financial Data" and "Financial Statements and Supplementary Data." General During the past two fiscal years, a number of events occurred which have had a significant impact on the financial condition of the Company and its subsidiaries. In January 1997, an investment group (the "TCR Investors") advised by Three Cities Research, Inc. ("TCR") obtained a controlling equity interest, approximately 79% after all Series B transactions, in the Company when the TCR Investors acquired all of the Common and Series A Preferred Stock held by the former chairman, vice chairman and chief executive officer of the Company (the "Former Executives") and the Company issued 22,000 shares of newly authorized Series B Preferred Stock to the TCR Investors (the "1997 Private Placement"). Subsequent to the close of fiscal 1996, the Company issued an additional 11,715 shares of the Series B Preferred stock to TCR Investors, directors and management of the Company. The Series B Preferred Stock has voting rights equivalent to the number of common shares into which it is convertible. In connection with the change in control, three former directors resigned from the Board of Directors and three managing directors of TCR were appointed to serve on the Company's Board. The person then serving as President and Chief Executive Officer of General Textiles and Factory 2-U, who was a director of the Company, was appointed President and Chief Executive Officer of the Company. In February 1997, the Company's Board of Directors elected three new directors, one of whom was elected Chairman of the Board of Directors. In August 1997, the President and Chief Executive Officer of the Company entered into a separation agreement and resigned from all positions with the Company (the "Former President and CEO"). In March 1998 the Company appointed a new President and Chief Executive Officer of General Textiles and Factory 2-U, and he was elected a member of the Board of Directors of the Company. During fiscal 1997, the Company shifted its focus from expanding its store base to improving the operating performance of existing stores. The Company expects to devote substantially all of fiscal 1998 to continuing to improve operating results and upgrading its information systems. 13 Results of Operations The Company defines its fiscal year by the calendar year in which most of the activity occurs (e.g. the year ended January 31, 1998 is referred to as fiscal 1997). The following table sets forth selected statement of operations data expressed as a percentage of net sales for the period indicated:
Fiscal year 1997 1996 1995 - -------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 64.9 67.8 65.2 ------------------------------------ Gross profit 35.1 32.2 34.8 Selling and administrative expenses 32.1 34.8 31.2 Amortization of intangibles 0.7 0.8 0.8 Unusual charges 0.6 3.6 - Provision for goodwill impairment - 3.3 - Write off of deferred offering costs - 0.8 - ------------------------------------- Operating income (loss) 1.7 (11.1) 2.8 Interest expense 1.7 3.4 2.0 ------------------------------------- Income (loss) from continuing operations before income taxes (0.0) (14.5) 0.8 Income taxes - - - Discontinued operations, net of income tax benefit - (0.3) (0.3) - -------------------------------------------------------------------------------- Net income (loss) 0.0 (14.8) 0.5 Preferred dividends (2.1) (1.4) (1.7) ------------------------------------- Net loss applicable to common stock (2.1%) (16.2%) (1.2%) - --------------------------------------------------------------------------------
Fiscal 1997 Compared to Fiscal 1996 Fiscal 1997 was a 52 week year and fiscal 1996 was a 53 week year. For purposes of determining comparable store sales, fiscal 1996 was adjusted to reflect a comparable 52 week year. As of January 31, 1998, the Company operated 166 stores compared to 150 as of February 1, 1997. Net sales were $300.6 million for fiscal 1997 compared to $252.2 million for fiscal 1996, an increase of $48.4 million. Comparable store sales increased $7.7 million, or 3.4%, in fiscal 1997, while new and noncomparable (open for less than one year) stores generated $40.7 million of sales. 14 Gross profit was $105.6 million for fiscal 1997 compared to $81.3 million in fiscal 1996, an increase of $24.3 million. The increase in gross profit was due to the opening of new stores, an increase in comparable store sales and an increase in gross profit as a percentage of sales. As a percentage of sales, gross profit was 35.1% in fiscal 1997 compared to 32.2% in fiscal 1996. The increase in gross profit as a percentage of sales was a result of a lower inventory shrinkage and higher initial markups in fiscal 1997 compared to fiscal 1996. Selling and administrative expenses were $96.5 million for fiscal 1997 compared to $87.8 million for fiscal 1996, an increase of $8.7 million. As a percentage of sales, selling and administrative expenses were 32.1% for fiscal 1997 compared to 34.8% in fiscal 1996. The decrease in selling and administrative expenses as a percentage of sales was primarily attributable to moving the Company's executive offices from New York City to San Diego and economies associated with increased sales volume. Amortization of intangibles consists of amortization of excess of cost over net assets acquired and agreements not to compete. The noncompete agreements are the result of two transactions discussed in the following paragraph. In January 1997, the Former Executives entered into an agreement not to compete with the Company until June 2000 in return for $1.8 million in secured promissory notes that were paid in January 1998. In August 1997, the Former President and CEO entered into an agreement not to compete with the Company until January 2001 in return for payments totaling $970,000. The Company recognized unusual charges to operations in the aggregate amount of $1.8 million in fiscal 1997 and $9.2 million during fiscal 1996. The fiscal 1997 amount pertains to the separation from the Company of the Former President and CEO, whereas the fiscal 1996 charges relate to terminating contracts with the Former Executives, former directors and consultants and closure of the former executive offices in New York City in connection with the change in control. Interest expense was $5.2 million in fiscal 1997 compared to $8.6 million for fiscal 1996, a decrease of $3.4 million. The decrease was attributable to decreases in the amortization of debt discount related to the Bankruptcy Debt of General Textiles (see Liquidity and Capital Resources - Bankruptcy Debt of General Textiles). There were no discontinued operations in fiscal 1997 compared to a loss from discontinued operations of $0.8 million in fiscal 1996. The net loss before dividends was $0.1 million in fiscal 1997 compared to a net loss before dividends of $37.4 million in fiscal 1996. Total dividends were $6.1 million in fiscal 1997 and $3.5 million in fiscal 1996. In fiscal 1997 non-cash dividends on the Series B preferred stock were $2.6 million, while there were no Series B preferred stock dividends in fiscal 1996. The net loss applicable to common stock was $6.2 million in fiscal 1997 compared to a net loss applicable to common stock of $40.9 million in fiscal 1996. Fiscal 1996 Compared to Fiscal 1995 Fiscal 1996 was a 53 week year and fiscal 1995 was a 52 week year. For purposes of determining comparable store sales, fiscal 1996 was adjusted to reflect a comparable 52 week year. As of February 1, 1997, the Company operated 150 stores compared to 131 as of January 27, 1996. Net sales were $252.2 million for fiscal 1996 compared to $179.8 million for fiscal 1995, an increase of $72.4 million. Of the increase, $41.5 million was attributable to the inclusion of Factory 2-U sales for a full year in fiscal 1996 compared to only 11 weeks in fiscal 1995, $7.7 million was due to increases in comparable store sales, $3.3 million was attributable to a 53rd week in fiscal 1996 and the remaining $19.9 million increase in sales was due to new and noncomparable (open for less than one year) stores. 15 Gross profit was $81.3 million for fiscal 1996 compared to $62.6 million for fiscal 1995, an increase of $18.7 million. Of the total increase, $15.4 million was attributable to the inclusion of a full year of Factory 2-U sales for fiscal 1996 as compared to only 11 weeks for fiscal 1995. The remaining increase in gross profit was due to the opening of new stores, an increase in comparable store sales, the additional week in fiscal 1996, all net of a decrease in gross profit as a percentage of sales. As a percentage of sales, gross profit was 32.2% in fiscal 1996 compared to 34.8% in fiscal 1995. The decrease in gross profit as a percentage of sales was a result of increased markdown activity, increased inventory shrinkage and the establishment of a markdown allowance related to parking lot sale inventory to be liquidated in the first half of fiscal 1996. Selling and administrative expenses were $87.8 million for fiscal 1996 compared to $56.1 million for fiscal 1995, an increase of $31.7 million. Of the total increase, $14.4 million was attributable to the inclusion of a full year of operations for Factory 2-U in fiscal 1996 compared to 11 weeks of activity in fiscal 1995. As a percentage of sales, selling and administrative expenses were 34.8% in fiscal 1996 compared to 31.2% in fiscal 1995. The increase in selling and administrative expenses as a percentage of sales was attributable to increases in salaries and wages, an increase in store closing and opening expenses and an increase in expenses of the former New York office. The increase in salaries and wages was due to the increase in the minimum wage during the latter part of fiscal 1996 and an increase in corporate wages as the Company increased its staff to accommodate anticipated additional growth. The increase in store closing and opening expenses arose from a $1.5 million charge taken at the end of fiscal 1996 to provide an allowance for stores that were identified for closing and to write-off $0.5 million in capitalized store preopening costs. Expenses related to the former New York office were $3.6 million, exclusive of unusual and closure charges, in fiscal 1996 compared to $1.8 million in fiscal 1995, an increase of $1.8 million. The Company closed the New York City office in January 1997 when it moved its executive offices to San Diego, CA. The Company recognized unusual charges to operations in the aggregate amount of $9.2 million during fiscal 1996 related to the termination of employment and benefit contracts of the Former Executives, the accrual of future lease payments on its former executive offices in New York City and costs to cancel contracts with consultants and former directors that were not expected to provide value to the Company in the future. The Company recognized a charge to operations in the amount of $8.4 million during fiscal 1996 when it determined that the goodwill arising from its acquisition of Factory 2-U was impaired. The Company recognized a charge to operations in the amount of $1.9 million in fiscal 1996 arising from the write-off of capitalized costs related to a public offering of securities that was withdrawn. In lieu of the withdrawn offering, the Company completed the private placement with the TCR Investors. Interest expense was $8.6 million in fiscal 1996 compared to $3.7 million for fiscal 1995, an increase of $4.9 million. Of the increase, $2.8 million was attributable to increases in the amortization of debt discount related to the Bankruptcy Debt (as defined below) of General Textiles. The remaining $2.1 million increase was attributable to increased debt arising from expansion of the Company, including the financing of Factory 2-U for a full fiscal year as compared to only two and one half months in the prior fiscal year. Loss on disposal of discontinued operations was $0.8 million in fiscal 1996 compared to $0.5 million in fiscal 1995. In fiscal 1996, the Company determined that a consulting contract arising from the settlement of a lawsuit had no value. Accordingly, the Company charged all prepaid and future payments related to the consulting contract to discontinued operations. The net loss before dividends was $37.4 million in fiscal 1996 compared to net income before dividends of $1.0 million in fiscal 1995. The net loss applicable to common stock was $40.9 million in fiscal 1996 compared to a net loss applicable to common stock of $2.1 million in fiscal 1995. 16 Liquidity and Capital Resources The Company General. The Company relies on payments from General Textiles and Factory 2-U to service the required principal, interest and dividend payments related to its debt and preferred stock and to pay operating costs and expenses. Such payments from General Textiles include payments to the Company pursuant to a Tax Sharing Agreement (defined below), debt service arising from certain subordinated debt of General Textiles (which the Company owns pursuant to purchases from third parties), and a Management Agreement (the "GT Management Agreement"), as described below. General Textiles filed as part of its bankruptcy proceedings a plan of reorganization ("The Reorganization Plan"). The U.S. Bankruptcy Court confirmed it April 20, 1993. Debt securities issued under the Reorganization Plan prohibit the payment of dividends and other distributions by General Textiles to the Company. Payments by Factory 2-U to the Company are limited under the Factory 2-U Revolving Credit Facility to payments pursuant to a management agreement (the "Factory 2-U Management Agreement") and a debt guaranty agreement ("the Guaranty Fee Agreement"). Pursuant to the Reorganization Plan, the Company and General Textiles entered into the tax sharing agreement (the "Tax Sharing Agreement"). The Tax Sharing Agreement requires General Textiles to pay to the Company or to its affiliates, an amount equal to 80% of any federal income tax savings achieved by General Textiles' sharing in net tax losses arising from General Textiles filing its federal income tax return on a consolidated basis with the Company and its affiliates as opposed to filing a federal income tax return on an unconsolidated "stand-alone" basis. Likewise, the Tax Sharing Agreement also requires the Company to pay to General Textiles 80% of any federal income tax savings accruing to the Company that arise from the filing of a consolidated federal income tax return. Payments or accruals to the Company or General Textiles under the Tax Sharing Agreement are made annually based on the estimated tax savings, if any. The payments or accruals under the Tax Sharing Agreement are intercompany transactions that are eliminated in consolidation, and have no effect on the consolidated financial position or results of operations. At January 31, 1998, the Company has significant net operating loss carryforwards ("NOLs") that may benefit General Textiles in future periods and result in General Textiles being required to make payments to the Company under the Tax Sharing Agreement. General Textiles experienced a tax loss for federal purposes in fiscal 1997 and therefore did not benefit from the Company's NOLs. Furthermore, a significant portion of the Company's NOLs are of limited use in the future because of Section 382 of the Internal Revenue Code, which limits the offsetting of NOLs against current taxable income following a change in control. Therefore, to the degree that General Textiles experiences tax losses in the future or has its own NOLs available to offset future taxable income, or to the degree there are limits on the availability of the Company's NOLs to offset future taxable income of General Textiles, payments to the Company pursuant to the Tax Sharing Agreement may be significantly limited. At January 31, 1998, the Company owned an aggregate of $11.3 million face amount of General Textiles subordinated notes acquired from third party note holders in fiscal 1993 and 1994. General Textiles makes payments to the Company in accordance with the terms of the notes and the Reorganization Plan as described below. The debt securities issued under the Reorganization Plan permit the payment of management fees and bonuses by General Textiles to the Company pursuant to the GT Management Agreement. Obligations for payments by General Textiles under the GT Management Agreement are subordinated to General Textiles' obligations under its revolving credit facility. Management believes that the Company's sources of cash, including the cash received under the Tax Sharing Agreement, the Trade Subordinated Notes (defined below), the Company Subordinated Note (defined below), the GT Management Agreement, the F2U Management Agreement, and the Guaranty Fee Agreement will be adequate to finance its operations and meet obligations under its existing indebtedness as they become due for at least the next twelve months. The ability of the Company to make dividend payments on the Series A Preferred Stock as they come due will be dependent on the results of operations of the Company. 17 Obligations of the Company. As of January 31, 1998, the Company, exclusive of General Textiles and Factory 2-U, had outstanding indebtedness in the principal amount of $0.8 million. The November 1995 acquisition of Factory 2-U was completed pursuant to a Stock Purchase Agreement between the Company and the former shareholders of Factory 2-U. The acquisition was financed in part by the issuance of certain notes payable. At January 31, 1998, the Company was obligated pursuant to two promissory notes: a $0.6 million term note with principal and accrued interest due in October 1998 and a $0.2 million installment note with principal and interest payable in quarterly installments until October 1998 (collectively, the "F2U Acquisition Notes"). The F2U Acquisition Notes bear interest at a rate of 8.75% per annum and are subject to penalties and adjustment in the event of failure to pay amounts when due. In January 1996, the Company settled a lawsuit commenced in 1993 by former owners of Mandel-Kahn Industries, Inc. which was purchased by the Company in 1992. Under the settlement, the Company paid $1.2 million and entered into a five-year consulting agreement requiring an aggregate of $0.8 million in cash payments and issuance of 60,000 shares of Series A Preferred Stock. The Company remains obligated at January 31, 1998 to pay an aggregate of $0.4 million in monthly installments until January 2001. Series A Preferred Stock. Dividends on the Series A Preferred Stock total $3.5 million per year based on the annual dividend rate of $0.95 per share and are payable quarterly if, as, and when declared by the Board of Directors. 1997 Private Placements of Series B Preferred Stock. On February 20, and March 13, 1997, the Company issued 5,000 and 4,600 additional shares, respectively, of its Series B Junior Convertible, Exchangeable Preferred Stock (the "Series B Preferred Stock") for aggregate proceeds of $9.6 million. Then, on March 20, 1997 and June 16, 1997, the Company issued 1,865 and 250 shares, respectively, of Series B Preferred Stock to certain members of management in return for $2.1 million in full-recourse notes collateralized by the stock. The Series B Preferred Stock has an increasing rate dividend. Accordingly, dividends on Series B Preferred Stock are recorded using the effective interest method to recognize the dividends ratably over the estimated period in which the stock will be outstanding. Although dividends are recorded for financial statement purposes, the Series B Preferred Stock pays no cash dividends, except under certain events of liquidity, until there is no longer any Series A Preferred Stock outstanding. The net proceeds obtained from the private placements were used by the Company to pay the costs to settle the existing employment and benefit agreements of the Former Executives and to reduce outstanding indebtedness under the Revolving Credit Facilities (defined below). General Textiles General. General Textiles finances its operations through credit provided by vendors and other suppliers, its $35.0 million working capital facility (the "GT Revolving Credit Facility"), $2.2 million in installment notes ("the GT Installment Notes"), capital leases, trade credit and internally generated cash flow. Credit terms provided by vendors and other suppliers are usually net 30 days. Amounts borrowed under the working capital facility are based on a percentage of eligible inventories, as defined, outstanding from time to time, as more fully described below. Upon and after emerging from bankruptcy in May 1993, General Textiles issued non-interest bearing Subordinated Notes and Reorganization Securities (collectively, the "Bankruptcy Debt") in satisfaction of the claims of its creditors. Payments to holders of the Bankruptcy Debt are contingent upon the annual earnings and cash flow levels of General Textiles. Interest expense and carrying value of the Bankruptcy Debt is determined based on projections of the earnings and cash flows of General Textiles, which in turn impact the projected amounts and timing of payments to be made on debt principal. Due to the 18 contingent nature of the timing and amounts of future payments, the carrying value and annual interest expense related to the Bankruptcy Debt can be significantly impacted by changes in expected earnings and cash flows of General Textiles. Likewise, actual earnings and cash flows, as well as minimum payment provisions of the Reorganization Plan and the related notes, can result in substantial principal payment requirements in future years. The inability of General Textiles to make such payments can result in additional issuance of debt or, ultimately, in the loss of control of General Textiles, as described more completely below. Management believes that General Textiles will have sufficient resources to provide for capital expenditures, to finance its working capital needs and to make expected payments required under the Bankruptcy Debt and other debt during the next twelve months from credit supplied by the Company, its suppliers, its working capital facility and internally generated cash flow. GT Revolving Credit Facility. Under the GT Revolving Credit Facility, General Textiles may borrow 65% of eligible inventory, as defined, subject to a maximum of $35.0 million of revolving credit indebtedness outstanding at any time. As of January 31, 1998, General Textiles owed $9.5 million under the GT Revolving Credit Facility and there was $9.3 million available for additional borrowing under the GT Revolving Credit Facility. Amounts borrowed under the GT Revolving Credit Facility bear interest at the prime rate plus 0.75%, payable monthly. The GT Revolving Credit Facility expires in November 1999 and is secured by a lien on all of the assets and a pledge of all the capital stock of General Textiles. GT Installment Notes. As of January 31, 1998, General Textiles owed $2.2 million to the working capital lender under three installment notes used to finance equipment purchases and general working capital needs. The GT Installment Notes bear interest at rates ranging from prime plus 2% to prime plus 3% per annum. Interest and principal are payable monthly and maturity dates range from April 1998 to July 2001. Under the GT Revolving Credit Facility and the GT Installment Notes, General Textiles is required to comply with certain covenants, including restrictions on distributions and dividends, additional indebtedness, salary increases and bonuses, changes in capital structure and business objectives, mergers, consolidations and sales of all or substantially all of General Textiles' assets. In addition, General Textiles is subject to certain financial covenants and ratios including those covering working capital, limitations on capital expenditures and payments of any money to affiliates, current ratios, minimum net worth and debt-to-net-worth ratios. Breach of these covenants or the occurrence of certain other events, including any material adverse change in the business or financial condition of General Textiles, may result in an event of default. General Textiles was not in compliance with the current ratio covenant in the GT Revolving Credit Facility as of January 31, 1998. The working capital lender has waived that requirement at January 31, 1998. In March 1998, General Textiles and its working capital lender agreed to amend certain terms and conditions of the GT Revolving Credit Facility. As a result, General Textiles' covenants and financial ratios will be reset to reflect the anticipated earnings, capital expenditures and cash flow of General Textiles during fiscal 1998. Bankruptcy Debt of General Textiles Subordinated Notes. Under the Reorganization Plan, General Textiles issued Subordinated Notes in the principal amount of $28.8 million in settlement of unsecured claims of approximately $47.2 million. At January 31, 1998, $5.6 million of Subordinated Notes were held by creditors not affiliated with General Textiles (the "Trade Subordinated Notes") and an additional $13.8 million Subordinated Note, which had been purchased by the Company in 1994, was held by it (the "Company Subordinated Note"). The Subordinated Notes do not bear interest. Principal is payable out of excess cash flow. Beginning in fiscal 1996, 30% of General Textiles' excess cash flow must be applied to pay Trade Subordinated Notes and the remaining 70% must be applied to pay the Company Subordinated Note (prior to fiscal 1996, 70% of excess cash flow was used to pay the Trade Subordinated Notes and 30% was used to pay the Company Subordinated Note). The Subordinated Notes are subordinated to all indebtedness of General Textiles other than that issued under the Reorganization plan. The Company Subordinated Note is eliminated in consolidation and is therefore not reflected on the Company's consolidated balance sheet. 19 If General Textiles failed to pay at least 60% of the original principal amount of the Trade Subordinated Notes by 30 days after determination of its excess cash flow for fiscal 1996, it would be required to issue additional Subordinated Notes equal to 29% of those which had originally been issued. However, sufficient principal payments have been made to avoid this requirement. There will be a similar requirement if 80% of the original principal amount of the Trade Subordinated Notes is not paid within 30 days after the determination of the excess cash flow for fiscal 1999. Unless all the Trade Subordinated Notes are repaid within 30 days after the determination of the excess cash flow for fiscal 2002, the holder of the Company Subordinated Note and the Creditor's Committee from the Reorganization Proceeding will have the right to elect all General Textile's directors in proportion to the outstanding principal amounts of the Company Subordinated Note and of the Trade Subordinated Notes. In addition, if specified percentages of all the original Subordinated Notes are not repaid within 39 days after determination of the excess cash flow for specified fiscal years (43.4% with regard to fiscal 1997, 53.5% with regard to fiscal 1998 and 70% with regard to fiscal 1999), the holders of the Trade Subordinated Notes and the Company Subordinated Note will have the right to elect a minority of General Textiles' directors, with the holders of the Trade Subordinated Notes and the Company Subordinated Note each being entitled to elect one half of the minority directors or, if there is an odd number of minority directors, the holders of the Company Subordinated Note being entitled to elect one more director than the holders of the Trade Subordinated Notes. The Subordinated Notes contain covenants, including limitations on executive compensation, limitations on dividends and mandatory prepayment under certain change in control events. Reorganization Securities. Pursuant to the Reorganization Plan, pre-petition subordinated lenders received $4.9 million principal amount of Subordinated Reorganization Notes and $17.3 million principal amount of Junior Subordination Reorganization Notes (collectively, the "Reorganization Securities"). The Subordinated Reorganization Notes are non-interest bearing and are not entitled to any cash payments until all of the Subordinated Notes are paid in full. However, the principal amount payable under the Subordinated Reorganization Notes increases annually on the anniversary of the notes as required under the Reorganization Plan and the terms of the notes. Under the terms of the Subordinated Reorganization Notes, General Textiles is subject to certain covenants, including limitations on executive compensation and dividends. The Junior Subordinated Reorganization Notes are currently non-interest bearing. During any fiscal year that General Textiles' adjusted earnings ("EBITDA" as defined in such notes) exceeds $10.0 million, the Junior Subordinated Reorganization Notes will accrue interest at the lesser of (i) 6% per annum, or (ii) 80% of General Textiles' EBITDA in excess of $10.0 million (the "Contingent Payments"). No interest or principal payments are payable on the Junior Subordinated Reorganization Notes until all of the Subordinated Notes are paid in full. In the event of a qualifying event of liquidity, as defined in the Reorganization Plan, which includes a public offering of General Textiles' securities, the Junior Subordinated Reorganization Notes could be exchanged, at the option of General Textiles, for 19% of the remainder of the market equity value of General Textiles, as defined, less $3.0 million payable at the option of the Company either in cash or in stock of General Textiles. Under the terms of the Junior Subordinated Reorganization Notes, General Textiles must devote a substantial portion of the Annual Payments to the repayment of the Subordinated Notes and is subject to certain covenants including limitations on executive compensation and dividends. Annual Payments are allocated to the Reorganization Securities commencing 30 days after the Subordinated Notes are paid in full. Annual Payments allocated to the Reorganization Securities are applied first to any accrued Contingent Payments, then to the Subordinated Reorganization Notes and lastly to the Junior Subordinated Reorganization Notes. 20 Factory 2-U General. Factory 2-U finances its operations through credit provided by its affiliates and suppliers, its $15.0 million working capital facility and internally generated cash flow. Amounts available under the working capital facility are based on a percentage of eligible inventory, as defined, outstanding from time to time, as more fully described below. General Textiles provides administrative services to Factory 2-U and charges Factory 2-U a management fee for such services. These services include merchandising, finance, accounting, distribution, advertising and executive administrative support. General Textiles also serves as the purchasing agent for all merchandise shipped to Factory 2-U. Factory 2-U generally pays General Textiles for merchandise purchased by General Textiles within 30 days of receipt of goods by General Textiles. Management believes that Factory 2-U will have sufficient working capital to meet its needs during the next twelve months from credit terms supplied by its affiliates and suppliers, its working capital facility and internally generated cash flow. F2U Revolving Credit Facility. Factory 2-U has a $15.0 million revolving credit facility with a lender (the "F2U Revolving Credit Facility", and collectively with the GT Revolving Credit Facility, the "Revolving Credit Facilities") secured by a lien on all of the assets of Factory 2-U, a Guaranty of the Company, and a pledge of certain other assets owned by the Company. Under the F2U Revolving Credit Facility, Factory 2-U may borrow up to 65% of eligible inventory, as defined, subject to a maximum of $15.0 million of amounts outstanding at any time. This rate was increased to 65% from 60% effective April 28, 1997. As of January 31, 1998 there was $3.2 million outstanding and $4.9 million available for additional borrowing under the F2U Revolving Credit Facility. Amounts borrowed under the F2U Revolving Credit Facility bear interest at an annual rate equal to prime plus 0.75%, payable monthly. The F2U Revolving Credit Facility expires in November 1999 and is secured by a lien on all of the assets of Factory 2-U. In addition, the Company is a guarantor under the F2U Revolving Credit Facility. MetLife Obligations. In connection with the Company's acquisition of Factory 2-U, Factory 2-U entered into a Consent and Restructure Agreement dated as of November 30, 1995 between Factory 2-U and MetLife Capital Corporation, which restructured indebtedness under a 1992 aircraft lease (the "MetLife Agreement"). Under the MetLife Agreement, Factory 2-U is obligated to repay the $0.4 million principal balance outstanding at January 31, 1998 plus interest at 8% per annum, in monthly payments through November 1998 and a balloon payment of $0.3 million in December 1998. The Company is a guarantor of this obligation. Capital Expenditures The Company anticipates spending approximately $6.0 million on capital expenditures in fiscal 1998 which includes costs to open new stores, to renovate and/or relocate existing stores and to upgrade information systems. Management believes that future expenditures will be financed from internal cash flow, the GT Revolving Credit Facility and the F2U Revolving Credit Facility. Inflation In general, the Company believes that inflation has had no recent material impact on operations and none is anticipated in the next fiscal year. 21 Minimum Wage Increases and Welfare Reform The Company employs, both in its stores and in its corporate headquarters, a substantial number of employees who earn hourly wages near or at the minimum wage. Actions by both the federal and certain state governments have increased the hourly wages payable by the Company to such employees. To mitigate the impact of this wage increase, the Company has instituted policies to maintain its ratio of wages to gross margins by controlling aggregate wage increases through an enhanced wage control and monitoring system and increased initial mark-ons to its retail prices. Management believes that these measures will be adequate to control the impact of hourly wage increases on the overall profitability of its operations. A significant number of the Company's customers are believed to come from low-income families whose incomes have historically been subsidized by government and other forms of assistance. Management believes that action by the federal and certain state governments to reform income subsidies may have an impact on its operating performance. However, management also believes it is too early to tell whether the impact will be materially adverse to the Company. Although management expects demand for off-price apparel and low-priced home goods to continue to grow in the markets its serves despite governmental reforms, management recognizes that there can be no assurance that demand will grow at all or as fast as it has historically. The Company has made substantial investments and financial commitments towards serving low-income customers, and any adverse impact on the income of such customers may adversely impact the operating results of the Company. Seasonality and Quarterly Fluctuations The Company historically has realized its highest level of sales and income during the third and fourth quarters of fiscal year (the quarters ending in October and January) as a result of the "Back to School" (August and September) and Christmas (November and December) seasons. If the Company's sales were substantially below seasonal expectations during the third and fourth quarters, the Company's annual results would be adversely affected. The Company historically has realized lower sales in its first two quarters (February through July), which often has resulted in the Company incurring losses during those quarters. The Company incurred a net loss and net losses applicable to common stock in both of the first two quarters of fiscal 1997. Based on these historical results, management believes that it may, during the first two quarters of fiscal 1998, experience operating results that are substantially below those expected for the third and fourth quarters of fiscal 1998. Year 2000 Issue The Company uses various computer programs that would fail to perform accurately if not replaced before the year 2000 affects any transactions. The Company has reviewed new integrated software packages to support future growth and which are capable of addressing the issues associated with the year 2000. As part of its capital expenditure plans previously discussed, the Company plans to install new software commencing in 1998 at a cost of approximately $2 million to $3 million and does not anticipate that conversion issues will materially influence operations or operating results. Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private Securities Litigation Reform Act of 1995 Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations that are not related to historical results are forward-looking statements. Actual results may differ materially from those projected or implied in the forward-looking statements. These forward-looking statements involve risks and uncertainties which are more fully described in Part I, Item 1 of this Form 10-K. 22 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FAMILY BARGAIN CORPORATION Reports of Independent Public Accountants F-1 Family Bargain Corporation and Subsidiaries Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997 F-3 Family Bargain Corporation and Subsidiaries Consolidated Statements of Operations for fiscal years ended January 31, 1998, February 1, 1997 and January 27, 1996 F-5 Family Bargain Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity for fiscal years ended January 31, 1998, February 1, 1997 and January 27, 1996 F-6 Family Bargain Corporation and Subsidiaries Consolidated Statements of Cash Flows for fiscal years ended January 31, 1998, February 1, 1997 and January 27, 1996 F-7 Family Bargain Corporation and Subsidiaries Notes to Consolidated Financial Statements F-9 All other schedules are omitted because of the absence of conditions under which they are required or because the required information is set forth in the consolidated financial statements and notes thereto. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Family Bargain Corporation: We have audited the accompanying consolidated balance sheet of Family Bargain Corporation (a Delaware corporation) and subsidiaries as of January 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Family Bargain Corporation and subsidiaries as of February 1, 1997 and January 27, 1996 were audited by other auditors whose report dated April 11, 1997 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Family Bargain Corporation and subsidiaries as of January 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP San Diego, California March 18, 1998 F-1 F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Family Bargain Corporation: We have audited the accompanying consolidated balance sheet of Family Bargain Corporation and subsidiaries as of February 1, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended February 1, 1997 and January 27, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Family Bargain Corporation and subsidiaries as of February 1, 1997, and the results of their operations and their cash flows for the years ended February 1, 1997 and January 27, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP San Diego, California April 11, 1997 F-2 F-3 FAMILY BARGAIN CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (in thousands)
January 31, February 1, 1998 1997 ASSETS Current assets: Cash $ 3,167 $ 3,261 Merchandise inventory 29,820 29,118 Prepaid expenses and other 727 939 ----------------------------- Total current assets 33,714 33,318 Leasehold improvements and equipment, at cost, net of accumulated depreciation and amortization (Note 5) 15,066 10,714 Other assets (Note 6) 3,326 2,323 Excess of cost over net assets acquired, less accumulated amortization of $6,935 and $5,332 at January 31, 1998 an February 1, 1997, respectively (Note 2) 32,711 34,314 ----------------------------- Total assets $ 84,817 $ 80,669 =============================
(continued) F-3 F-4 FAMILY BARGAIN CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except share data)
January 31, February 1, 1998 1997 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital leases (Notes 8 and 10) $ 4,873 $ 5,748 Accounts payable 19,003 17,491 Accrued expenses (Note 7) 12,587 9,831 ------------------------------ Total current liabilities 36,463 33,070 Revolving credit notes (Note 8) 12,657 17,887 Long-term debt (Note 8) 12,922 14,422 Capital lease and other long-term obligations (Note 10) 3,306 1,984 Deferred rent (Note 10) 2,251 2,098 ------------------------------ Total liabilities 67,599 69,461 ------------------------------ Commitments and contingencies (Notes 4, 8, 10, 11 and 15) Stockholders' equity (Notes 11 and 12): Series A convertible preferred stock, $0.01 par value, 4,500,000 shares authorized, 3,638,690 and 3,727,415 shares issued and outstanding (aggregate liquidation preference of $36,387 and $37,274) at January 31, 1998 and February 1, 1997, respectively 36 37 Series B junior convertible, exchangeable preferred stock, $0.01 par value, 40,000 shares authorized, 33,714 and 22,000 shares issued and outstanding (aggregate liquidation preference of $33,714 and $22,000) at January 31, 1998 and February 1, 1997, respectively - - Common stock, $0.01 par value, 80,000,000 shares authorized, 4,929,122 shares and 4,693,337 shares issued and outstanding at January 31, 1998 and February 1, 1997, respectively 49 47 Additional paid-in capital 83,312 71,057 Accumulated deficit (66,179) (59,933) ------------------------------- Total stockholders' equity 17,218 11,208 Total liabilities and stockholders' equity $ 84,817 $ 80,669 ===============================
The accompanying notes are an integral part to these consolidated financial statements. F-4 F-5 FAMILY BARGAIN CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (in thousands, except per share data) Fiscal Year Ended
January 31, February 1, January 27, 1998 1997 1996 Net sales $ 300,592 $ 252,165 $ 179,820 Cost of sales 195,010 170,857 117,188 ------------------------------------- Gross profit 105,582 81,308 62,632 Selling and administrative expenses 96,497 87,806 56,097 Amortization of intangibles 2,238 1,966 1,382 Unusual charges (Note 3) 1,750 9,172 - Provision for goodwill impairment (Note 2) - 8,380 - Write off of deferred offering costs (Note 3) - 1,923 - -------------------------------------- Operating income (loss) 5,097 (27,939) 5,153 Interest expense (Note 8) 5,226 8,625 3,675 -------------------------------------- Income (loss) from continuing operations before income taxes (129) (36,564) 1,478 Income taxes (Note 9) - - - Discontinued operations (Notes 4 and 15): Loss on disposal, net of income tax benefit - (826) (500) -------------------------------------- Net income (loss) (129) (37,390) 978 Preferred stock dividends: Series A (Note 11) (3,456) (3,509) (3,040) Series B (Note 11) (2,661) - - ====================================== Net loss applicable to common stock $ (6,246) $ (40,899) $ (2,062) ====================================== Loss per common share (basic and diluted): Loss from continuing operations $ (1.27) $ (8.89) $ (0.39) Net loss applicable to common stock (1.27) (9.07) (0.51) Weighted average common shares outstanding (basic and diluted) 4,901 4,507 4,006
The accompanying notes are an integral part to these consolidated financial statements. F-5 F-6 FAMILY BARGAIN CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (in thousands, except share data) Preferred Stock ---------------------------------- Series A Series B Common Stock Additional ----------------- -------------- ----------------- paid-in Accumulated Shares Amount Shares Amount Shares Amount capital deficit Total --------- ------ ------ ------ --------- ------ --------- ----------- ---------
Balance at January 28, 1995 3,200,000 $ 32 - $ - 4,506,981 $ 45 $ 46,707 $ (16,972) $ 29,812 Series A Preferred stock dividends (Note 11) - - - - - - - (3,040) (3,040) Purchase of treasury shares - - - - (22,916) - (33) - (33) Cancellation of incentive shares - - - - (498,672) (5) 5 - - Net income - - - - - - - 978 978 --------------------------------------------------------------------------------------------- Balance at January 27, 1996 3,200,000 $ 32 - $ - 3,985,393 $ 40 $ 46,679 $ (19,034) $ 27,717 ============================================================================================= Series A Preferred stock dividends (Note 11) - - - - - - - (3,509) (3,509) Issuance of preferred stock in settlement of lawsuit (Notes 4 and 11) 60,000 1 - - - - 359 - 360 Issuance of preferred stock in a private placement (Note 11) 726,000 7 - - - - 2,849 - 2,856 Conversion of preferred stock to common stock (258,585) (3) - - 710,644 7 (4) - - Issuance of preferred stock in a private placement (Note 11) - - 22,000 - - - 21,174 - 21,174 Correction of unsplit units - - - - (2,700) - - - - Net loss - - - - - - - (37,390) (37,390) ------------------------------------------------------------------------------------------------ Balance at February 1, 1997 3,727,415 $ 37 22,000 $ - 4,693,337 $ 47 $ 71,057 $ (59,933) $ 11,208 ================================================================================================ Series A preferred stock dividends (Note 11) - - - - - - - (3,456) (3,456) Series B preferred stock dividend accretion (Note 11) - - - - - - 2,661 (2,661) - Conversion of preferred stock to common stock (88,725) (1) - - 235,785 2 (1) - - Issuance of preferred stock in a private placement (Note 11) - - 9,599 - - - 9,600 - 9,600 Issuance of preferred stock to management for notes (Note 11) - - 2,115 - - - - - - Common stock rights redemption - - - - - - (5) - (5) Net loss - - - - - - - (129) (129) ------------------------------------------------------------------------------------------------ Balance at January 31, 1998 3,638,690 $ 36 33,714 $ - 4,929,122 $ 49 $ 83,312 $ (66,179) $ 17,218 ================================================================================================
The accompanying notes are an integral part to these consolidated financial statements. F-6 F-7 FAMILY BARGAIN CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Fiscal Year Ended -------------------------------------
January 31, February 1, January 27, 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Income (loss) from continuing operations $ (129) $ (36,564) $ 1,478 Adjustments to reconcile income (loss) to net cash provided by (used in) continuing operations: Depreciation 3,505 2,253 1,603 Amortization of intangibles 2,238 1,966 1,382 Amortization of debt discount 2,168 4,376 1,555 Provision for goodwill impairment - 8,380 - Gain on revaluation of subordinated notes - - (822) (Increase) decrease in assets: Merchandise inventory (702) (3,244) 124 Prepaid expenses and other (1,359) 924 (7,647) Increase (decrease) in liabilities: Accounts payable 1,512 (1,269) 5,365 Accrued expenses 3,655 2,282 946 Other 587 1,827 292 ------------------------------------ Net cash provided by (used in) continuing operations 11,475 (19,069) 4,276 ------------------------------------ Discontinued operations: Loss from discontinued operations - (826) (500) Decrease in net liabilities - (581) (287) ------------------------------------ Net cash used in discontinued operations - (1,407) (787) ------------------------------------ Cash flows from investing activities: Purchase of leasehold improvements and equipment (5,865) (4,635) (3,889) Investment in Factory 2-U, net of cash acquired - (230) (520) Proceeds from sale of real property and equipment - 4,570 - ----------------------------------- Net cash used in investing activities (5,865) (295) (4,409) -----------------------------------
(continued) F-7 F-8 FAMILY BARGAIN CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Fiscal Year Ended -------------------------------------
January 31, February 1, January 27, 1998 1997 1996 ----------- ----------- ----------- Cash flows from financing activities: Borrowings on revolving credit notes 335,053 315,156 210,613 Payments on revolving credit notes (340,283) (312,428) (207,022) Payments of long-term debt and capital lease obligations (6,218) (3,945) (1,565) Cash payments of preferred stock dividends (3,456) (3,509) (3,040) Proceeds from issuance of Series B Preferred Stock 9,595 - - Proceeds from issuance of preferred stock, net - 24,030 - Proceeds from issuance of notes payable - 3,100 1,500 Payment of deferred debt issuance costs (320) (330) (40) Purchase of subordinated notes, stock and warrants (75) - (90) ------------------------------------ Net cash (used in) provided by financing activities (5,704) 22,074 356 ------------------------------------ Net increase (decrease) in cash (94) 1,303 (564) Cash at the beginning of the period 3,261 1,958 2,522 ------------------------------------ Cash at the end of the period $ 3,167 $ 3,261 $ 1,958 ==================================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 2,948 $ 3,299 $ 1,783 Income taxes $ - $ - $ - Supplemental disclosures of non-cash investing and financing activities: Acquisition of equipment financed by capital leases (Note 10) $ 2,173 $ 125 $ 123 Issuance of Series B preferred stock for notes $ 2,115 $ - $ - Series B preferred stock dividend accretion $ 2,661 $ - $ - Issuance of notes payable for non-compete agreement (Note 3) $ - $ 1,750 $ - Issuance of preferred stock in return for consulting agreement (Notes 4 and 11) $ - $ 360 $ - Issuance of and adjustments to notes payable to former stockholders of Factory 2-U (Notes 2 and 8) $ - $ 600 $ 625 Issuance of note payable for Mandel-Kahn settlement (Notes 4, 8 and 15) $ - $ - $ 1,000
The accompanying notes are an integral part to these consolidated financial statements. F-8 F-9 FAMILY BARGAIN CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Family Bargain Corporation and subsidiaries ("the Company") operates off-price retail apparel and home goods stores in the western United States. At January 31, 1998, the Company operated 166 stores in seven states under the names Family Bargain and Factory 2-U. Principles of Consolidation The consolidated financial statements include the accounts of Family Bargain Corporation and its wholly-owned subsidiaries, General Textiles and Factory 2-U, Inc. All significant intercompany accounts have been eliminated in consolidation. Fiscal Year The Company's fiscal year is based on a 52/53 week year ending on the Saturday nearest January 31. Fiscal years ended January 31, 1998 and January 27, 1996 included 52 weeks and the fiscal year ended February 1, 1997 included 53 weeks. The Company defines its fiscal year by the calendar year in which most of the activity occurs (e.g. the year ended January 31, 1998 is referred to as fiscal 1997). Merchandise Inventory Merchandise inventory is stated at the lower of cost or market determined using the retail inventory method on a first-in, first-out flow assumption. In addition, consistent with industry practice, the Company capitalizes certain buying, warehousing, storage and transportation costs. At January 31, 1998 and February 1, 1997, such costs included in inventory were approximately $1,300,000 and $1,353,000, respectively. Leasehold Improvements and Equipment Leasehold improvements and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments at the date of acquisition. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives of the related asset or the lease term, generally five to seven years. Other Assets Other assets consist principally of rental deposits on leased stores, deferred debt issuance costs and a covenant not to compete. Deferred debt issuance costs are amortized using the effective interest method over the terms of the related debt. Noncompete agreements are amortized ratably over the life of the agreement. Excess of Cost Over Net Assets Acquired Excess of cost over net assets acquired (goodwill) is amortized on a straight-line basis over the expected periods to be benefited, generally 25 years. The Company assesses the recoverability of this intangible asset by determining whether the goodwill balance can be recovered from undiscounted future operating cash flows. The impairment if any is measured based on estimated fair values. Goodwill recovery may be impacted if estimated future operating cash flows are not achieved (Note 2). F-10 Asset Impairment Effective March 3, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets (Note 2). Fair Value of Financial Instruments The carrying amounts of all receivables, payables and accrued balances approximate fair value due to the short-term nature of such instruments. The carrying amount of the revolving credit notes approximates fair value due to the floating rate on such instruments. The carrying value of long-term debt with fixed payment terms approximates fair value. Long-term debt subject to contingent principal payments is evaluated each year based on expected debt repayment (Note 8). It is not practicable to estimate the fair value of such instruments due to the potential volatility in repayment amounts Leases Rent expense is recorded on a straight-line basis over the life of the lease. Deferred rent represents the difference between base rentals paid under operating lease agreements and rent expense recognized (Note 10). Store Preopening and Closing Costs In fiscal 1996, the Company changed its method of accounting for preopening costs (costs of opening new stores including grand opening promotions, training, store set-up and other direct incremental store opening costs) to charging such costs to expense as incurred. Prior to fiscal 1996, the Company capitalized and amortized preopening costs using the straight-line method over the first twelve months of operation. The impact of the change was not material to the Company's consolidated financial statements. Costs associated with closing stores, consisting primarily of lease obligations and provisions to reduce assets to net realizable value, are charged to operations upon the commitment to close a store. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date (Note 9). F-11 Stock Based Compensation Prior to January 28, 1996, the Company accounted for stock options issued to directors and employees in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded under the intrinsic value method. Under the intrinsic value method, compensation expense is recognized only in the event that the exercise price of options granted is less than the market price of the underlying stock on the date of grant. On January 28, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation, which permits entities to measure compensation expense related to stock options using either the intrinsic value method or a fair value method. The fair value method generally requires entities to recognize compensation expense over the vesting period of options based on the estimated fair value of the options granted. The Company has elected to apply the intrinsic value method of measuring stock based compensation and provide the pro forma disclosure requirements of SFAS No. 123 (Note 12). The Company has only issued options with exercise prices above or equivalent to market price on the grant date. Accordingly, the Company has recognized no compensation expense related to stock options in the accompanying consolidated financial statements. Earnings (Loss) per Common Share In December 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The statement specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) and diluted earnings per share (DEPS). The statement requires retroactive adoption for all prior periods presented. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision and (c) revising the contingent share provisions and the supplemental EPS data requirements. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. For fiscal years 1997, 1996 and 1995 potential dilutive securities include stock options, warrants, and convertible preferred stock and had such potential common shares been outstnading, the effect on earnings per share would have been anti-dilutive. Therefore, the exercise or conversion of such securities is not assumed for purposes of calculating diluted earnings per share. Basic and diluted are equal in each period presented. Dividend Accretion The Company's Series B preferred stock has an increasing rate dividend feature (Note 11). Accordingly, dividends on Series B preferred stock are recorded using the effective interest method to recognize the dividends ratably over the estimated period in which the stock will be outstanding. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-12 Reclassifications Certain prior period amounts have been reclassified to conform their presentation to fiscal 1997 consolidated financial statements. New Accounting Pronouncements In December 1997, the Company adopted SFAS No. 129, "Disclosure of Information about Capital Structure". This Statement establishes standards for disclosing information about an entity's capital structure. This Statement is effective for financial statements for periods ending after December 15, 1997. The adoption of SFAS No. 129, in fiscal 1997 did not have a material effect on the Company's financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 131 requires reporting certain information about operating segments in condensed financial statements of interim periods issued to shareholders. Both standards are required to be adopted during fiscal 1998. Management does not expect the adoption of these standards to have a material effect on the Company's financial position or results of operations. 2. ACQUISITION OF FACTORY 2-U On November 13, 1995, the Company acquired all of the common stock of Capin Mercantile Corporation, an off-price clothing and home goods retailer operating in the southwestern United States, for $1,675,000 in cash (including acquisition expenses) and $1,225,000 in notes payable to former stockholders (Note 8). Immediately following the acquisition, the name of Capin Mercantile Corporation was changed to Factory 2-U, Inc. (Factory 2-U). The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of Factory 2-U have been included in these consolidated financial statements from November 11, 1995, the end of the accounting period closest to the acquisition date. All acquired assets and liabilities of Factory 2-U have been recorded at estimated fair market values on November 10, 1995, with the purchase price of $2,900,000 and the net tangible book deficit of $13,676,000 allocated to acquired goodwill of $16,576,000. In 1997, additional goodwill in the amount of $1,906,000 was recorded pursuant to the resolution of contingencies. The following table sets forth the Company's pro forma unaudited consolidated statement of operations for fiscal year ended January 27, 1996. The pro forma consolidated statement of operations gives effect to the consolidation of Factory 2-U, elimination of sales and cost of sales related to Factory 2-U stores no longer in operation, elimination of Factory 2-U general and administrative expenses, the adjustment of interest expense and financing fees to reflect the debt structure of the consolidated entity, and the recognition of the amortization of the excess of cost over the fair value of assets acquired with all transactions treated as though the acquisition had occurred at January 29, 1995. Pro forma IN THOUSANDS EXCEPT PER SHARE DATA 1995 ---------- Net sales $ 220,084 Net loss $ (4,020) Loss applicable to common stock $ (7,060) Loss per common share (basic and diluted) $ (1.76) F-13 In connection with the Factory 2-U acquisition, the Company acquired certain real property. The Company sold this property to a third party at no gain or loss in July 1996 for net proceeds of $4,500,000. In January 1997, the Company reviewed the historical results of Factory 2-U's operations and revised its projection of cash flows as the basis for determining whether goodwill was impaired. Based on the revised projection, the Company determined that the goodwill arising from the Factory 2-U acquisition was impaired and recorded a charge to operations in the amount of $8,380,000 to adjust goodwill to its estimated fair value. 3. UNUSUAL CHARGES In August 1997, the Company recorded unusual charges to operations in the amount of $1,750,000 pertaining to the separation from the Company of the former President and CEO. In connection with the sale of a controlling interest in the Company to a new investor group in January 1997 (Note 11), the Company moved its executive offices from New York City to San Diego, CA and entered into a separation agreement with three former executives (the Former Executives). As a result of these actions, the Company recognized unusual charges in the amount of $9,172,000 in fiscal 1996. The unusual charges included $7,081,000 to settle the existing employment and benefit agreements of the Former Executives and $2,091,000 to cancel certain contracts and expenses related to the separation of the Former Executives and closure of the New York office. The Company withdrew a securities offering in January 1997. In conjunction with this withdrawal, the Company wrote-off $1,923,000 in deferred offering costs. 4. DISCONTINUED OPERATIONS The Company divested its distribution business (the Former Distribution Business), which was comprised of the operations of MKI Acquisition, Mandel-Kahn, CB/Camelot and CB/Murray, prior to April 30, 1993. The estimation and settlement of the residual net liabilities of the Former Distribution Business have been accounted for as discontinued operations in these consolidated financial statements. In January 1996, the Company settled the remaining claims related to the Former Distribution Business by agreeing to pay the former owners of Mandel-Kahn Industries, Inc. a combination of $230,000 in cash, an interest bearing installment note of $1,000,000 and a consulting arrangement consisting of aggregate cash payments of $750,000 and 60,000 shares of Series A Preferred Stock (Note 11). In 1997, the Company determined that it did not intend to employ the services required of the consultant under the settlement and accordingly charged all remaining prepayments and future payments related to the consulting agreement to loss on disposal of discontinued operations. The Company recognized a loss, net of taxes, on disposal of discontinued operations in the amount of $826,000 and $500,000 in fiscal 1996 and 1995, respectively, to reflect the costs to litigate and settle claims and the cost of consulting services that it does not intend to use. The Company does not anticipate any future expenses related to the Former Distribution Business. F-14 5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT Leasehold improvements and equipment consist of the following:
January 31, February 1, IN THOUSANDS 1998 1997 ---------------------------- Furniture, fixtures and equipment $ 15,272 $ 10,740 Leasehold improvements 4,797 3,492 Transportation and equipment 114 174 Equipment under capital leases 2,883 741 Construction in progress - 330 ---------------------------- 23,066 15,477 Less accumulated depreciation and amortization (8,000) (4,763) ---------------------------- $ 15,066 $ 10,714 ============================
6. OTHER ASSETS Other assets consist of the following:
January 31, February 1, IN THOUSANDS 1998 1997 ---------------------------- Deferred debt issuance costs $ 257 $ 189 Rent and other deposits 989 533 Noncompete agreements 2,756 1,800 ---------------------------- 4,002 2,522 Less accumulated amortization (676) (199) ---------------------------- $ 3,326 $ 2,323 ============================
In August 1997, the former President and CEO entered into an agreement not to compete with the Company until January 2001 in return for payments totaling $970,000. In January 1997, the Company entered into an agreement not to compete with the Former Executives in favor of the Company until June 2000 in return for $1.8 million in secured promissory notes that were paid in January 1998. 7. ACCRUED EXPENSES Accrued expenses consist of the following:
January 31, February 1, IN THOUSANDS 1998 1997 ---------------------------- Accrued compensation and related costs $ 3,153 $ 2,924 Sales tax payable 3,432 1,035 Other accrued expenses 6,002 5,872 ---------------------------- $ 12,587 $ 9,831 ============================
F-15 8. LONG-TERM DEBT AND REVOLVING CREDIT NOTES Long-term debt and revolving credit notes at January 31, 1998 and February 1, 1997 consists of the following:
January 31, February 1, IN THOUSANDS 1998 1997 ------------------------ Revolving credit note, interest at prime plus 2.0% till June 1997 then prime plus 0.75% (9.25% at January 31, 1998 and 10.25% at February 1, 1997) payable monthly, principal due in November 1999 $ 9,473 $ 12,967 Revolving credit note, interest at prime plus 2% till June 1997 then prime plus 0.75% (9.25% at January 31, 1998 and 10.25% at February 1, 1997) payable monthly, principal due in November 1999 3,184 4,920 Installment note payable to a finance company, interest at prime plus 2%(10.5% at January 31, 1998 and 10.25% at February 1, 1997) payable monthly, principal payable in monthly in installments of $37,750, final balloon payment of $216,500 due in April 1998 292 745 Installment note payable to a finance company, interest at prime plus 2%(10.5% at January 31, 1998 and 10.25% at February 1, 1997) payable monthly, principal payable monthly in installments of $30,556, final payment due in May 1999. 489 856 Installment note payable to a finance company, interest at prime plus 3%(11.5% at January 31, 1998 and 11.25% at February 1, 1997) payable monthly, principal payable monthly in installments of $33,333, final payment du in July 2001. 1,400 1,800 Subordinated notes, non-interest bearing, discounted at rates ranging from 6.0% to 25%, principal payments based on excess cash flow, as defined 13,042 13,158 Installment note payable to a finance company, interest at 8%, principal and interest payable in installments of $13,648, final balloon payment of $304,000 due in December 1998 414 549 Installment note payable to former stockholders of Factory 2-U, interest at 8.75%, principal payments of $45,455 plus accrued interest payable quarterly beginning in May 1996, final payment due in October 1998 (Note 4) 182 364 Note payable to former stockholders of Factory 2-U, interest at 8.75%, principal and accrued interest due in October 1998 (Note 4) 600 600
F-16
January 31, February 1, IN THOUSANDS 1998 1997 ------------------------- Installment note payable to the Commerce and Economic Development Commission of Arizona, interest at 6%, principal and interest payable in monthly installment of $4,232. Note paid in full in fiscal 1997. - 136 Installment note payable to the Economic Development Administration of Arizona, interest at 5%, principal and interest payable in monthly installments of $1,992. Note paid in full in fiscal 1997. - 49 Secured promissory notes payable to Former Executives, interest at 5.6%, principal and accrued interest due January 1998 (Note 2). Note paid in full in fiscal 1997. - 1,750 -------------------------- Total long-term debt 29,076 37,894 Less current maturities (3,497) (5,585) -------------------------- Long-term debt and revolving credit notes, net of current maturities $ 25,579 $ 32,309 ==========================
Revolving Credit Notes At January 31, 1998 the Company may borrow up to $50,000,000 under its revolving credit facilities (the Facilities) at the prime rate plus 0.75%. Advances under the Facilities are subject to limitations based on inventory levels, as defined. The Facilities expire in November 1999 but are subject to one year automatic renewal periods, unless terminated by the Company or its lender. The balances owed under the Facilities fluctuate based on working capital requirements. The Company pays fees ranging from .25% to .50% on the unused portions of the Facilities. The installment notes payable in the amounts of $2,181,000 and $3,401,000 at January 31, 1998 and February 1, 1997, respectively, and the Facilities are secured by substantially all the assets of General Textiles and Factory 2-U and the common stock of General Textiles. The Company was not in compliance with the current ratio covenant in the Facilities as of January 31, 1998. The lender has waived that requirement at January 31, 1998. In March 1998, the Company and its lender agreed to amend certain terms and conditions of the Facilities. As a result, the Company's covenants and financial ratios will be reset to reflect anticipated earnings, capital expenditures and cash flow of the Company during fiscal 1998. Subordinated Notes At January 31, 1998 and February 1, 1997, the Company owed $22,945,000 and $25,269,000, respectively, face value of subordinated notes (the Sub Notes) issued in settlement of certain pre-bankruptcy claims of General Textiles. The Sub Notes are comprised, in order of seniority, of New Subordinated Notes (due no later than April 2003), Subordinated Reorganization Notes (due no later than November 2003) and Junior Subordinated Reorganization Notes (due no later than May 2005). The Sub Notes are non-interest bearing, except for certain contingent interest payments (described below), and are subject to minimum principal payment requirements based on the annual excess cash flows (Excess Cash Flows) F-17 of General Textiles as defined in the Plan of Reorganization (the Plan) under which General Textiles has operated since emerging from bankruptcy in May 1993. Accordingly, the Sub Notes have been discounted to carrying values reflected on the accompanying consolidated balance sheets based on estimated future cash flows of General Textiles at discount rates ranging from 6% to 25%. The discount rates applied in determining the carrying values of the Sub Notes were established when General Textiles emerged from bankruptcy in May 1993 and, under generally accepted accounting principles, may not be adjusted to reflect changes in market rates of debt with similar characteristics. Accordingly, the fair values of the Sub Notes may differ substantially from the carrying values reflected in the accompanying consolidated balance sheets. The Company does not consider estimation of the fair values of the Sub Notes to be practicable given the uncertainty regarding the timing and amounts of future payments. The aggregate unamortized discount related to the Sub Notes was $9,903,000 and $12,111,000 at January 31, 1998 and February 1, 1997, respectively. The discount is amortized to interest expense as a non-cash charge until the notes are paid in full. The impact of changes in estimates of future Excess Cash Flows on expected amounts and timing of payments are reflected in current earnings as an adjustment to interest expense. To the degree General Textiles experiences actual Excess Cash Flows that differ in amounts or timing from those currently projected, or to the degree General Textiles changes its projections of Excess Cash Flows in future periods, the Company may experience significant adjustments to interest expense to reflect such changes. The Junior Subordinated Reorganization Notes are subject to interest payments contingent upon the annual adjusted earnings (EBITDA) of General Textiles as defined in the Plan (Contingent Payments). A Contingent Payment accrues when the EBITDA of General Textiles exceeds $10 million in a given year and is payable when Excess Cash Flows are available. Contingent Payments, if accrued, must be made prior to any other payments in respect of the Subordinated Reorganization Notes or the Junior Subordinated Reorganization Notes but rank junior to the New Subordinated Notes and certain debt of General Textiles held by Family Bargain Corporation. The contingent payment obligation may not exceed 6% of the outstanding face amount of the notes. The face amount of the Junior Subordinated Reorganization Notes at January 31, 1998 and February 1, 1997 was $17,335,000. No Contingent Payments have been accrued or disbursed to date. The Subordinated Reorganization Notes are subject to a schedule of annual increases in principal payment requirements. As such, adjustments to interest expense can occur when the timing of projected payments changes from period to period. The future maturities of long-term debt include estimated principal payments on the Sub Notes based on management's estimates of projected Excess Cash Flows of General Textiles. The future maturities at January 31, 1998 are as follows: IN THOUSANDS Fiscal year ending:
January 30, 1999 $ 3,497 January 29, 2000 1,040 February 3, 2001 6,926 February 2, 2002 13,920 February 1, 2003 939 Thereafter - --------- 26,322 Less portion representing interest (9,903) --------- 16,419 Less current maturities (3,497) --------- $ 12,922 =========
F-18 9. INCOME TAXES The principal temporary differences that give rise to significant portions of the consolidated deferred tax assets and liabilities are presented below:
January 31, February 1, IN THOUSANDS 1998 1997 ------------------------------- Deferred tax assets Net operating loss carryforwards $ 7,562 $ 9,454 Compensated absences and bonuses 1,184 1,376 Deferred rent 1,118 1,049 Closed store accrual 1,158 671 Excess of tax over book inventory 341 544 Restructuring costs 121 325 Other 497 826 Discontinued operations accruals 48 52 ------------------------------- Total gross deferred tax assets 12,029 14,297 Less valuation allowance (9,901) (11,452) ------------------------------- Net deferred tax assets 2,128 2,845 ------------------------------- Deferred tax liabilities Subordinated notes 481 1,363 Inventory reserves and prepaid expenses 151 164 Leasehold improvements and equipment, principally due to differences in depreciation recognized on fixed assets 598 607 Other 898 711 ------------------------------- Deferred tax liabilities 2,128 2,845 ------------------------------- Net deferred taxes $ - $ - ===============================
The Company has established a valuation allowance due to lack of historical earnings and annual limitations on the usage of net operating loss carryforwards. F-19 The difference between the expected income tax expense (benefit) computed by applying the U.S. federal income tax rate of 34% to net income from continuing operations for fiscal 1997, 1996 and 1995 and actual expense is a result of the following:
January 31, February 1, January 27, IN THOUSANDS 1998 1997 1996 ------------------------------------- Computed "expected" tax expense (benefit) $ (44) $ (12,432) $ 503 Amortization of goodwill 638 668 470 Change in valuation allowance (1,551) 5,950 64 Provision for goodwill impairment - 2,849 - Impact of purchase accounting adjustments - - (603) Debt forgiveness permanent difference - - (279) State income taxes, net of federal income tax benefit - - - Limitation of net losses due to change in control - 2,988 - Other, net 957 (23) (155) ------------------------------------- $ - $ - $ - =====================================
At January 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $24.6 million that expire between 2006 and 2012. 10. LEASE COMMITMENTS The Company operates retail stores, warehouse facilities and administrative offices under various operating leases. Total rent expense was $17,313,000, $14,987,000 and $10,128,000, including contingent rent expense of $128,000, $89,000 and $63,000, for fiscal years ended January 31, 1998, February 1, 1997 and January 27, 1996, respectively. For financial statement purposes, rent expense is recorded on a straight-line basis over the life of the lease. Generally, lease payments are lower in the early years of the lease term and, as a result, financial statement expense is greater than the cash payments. For fiscal 1997, 1996 and 1995, rent expense charged to operations exceeded cash payment requirements by $153,000, $452,000 and $202,000, respectively, and resulted in an increase to the deferred rent liability for the same amount. The Company is also obligated under various capital leases for leasehold improvements and equipment that expire at various dates during the next three years. Leasehold improvements and equipment and related accumulated amortization recorded under capital leases are as follows:
January 31, February 1, IN THOUSANDS 1998 1997 ------------------------------ Leasehold improvements $ 340 $ 291 Equipment 2,543 450 ------------------------------ 2,883 741 Less accumulated amortization (531) (255) ------------------------------ $ 2,352 $ 486 ==============================
F-20 At January 31, 1998, the future minimum lease payments under capital leases and operating leases with remaining noncancelable terms and are as follows:
Capital Operating IN THOUSANDS leases leases ------------------------ Fiscal year ending: January 30, 1999 $ 1,445 $ 13,348 January 29, 2000 267 11,746 February 3, 2001 214 8,813 February 2, 2002 171 7,161 February 1, 2003 20 4,811 Thereafter - 9,233 ------------------------ Total minimum lease payments 2,117 $ 55,112 ========= Less amount representing interest (rates ranging from 9.0% to 14.8%) (144) --------- Present value of capital lease obligation 1,973 Less current maturities (1,377) Long-term capital lease obligation $ 596 =========
11. STOCKHOLDERS' EQUITY The Company has 7,500,000 shares of preferred stock authorized, of which 4,500,000 have been allocated to Series A 9-1/2% Cumulative Convertible Preferred Stock (the Series A Preferred Stock) and 40,000 have been allocated to Series B Junior Convertible, Exchangeable Preferred Stock (the Series B Preferred Stock). Series A Preferred Stock The Series A Preferred Stock ranks senior to the Series B Preferred Stock and the common stock with respect to the payment of dividends and distribution of net assets upon liquidation, dissolution or winding up. Cumulative dividends are payable quarterly at the rate of $.95 per year on April 30, July 31, October 31, and the last Friday in January if, as and when declared by the Board of Directors. Series A Preferred Stock is convertible, prior to redemption, at the option of the holder, into shares of common stock at a conversion price subject to adjustment under certain circumstances pursuant to anti-dilution provisions. If the Company fails to declare and pay dividends on the Series A Preferred Stock within 90 days after a quarterly divided date, the conversion price is reduced by $.50 per share in each instance but not below the par value of the stock. In March 1996, the Company issued 726,000 shares of its Series A Preferred Stock in a private placement to foreign investors under Regulation S of the Securities Act of 1933. The Company received aggregate proceeds, before commissions and expenses of the private placement, of $3,539,000. Net proceeds from this offering were $2,856,000 after payment of $319,000 in placement agent commissions and $364,000 in offering expenses. As additional compensation in connection with the private placement, the Company issued to the placement agent and its designees warrants to purchase up to an aggregate of 181,500 shares of the Company's common stock at an exercise price of $1.88 per share (Note 12). In March 1996, the Company issued 60,000 shares of Series A Preferred Stock valued at the then market value of $360,000 in partial settlement of a lawsuit (Note 4). At January 31, 1998, warrants to purchase 320,000 shares of Series A Preferred Stock were outstanding with an exercise price of $16.50 per share and an expiration date of July 1999. F-21 Series B Preferred Stock On January 10, 1997, the Company issued 22,000 shares of Series B Preferred Stock in a private placement to an investor group. The Company received aggregate proceeds of $22,000,000 and recognized a charge to additional paid-in capital of $826,000 for expenses of the private placement. The net proceeds of the private placement were used to pay costs related to the Unusual Charges (Note 3) and for general working capital purposes. During fiscal 1997, the Company placed an additional 11,715 shares of its Series B Preferred Stock for aggregate cash proceeds of $9,600,000 with private investors and notes receivable in the amount of $2,115,000 from management of the Company (the Management Group Notes). The Management Group Notes are due in March 2002, accrue interest at 8% per annum and require annual principal payments equivalent to 16.25% of the annual bonus of each purchaser and a balloon payment of the unpaid principal and accrued interest at maturity. The notes are full-recourse notes secured by the Series B Preferred Stock issued in return for the notes. In April 1997, concurrent with the Series B issuance, the Company effectively redeemed all rights outstanding under its Shareholders' Rights Agreement. The Company paid each holder of common stock $0.001 per share totaling $4,930. The Series B Preferred Stock ranks junior to the Series A Preferred Stock and senior to the common stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up. The Series B Preferred Stock is convertible, at the option of the holder, only after all the Series A Preferred Stock is converted or redeemed. The conversion price per share is subject to adjustment under certain circumstances pursuant to anti-dilution provisions. Each share of Series B Preferred Stock is entitled to voting rights equivalent to the number of common shares into which it is convertible. The Series B Preferred Stock pays no dividend until January 2002. Beginning in 2002, the Company is obligated to pay a dividend to holders of the Series B Preferred Stock in the amount of $60 per share subject to increases of $20 per share every year thereafter until 2005 up to a maximum of $120 per share. In recognition of the increasing rate feature of Series B preferred stock, the Company accreted non-cash dividends of $2,661,000 in fiscal 1997. Annual cash dividends may be required prior to 2002 or in amounts greater than otherwise required prior to or after 2002 in the event the Company defaults on its revolving credit facilities or declares a dividend on its common stock. 12. STOCK OPTIONS AND WARRANTS At January 31, 1998, warrants to purchase 331,106 common shares were outstanding. Of these warrants, 15,000 are exercisable at the common stock market price and expire by December 1998, 150,941 have exercise prices ranging from $9.00 to $10.50 and expiration dates ranging from August 1998 to December 1998 and 165,165 have an exercise price of $1.88 and expire in March 2001 (the $1.88 Warrants). The $1.88 Warrants were issued in March 1996 in connection with a private placement of Series A Preferred Stock (Note 11). Had the Company measured the estimated fair value of the warrants issued in March 1996, there would have been no impact on the consolidated financial statements due their being treated as an expense of the private placement. F-22 The Company's Board of Directors has granted stock options to members of the Board and to Company management. The following table summarizes common stock option plan activity: Number of Weighted average shares of exercise prices Outstanding at January 29, 1995 558,333 12.49 Granted 560,833 1.38 Canceled (including repriced options) (264,582) 12.48 ---------- Outstanding at January 27, 1996 854,584 2.14 Granted 37,417 1.38 Canceled (502,834) 1.38 ---------- Outstanding February 1, 1997 389,167 3.05 Granted 3,016,450 2.15 Canceled (317,917) 3.43 ---------- Outstanding January 31, 1998 3,087,700 2.13 Exercisable at January 31, 1998 1,476,206 2.09 Exercisable at February 1, 1997 385,834 3.07 In fiscal 1995, the Board of Directors repriced 235,417 options formerly granted at an exercise price of $12.48 to an exercise price of $1.38. All options have been granted or repriced at the closing market price of the underlying stock at the date of grant or the date of repricing. Options outstanding at January 31, 1998 had exercise prices ranging from $1.38 to $2.34 and a weighted average remaining contractual life of 4.3 years. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" under which no compensation cost has been recognized. If the Company had elected to recognize compensation costs based on the fair value on the date of grant for awards in fiscal years 1997 and 1996, consistent with the provisions of SFAS No. 123, net loss and net loss per share would have been increased to the following amounts: IN THOUSANDS, EXCEPT PER SHARE DATA 1997 1996 1995 ---- ---- ---- Pro forma net loss ($7,114) ($40,933) ($2,278) Pro forma net loss per share (basic and diluted) ($ 1.45) ($ 9.08) ($0.56) The pro forma effect on net loss for fiscal years 1997 and 1996 may not be representative of the pro forma effect on net loss of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to fiscal 1996. The weighted-average fair values at date of grant for options granted during fiscal 1997 and 1996 were between $0.90 and $1.85 and were estimated using the Black-Scholes option pricing model. The following assumptions were applied: (i) expected dividend yield of 0%, (ii) expected volatility rates of 1.388 and 0.83 for fiscal years 1997 and 1996, respectively, (iii) expected life of three to five years for fiscal 1997 and eight years for fiscal 1996, (iv) risk free interest rates ranging from 5.45% to 6.88%. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models also require the input of highly subjective assumptions such as expected option life and expected stock price volatility. Because the Company's employee stock-based compensation plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, the Company believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from those plans. F-23 13. EMPLOYEE BENEFITS The Company sponsors a defined contribution plan, qualified under Internal Revenue Code Section 401(k), for the benefit of employees who have completed twelve months of service and who work a minimum of 1,000 hours during that twelve month period. The Company makes a matching contribution equal to 20% of participating employees' voluntary contributions. Participants may contribute from 1% to 15% of their compensation annually, subject to IRS limitations. The Company contributed $132,000, $111,000 and $116,000 in fiscal 1997, 1996 and 1995, respectively. 14. RELATED PARTY TRANSACTIONS During fiscal 1996, the Company paid $1,100,000 in fees and expense reimbursements related to its withdrawn securities offering and advisory fees related to the private placement of Series B Preferred Stock to an investment banking firm for which a director of the Company serves as a managing director (Notes 3 and 11). This same director was appointed to the Board of Directors following the successful completion of the initial public offering of Series A Preferred Stock in July 1994. The Company also paid a $250,000 finder's fee to a newly appointed director in respect of advisory services rendered to the Company in connection with the private placements of Series B Preferred Stock (Note 11). In January 1997, the Company paid $96,000 to former directors of the Company pursuant to the cancellation of their stock options and warrants. In March 1996, a director of the Company was a managing director of the investment-banking firm that served as the placement agent for the Company's private placement of 726,000 shares of Series A Preferred Stock (Note 11). At January 27, 1996, an accounts receivable balance of approximately $170,000 was outstanding from an affiliate of the Former Executives. This receivable was forgiven in connection with the settlements with the Former Executives and is included in the unusual charges recorded in fiscal 1996 (Note 3). 15. COMMITMENTS AND CONTINGENCIES The Company is at all times subject to pending and threatened legal actions that arise out of the normal course of business. In the opinion of management, based in part on the advice of legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company. 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Registrant filed a Form 8-K dated May 14, 1997. A Form 8-K/A-1 filed May 23, 1997 amended it in its entirety. The reports on Form 8K and 8K/A-1 reported on a change in certifying accountants filed pursuant to Section 13 of the Securities Act of 1934. 24 PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item is incorporated by reference to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A in connection with the 1998 Annual Meeting of Shareholders (the "Proxy Statement") under the headings "Proposal 1 -- "Election of Directors" and "Executive Officers." Item 11. Executive Compensation The information required by this item is incorporated by reference to the Registrant's Proxy Statement under the heading "Executive Compensation." Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference to the Registrant's Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated by reference to the Registrant's Proxy Statement under the heading "Certain Relationships and Related Transactions." 25 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Documents filed as part of this report: The following is an index of the financial statements and exhibits included in this report or incorporated herein by reference. 1) Financial Statements; the financial statements filed as part of this report are listed in the index to financial statements on page 22. 2) Exhibits: Exhibit No. Description - ------- 2.1 Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code of FBS Holdings, Inc. and General Textiles, d/b/a Family Bargain Centers ("Family Bargain") included in First Amended Disclosure Statement (2-Exhibit 2.1) 2.3 Stock Purchase Agreement, dated June 10, 1993, by and between Diversified Retail Services, Inc. ("Retail") and MKI Holding Corp. (4-Exhibit 2) 2.4 Securities Purchase Agreement dated December 30, 1996 among Family Bargain Corporation and the Purchasers (11-Exhibit 2.4) 3.1 Restated Certificate of Incorporation of the Registrant (1-Exhibit 3.1) 3.2 Amendments to the Restated Certificate of Incorporation of the Registrant (6-Exhibit 3.2) 3.3 Amended and Restated By-Laws of the Registrant (6-Exhibit 3.4) 4.1 Form of Certificate of Designation of Series A 9% Cumulative Preferred Stock (6-Exhibit 4.1) 4.2 Special Series A 9% Cumulative Convertible Preferred Stock (6-Exhibit 4.3) 4.3 Specimen Common Stock Certificate (1-Exhibit 4.2) 4.4 Specimen Class C Redeemable Common Stock Purchase Warrant Certificate (1-Exhibit 4.3) 4.5 Specimen Class D Redeemable Common Stock Purchase Warrant Certificate (1-Exhibit 4.4) 4.6 Certificate of Designations of the Series C Convertible Preferred Stock (6-Exhibit 4.8(a)) 4.7 Certificate of Correction of the Certificate of Designations of the Series C Convertible Preferred Stock (6-Exhibit 4.8(b)) 4.8 Certificate of Designations of the Series D Convertible Preferred Stock (6-Exhibit 4.9(a)) 4.9 Certificate of Correction of the Certificate of Designations of the Series D Convertible Preferred Stock (6-Exhibit 4.9(b)) 26 4.10 Indenture, dated as of May 1993, between General Textiles and IBJ Schroder Bank & Trust Company (included in Exhibit 2.1 above) 4.11 General Textiles Subordinated Notes Due 2003 (included in Exhibit 2.1 above) 4.12 Subordinated Reorganization Note Agreement, dated as of May 28, 1993, among General Textiles, Berkeley Atlantic Income Limited, Govett American Endeavor Fund Limited and London Pacific Life & Annuity Company (included in Exhibit 2.1 above) 4.13 Junior Subordinated Reorganization Note Agreement, dated as of May 1993, among General Textiles, Berkeley Atlantic Income Limited, Govett American Endeavor Fund Limited and London Pacific Life & Annuity Company (included in Exhibit 2.1 above) 4.14 Rights Agreement dated as of November 27, 1995 between the Registrant and Corporate Stock Transfer, Inc.(8-Exhibit 1) 4.15 Certificate of Designations of the Series A Junior Participating Preferred Stock (included in Exhibit 4.14 above) 4.16 Certificate of Designations of Series B Junior Convertible, Exchangeable Preferred Stock. (11-Exhibit 4.16) 10.1 Agreement, dated March 31, 1994, among Registrant, Bastian Holdings, Inc., Kabushi Investments Limited and Michael A. Gibbs (6-Exhibit 10.1) 10.2 Agreement, dated as of March 16, 1994, among Registrant, DRS Apparel, Inc., L'Ancresse Holdings, Ltd., Kabushi Investments Ltd. and Bastian Holdings, Inc. (6-Exhibit 10.2) 10.3(a) Stock Purchase Agreement, dated as of December 13, 1991, between the Hanover Partnership and the Registrant, incorporated by reference to Exhibit 1 of the Statement on Schedule 13D, filed on January 13, 1992 by Bastian Holdings, Kabushi et al. with respect to the Common Stock of the Registrant (the "Bastian Holdings 13D") 10.3(b) Assignment, dated as of January 2, 1992, by the Hanover Partnership in favor of Bastian Holdings and Kabushi, incorporated by reference to Exhibit 5 to the Bastian Holdings 13D 10.3(c) Amendment, dated as of March 8, 1992, between the Hanover Partnership and the Registrant, incorporated by reference to Exhibit 1 to Amendment No. 1 to the Bastian Holdings 13D, filed on March 18, 1992 10.3(d) Amendment No. 2 to Stock Purchase Agreement, dated as of April 20, 1992, among the Hanover Partnership, Bastian Holdings, Kabushi, Michael A. Gibbs and the Registrant (3-Exhibit 10.5(d)) 10.3(e) Amendment No. 3 to Stock Purchase Agreement, dated June 30, 1992, among the Hanover Partnership, Bastian Holdings, Kabushi, Michael A. Gibbs and the Registrant (1-Exhibit 10.5(e)) 10.3(f) Assignment, dated as of January 3, 1992, by the Registrant in favor of DRE (1-Exhibit 10.5(f)) 10.4(a) Employment Agreement, dated as of April 24, 1992, among the Registrant, C-B/Murray and Benson A. Selzer (1-Exhibit 10.6(a)) 10.4(b) Amendment to Employment Agreement, dated as of June 16, 1992, among the Registrant, C-B/Murray, Mandel-Kahn and Benson A. Selzer (1-Exhibit 10.6(b)) 27 10.5(a) Employment Agreement, dated as of April 24, 1992, among the Registrant, C-B/Murray and Joseph Eiger (1-Exhibit 10.7(a)) 10.5(b) Amendment to Employment Agreement, dated as of June 16, 1992, among the Registrant, C-B/Murray, Mandel-Kahn and Joseph Eiger (1-Exhibit 10.7(b)) 10.6 Consulting Agreement, dated January 1, 1996, between Joel Mandel and General Textiles (10-Exhibit 10.6) 10.7 Employment Agreement, dated as of August 1, 1995, between General Textiles and William Mowbray (10-Exhibit 10.7) 10.7(a) Separation Agreement, dated as of August 1, 1997, between General Textiles and William Mowbray (13-Exhibit 10.4) 10.8 Employment Agreement, dated as of August 21, 1995, between General Textiles and Kevin P. Frabotta (10-Exhibit 10.8) 10.8(a) Advisory Agreement dated as of November 1, 1995 between the Registrant and H. Jurgen Schlichting (10-Exhibit 10.8(a)) 10.9(a) Management Agreement, dated May 28, 1993, among DRS Apparel, Inc., General Textiles and Transnational Capital Ventures, Inc. (6-Exhibit 10.9 (a)) 10.9(b) Assignment (of Management Agreement), dated January 28, 1994, among DRS Apparel, Inc., General Textiles and Transnational Capital Ventures, Inc. (6-Exhibit 10.9(b)) 10.10(a)Amended and Restated Loan and Security Agreement, dated as of October 14, 1993, between General Textiles and Guilford Investments, Inc. (6-Exhibit 10.10(a)) 10.10(b)First Amendment to Amended and Restated Loan and Security Agreement (6-Exhibit 10.10(b)) 10.11 Option Agreement, dated January 28, 1994, between Registrant and Guilford Investments, Inc. (6-Exhibit 10.11) 10.12 Agreement, dated January 28, 1994, between Registrant and Guilford Investments, Inc. (6-Exhibit 10.12) 10.13 Federal Income Tax Allocation Agreement, dated May 28, 1993, between Registrant and General Textiles (6-Exhibit 10.13) 10.14 Amended and Restated Loan and Security Agreement, dated as of October 14, 1993 Westinghouse Electric Corporation and General Textiles (6-Exhibit 10.14) 10.15 Loan and Security Agreement, dated as of October 14, 1993, between General Textiles and Greyhound Financial Capital Corporation (6-Exhibit 10.15) 10.15(a)Amendment No. 1 to Loan and Security Agreement, dated as of July 14, between General Textiles and Greyhound Financial Capital Corporation (7-10.15(3)) 10.15(b)Amendment No. 5 to Loan and Security Agreement, dated April 18, between General Textiles and Finova Capital Corporation (10-10.15(b)) 10.15(c)Amendment No. 6 to Loan and Security Agreement, dated July 10, 1996, between General Textiles and Finova Capital Corporation (11-Exhibit 10.15(c)) 28 10.15(d)Amendment No. 7 to Loan and Security Agreement, dated December 31, 1996, between General Textiles and Finova Capital Corporation (11-Exhibit 10.15(d)) 10.15(e)Amendment No. 8 to Loan and Security Agreement, dated April 23, 1997, between General Textiles and Finova Capital Corporation (12-Exhibit 10.2(a)) 10.15(f)Amendment No. 9 to Loan and Security Agreement, dated May 30, 1997, between General Textiles and Finova Capital Corporation (12-Exhibit 10.2(b)) 10.15(g)Amendment No. 10 to Loan and Security Agreement, dated September 24, 1997, between General Textiles and Finova Capital Corporation (13-Exhibit 10.2) 10.16 Second Amended and Restated Senior Secured Term Note (6-Exhibit 10.16) 10.17 Amended and Restated Revolving Credit Note, dated October 14, 1993 from General Textiles in favor of Westinghouse Electric Corporation (6-Exhibit 10.17) 10.18 Intercreditor, Standstill and Subordination Agreement, dated as of October 14, 1993, among Greyhound Financial Capital Corporation, Westinghouse Electric Corporation, Guilford Investments Inc. and General Textiles (6-Exhibit 10.18) 10.19 Stock Pledge Agreement, dated as of October 14, 1993, between DRS Apparel, Inc. and Greyhound Financial Corporation (6-Exhibit 10.19) 10.20 Purchase and Sale Agreement, dated as of December 28, 1993, between Guilford Investments, Inc. and Westinghouse Electric Corporation (6-Exhibit 10.20) 10.21 Assignment and Assumption Agreement, dated December 29, 1993, between Guilford Investments, Inc. and Westinghouse Electric Corporation (6-Exhibit 10.21) 10.22(a)Stock Option Agreement, dated September 20, 1991, among Transnational Capital Ventures, Inc. ("TCV"), the Selzer Group, Inc. ("TSG") and the stockholders of Mandel-Kahn (3-Exhibit 10.14(a)) 10.22(b)Consent, dated as of December 11, 1991, among TCV, TSG and the stockholders of Mandel-Kahn (3-Exhibit 10.14(b)) 10.22(c)First Amendment to Stock Option Agreement, effective as of January 7,1992, among TCV, TSG and the stockholders of Mandel-Kahn (3-Exhibit 10.14(c)) 10.22(d)Assignment of Contract, dated June 15, 1992, from TCV and TSG to MKI Acquisition (5-Exhibit 4) 10.22(e)Amendment No. 2 to Stock Option Agreement, dated as of June 16, 1992, among TCV, TSG, Mandel-Kahn and the stockholders of Mandel-Kahn (5-Exhibit 5) 10.22(f)Notice of Exercise, dated June 16, 1992, from MKI Acquisition to the stockholders of Mandel-Kahn (5-Exhibit 6) 10.23 Stock Purchase Agreement, dated June 10, 1993, between Registrant and MKI Holding Corp. (6-Exhibit 10.23) 10.24 Agreement and Plan of Merger, dated as of February 25, 1993, among Batra, Inc., L'Ancresse Holdings, Ltd., Kabushi Investments, Ltd., Bastian Holdings, Inc., Registrant and DRS Apparel, Inc. (6-Exhibit 10.24) 10.25(a)Agreement, dated April 10, 1992, by and among Myrtle Services (Overseas) Limited, Harold Chaffe and DRE (3-Exhibit 10.16(a)) 10.25(b)Pledge Agreement, dated April 10, 1992, between DRE and the Trustees of the Erin Settlement (3-Exhibit 10.16(b)) 10.25(c)Promissory Note, dated April 10, 1992, by DRE to the Trustees of the Erin Settlement (3-Exhibit 10.16(c)) 29 10.25(d)Amendment to Pledge Agreement, dated as of July 22, 1992, between DRE and the Trustees of the Erin Settlement (1-Exhibit 10.16(d)) 10.26(a)Sale Agreement, dated as of March 1, 1993, between DRE and the Trustee (2-Exhibit 10.23(a)) 10.26(b)Pledge Agreement, dated as of March 1, 1993, between DRE and the Trustees (2-Exhibit 10.23(b)) 10.27(a)Stock Purchase Agreement, dated as of August 29, 1995, among the Registrant, certain shareholders of Capin Mercantile Corporation and Sellers Agent ("F2U Sellers") (8-Exhibit 10.1) 10.27(b)Amendment to Stock Purchase Agreement, dated November 10, 1995, between the Registrant and F2U Sellers (8-Exhibit 10.2) 10.30(a)Loan and Security Agreement dated November 13, 1995 between Factory 2-U and Finova Capital Corporation (10-Exhibit 10.30(a)) 10.30(b)Amendment No. 1 to Loan and Security Agreement, dated April 18, 1996, between Factory 2-U, Inc. and Finova Capital Corporation (10-Exhibit 10.30(b)) 10.30(c)Amendment No. 2 to Loan and Security Agreement, dated April 22, 1996 between Factory 2-U and Finova Capital Corporation (11-Exhibit 10.3(c)) 10.30(d)Amendment No. 3 to Loan and Security Agreement, dated July 10, 1996 between Factory 2-U and Finova Capital Corporation (11-Exhibit 10.3(d)) 10.30(e)Amendment No. 4 to Loan and Security Agreement, dated December 31, 1996 between Factory 2-U and Finova Capital Corporation (11-Exhibit 10.3(e)) 10.30(f)Amendment No. 5 to Loan and Security Agreement, dated April 23, 1997 between Factory 2-U and Finova Capital Corporation (12-Exhibit 10.1(a)) 10.30(e)Amendment No. 6 to Loan and Security Agreement, dated May 30, 1997 between Factory 2-U and Finova Capital Corporation (12-Exhibit 10.1(b)) 10.30(f)Amendment No. 7 to Loan and Security Agreement, dated May 30, 1997 between Factory 2-U and Finova Capital Corporation (13-Exhibit 10.1) 10.30(g)Modifications to Loan and Security Agreement, dated August 28, 1997 between Finova Capital Corporation and both General Textiles and Factory 2-U (12-Exhibit 10.6) 10.33 Acknowledgement and Reaffirmation (Re: Affiliate Debt, Management Fees, Intercreditor Agreement) dated as of April 23, 1997, between Family Bargain Corporation and Finova Capital Corporation (12-Exhibit 10.3(a)) 10.33(a)Acknowledgement and Reaffirmation (Re: Affiliate Debt, Management Fees, Intercreditor Agreement) dated as of May 30, 1997, between Family Bargain Corporation and Finova Capital Corporation (12-Exhibit 10.3(b)) 10.33(b)Acknowledgement and Reaffirmation (Re: Affiliate Debt, Management Fees, Intercreditor Agreement) dated as of September 24, 1997, between Family Bargain Corporation and Finova Capital Corporation (13-Exhibit 10.3) 10.40 Subordination and Standill Agreement (Re: $6.35 MM Debt), dated as of May 30, 1997, between Family Bargain Corporation and Finova Capital Corporation (12-Exhibit 10.4) 30 10.50 Subordinated Promissory Note ($6.35 MM), dated as of April 30, 1997 between General Textiles and Family Bargain Corporation(12-Exhibit 10.5) 11.1 Computation of per share loss 21 List of the Registrant's Subsidiaries (10-Exhibit 21) 27 Financial Data Schedule 31 (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 33-47645 filed with the Commission on September 16, 1992. (2) Incorporated by reference to the Registrant's Form 10-K for fiscal year ended April 30, 1993. (3) Incorporated by reference to the Registrant's Form 10-K for fiscal year ended December 31, 1991. (4) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on June 23, 1993. (5) Incorporated by reference to the Registrant's Form 8-K filed with the Commission in July 1992. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 33-77488 filed with the Commission on April 7, 1994. (7) Incorporated by reference to General Textiles' Registration Statement on Form S-4, No. 33-92176 filed with the Commission on May 11, 1995. (8) Incorporated by reference to the Registrant's Form 8-K and 8-K/A dated November 28, 1995. (9) Incorporated by reference to the Registrant's Form 8-K dated November 27, 1995. (10) Incorporated by reference to the Registrant's Form 10-K/A for fiscal year ended January 27, 1996. (11) Incorporated by reference to the Registrant's Form 10-K for fiscal year ended February 1, 1997. (12) Incorporated by reference to the Registrant's Form 10-Q for the 13 weeks ended August 2, 1997 (2nd Quarter). (13) Incorporated by reference to the Registrant's Form 10-Q for the 13 weeks ended November 1, 1997 (3rd Quarter). (b) Reports on Form 8-K. The Registrant filed a Form 8-K dated May 14, 1997. A Form 8-K/A-1 filed May 23, 1997 amended it in its entirety. The reports on Form 8K and 8K/A-1 reported on a change in certifying accountants filed pursuant to Section 13 of the Securities Act of 1934. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. FAMILY BARGAIN CORPORATION By: /s/ James D. Somerville James D. Somerville Chairman Dated: April 29, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of this Company and in the capacities and on the date indicated. Signature Title Date /s/ James D. Somerville Chairman and Director April 29, 1998 - ----------------------- (Principal Executive Officer) James D. Somerville /s/ Jonathan W. Spatz Executive Vice President, April 29, 1998 - ----------------------- Chief Financial Officer Jonathan W. Spatz (Principal Financial and Accounting Officer) /s/ Michael M. Searles Director April 29, 1998 - ----------------------- Michael M. Searles /s/ Thomas G. Weld Director April 29, 1998 - ----------------------- Thomas G. Weld /s/ H. Whitney Wagner Director April 29, 1998 - ----------------------- H. Whitney Wagner /s/ J. William Uhrig Director April 29, 1998 - ----------------------- J. William Uhrig /s/ Ronald Rashkow Director April 29, 1998 - ----------------------- Ronald Rashkow /s/ John J. Borer III Director April 29, 1998 - ----------------------- John J. Borer III /s/ Peter V. Handal Director April 29, 1998 - ----------------------- Peter V. Handal 33 EXHIBIT INDEX Exhibit Number Description Page 11.1 Computation of per share loss 34 27 Financial Data Schedule (submitted for SEC use only) 35 EX-11 2 EXHIBIT 11.1 Exhibit 11.1 Family Bargain Corporation Computation of Net Loss Per Common Share (Basic and Diluted) (Dollars in Thousands, except per share data)
Fiscal Year Ended ------------------------------------- January 31, February 1, January 27, 1998 1997 1996 The computation of net (loss) available & adjusted shares outstanding follows: Income (loss) from continuing operations $ (129) $(36,564) $ 1,478 Discontinued operations: Loss on disposal, net of income tax benefit - (826) (500) ------------------------------------- Net income (loss) (129) (37,390) 978 Less: Preferred stock dividends (6,117) (3,509) (3,040) ------------------------------------- Net (loss) used for basic and diluted computation $ (6,246) $ (40,899) $ (2,062) ===================================== Weighted average number of common shares outstanding 4,901,268 4,507,340 4,006,420 Add: Assumed exercise of those options that are common stock equivalents - - - Assumed exercise of convertible preferred stock - - - Adjusted shares outstanding, used for basic & diluted computation 4,901,268 4,507,340 4,006,420 ===================================== Loss from continuing operations $ (1.27) $ (8.89) $ (0.39) Net loss applicable to common stock per $ (1.27) $ (9.07) $ (0.51) =====================================
Page 34 EX-27 3 FDS --
5 This schedule contains summary financial information extracted from the Balance Sheet and Statement of Operations as of and for the 52 weeks ended January 31, 1998 and is qualified in its entirety by reference to such financial statements as included in the Company's Annual Report on Form 10-K. 0000813775 Family Bargain Corporation 1,000 12-MOS JAN-31-1998 FEB-2-1997 JAN-31-1998 3,167 0 0 0 29,820 33,714 23,066 8,000 84,817 36,463 0 0 36 49 17,133 84,817 300,592 300,592 195,010 195,010 100,485 0 5,226 (129) 0 (129) 0 0 0 (129) (1.27) (1.27)
-----END PRIVACY-ENHANCED MESSAGE-----