<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended January 31, 1994 Commission file number 1-7927
---------------- ------
HOUSE OF FABRICS, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3426136
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13400 Riverside Drive, Sherman Oaks, California 91423-2598
----------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 995-7000
-------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common stock, $.l0 par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
----
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past ninety (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 the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT. (Estimated solely for purpose of this cover page. Only market
value of shares held by officers, directors and 5% stockholders have been
excluded.)
$68,328,384 as of May 12, 1994
- - --------------------------------------------------------------------------------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Common stock, $.l0 par value; outstanding 13,697,107 shares as of May, 12, 1994.
- - --------------------------------------------------------------------------------
LIST HEREUNDER DOCUMENTS INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K
INTO WHICH THE DOCUMENT IS INCORPORATED.
Portions of the 1994 Annual Report to Stockholders Part II
- - --------------------------------------------------------------------------------
Portions of the 1994 Proxy Statement Part III
- - --------------------------------------------------------------------------------
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
Documents Incorporated by Reference and Index
Page Number
___________________________________
1994 Annual
Report to 1994 Proxy Included
Stockholders* Statement* Herein
------------- ---------- --------
PART I
------
Item 1. Business 1-4
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a
Vote of Security Holders 5
PART II
-------
Item 5. Market for the Registrant's "Financial Highlights
Common Stock and Related and Corporate
Stockholder Matters Listings Pages" 6
Item 6. Selected Financial Data 7 6
Item 7. Management's Discussion and
Analysis of Operations and
Financial Condition 8-10 6
Item 8. Financial Statements and
Supplementary Data 6
Consolidated Statements of
Operations For the Years
Ended January 31, 1994,
1993 and 1992 11
Consolidated Balance Sheets
as of January 31, 1994
and 1993 12
Consolidated Statements of
Cash Flows For the Years
Ended January 31, 1994,
1993 and 1992 13
Consolidated Statements of
Stockholders' Equity For
the Years Ended January
31, 1994, 1993 and 1992 11
Notes to Consolidated
Financial Statements 14-18
Independent Auditors' Report 19
<PAGE>
Page Number
___________________________________
1994 Annual
Report to 1994 Proxy Included
Stockholders* Statement* Herein
------------- ---------- ---------
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 6
PART III
--------
Item 10. Directors and Executive
Officers of the Registrant 3,10 7-8
Item 11. Executive Compensation 5-8 9
Item 12. Security Ownership of Certain
Beneficial Owners and
Management 2 9
Item 13. Certain Relationships and
Related Transactions 4 9
PART IV
-------
Item 14. Exhibits, Financial Statement
Schedules and Reports on
Form 8-K 10-13
Independent Auditors' Report 14
Independent Auditors' Consent 15
Signatures 16
*Portions of which are incorporated herein by reference.
<PAGE>
PART I
Item 1. Business
------------------
House of Fabrics, Inc. ("Company") is one of the largest
retailers of home sewing products in the United States, with 556
Company-owned super stores in 40 states selling medium priced
fabrics, crafts, notions, and sewing machines.
The Company was incorporated in 1946 and has been in the
retail fabric and notions business since that date. In the fiscal
year ended January 31, 1994, the Company's sales consisted of
fabrics, sold by the yard and used principally for clothing, home
decorating and crafts (49.7%), sewing notions and accessories
(29.5%), crafts (15.2%) and sewing machines and related
accessories (5.6%). Needlecrafts and sewing machines are sold in
substantially all of the Company's stores.
In July, 1991, the Company acquired Fabricland, Inc.
("Fabricland") a specialty retailer of fabrics, sewing notions,
yarns and crafts. Fabricland currently operates in the seven
western states and Alaska.
All of the Company's stores located west of the Rocky
Mountains are operated under the name "House of Fabrics",
"Fabricland" or "Fabric King". Its stores in other states are
operated under the name "So-Fro Fabrics" or "House of Fabrics".
The Company operates substantially all of its stores in leased
premises and does not engage in any franchising activity. Until
1984, the Company's stores averaged approximately 4,200 square
feet and were located principally inside neighborhood and regional
shopping centers. In 1984, the Company commenced operation, in
freestanding and shopping center locations, of large-sized stores
which range in size between 10,000 and 29,000 square feet and are
called "super stores". It currently operates 556 super stores and
expects substantially all of its future store openings to be super
stores.
The Company purchases finished goods directly from mills
and manufacturers and has facilities in South Carolina for
processing and warehousing merchandise for distribution to its
stores.
The Company's executive offices are located at 13400
Riverside Drive, Sherman Oaks, California 91423-2598, and its
telephone number is (818) 995-7000.
1
<PAGE>
Retail Stores
The Company locates its stores primarily in cities with
populations in excess of 25,000. Until 1984 the Company's stores
averaged approximately 4,200 square feet and were located
principally inside neighborhood and regional shopping centers. In
1984 the Company began to open super stores in freestanding and
shopping center locations, and at January 31, 1994 operated 556
super stores.
Effective September 1, 1993, the Board of Directors
approved a plan of restructuring ("the Plan") to close the
Company's remaining mall stores and embark on a new merchandising
strategy. Accordingly, in the third quarter of fiscal 1994, the
Company recorded a pretax restructuring charge of $12,909,000 for
disposition of the then 110 remaining mall stores (89 remaining at
January 31, 1994). The mall stores are scheduled for closure over
a three year period, although the Company expects the majority of
the stores to be closed in the first twenty-four months. Thus,
operating information reported after September 1, 1993 excludes
mall stores.
Information with respect to the number of super stores
operated by the Company for each of the last three years is set
forth below.
Number of Super Stores
<TABLE>
<CAPTION>
Year
Ended
Jan 31 Opened Closed Total
------ ------ ------ -----
<S> <C> <C> <C>
1994 31 21 556
1993 91 10 546
1992 138 7 465
</TABLE>
Total super store rental expense for the fiscal year ended
January 31, 1994 was $58,809,332. This includes fixed minimum monthly
rental, additional percentage rent based on gross store sales, and real
estate taxes. The average annual rental expense and related occupancy
costs for super stores in operation during the fiscal year was
approximately $157,564 per store.
The terms of the Company's leases range from
month-to-month to 20 years. Most new leases are for a term of 10
to 15 years. Of the current leases, 63 expire in fiscal year
ending 1999 or sooner.
Each store has a manager, an assistant manager and a
number of full-time and part-time personnel averaging 25 per super
store. District sales managers are each responsible for
supervising approximately 15 stores, and report to one of the
Company's regional sales supervisors who in turn report to the
Executive Vice President - Store Operations. Almost all district
sales managers, and regional sales supervisors are former store
managers.
2
<PAGE>
Fabrics and Notions
-------------------
All super stores carry a fabric inventory for apparel
and non-apparel use, which includes cottons, rayons, synthetics,
woolens, silks and laces. Each super store also sells notions,
including threads, zippers, patterns, buttons, sewing accessories
and ornamentations. Super stores also carry basic non-seasonal
merchandise as well as stylized seasonal inventory purchased for
the spring and fall seasons. The Company's policy is to avoid
carrying stylized seasonal fabrics over to the following season
and at the end of each season such fabrics are normally marked
down and sold.
The Company's inventory level at any time reflects the
Company's philosophy of providing the customer with a wide variety
of products from which to choose. In addition the Company's
emphasis on customer satisfaction allows the customer to return
any merchandise purchased. Returns, however, are not significant.
The Company makes sales for cash, check, or credit card, and
consequently offers no credit terms. Inventory levels tend to
build slightly during the second and third quarters in
anticipation of somewhat greater third and fourth quarter sales.
This growth is financed through debt provided by the Company's
credit agreement.
Sewing Machines
---------------
The Company became an authorized dealer for the sale of
Singer sewing machines and related accessories upon Singer's
withdrawal in 1980 from direct retailing of sewing machines in the
United States. The Company has become Singer's largest retail sewing
machine dealer in the United States. The Company sells sewing
machines in substantially all of its super stores.
The Company's agreement with Singer is not exclusive, and
Singer has retained the right to sell its products directly and to
other retailers. The Company has the right to use the Singer
trademarks to identify and advertise Singer products offered at its
stores, and to participate in Singer's cooperative advertising
programs. The agreement continues for one-year periods until
terminated. The Company believes that if its Singer dealerships were
terminated, it would be able to make alternative arrangements for
sewing machine products to sell.
Crafts
------
The Company established craft departments in selected
stores in 1981, and substantially all its super stores now operate a
craft department offering a diverse selection of products ranging
from soft crafts to hard-line crafts, including florals, garment
embellishments, needlework kits, needlepoint kits, yarn and seasonal
gifts.
3
<PAGE>
Processing and Suppliers
------------------------
The Company purchases fabrics directly from mills,
principally in the United States, and processes the purchased fabrics
at its facility in Mauldin, South Carolina (see "Properties"). The
fabrics are generally received in bulk, unrolled and inspected, cut
into 10 to 25-yard lengths, and rolled on fabric boards and packaged
for shipment to stores. Substantially all notions sold by the
Company are purchased directly from manufacturers. The Company
maintains a fleet of tractors and trailers for delivering inbound
freight to the Company's Mauldin facility and distributing
merchandise to some of its super stores. The Company's fleet handles
approximately 40% of total store deliveries and 70% of inbound bulk
fabric freight. When possible, the Company seeks freight from third
parties in connection with return trips to South Carolina, to
minimize non-productive fleet travel.
The Company has no long-term contracts for the purchase of
merchandise and purchases no more than 10% of its merchandise from
any one supplier. The Company is one of the largest purchasers of
fabrics in the United States and has never experienced difficulty in
obtaining satisfactory supplies of merchandise. Merchandise is
purchased from suppliers on negotiated credit terms, which the
Company believes are typical for the industry.
Competition
-----------
The retail fabric, notion, sewing machine and craft
businesses are highly competitive. In selling fabric, notions and
crafts, the Company competes with other national, regional, and
local retail fabric, craft and department stores. Competition in
the fabric, notions and craft businesses is based primarily on
location, product selection, quality, price and personal service.
In selling sewing machines, the Company competes with department
store chains and other independent dealerships (including
independent Singer dealerships). While the Company is currently
the largest Singer dealer in the United States, and most other
fabric and notions retailers do not offer sewing machines, several
of the Company's major home sewing competitors also are Singer
dealers. Competition in the sewing machine business is based
primarily on product, quality, price and service.
Employees
---------
As of January 31, 1994, the Company had approximately
12,580 employees, of whom approximately 11,910 were engaged in
retail sales. Approximately 9,020 of these sales employees worked
on a part-time basis. The number of Company employees increases
during peak seasons. The Company has never experienced a work
stoppage and no employees are covered by a collective bargaining
agreement.
4
<PAGE>
Item 2. Properties
--------------------
The Company's executive offices are located in a 72,000
square foot building in Sherman Oaks, California owned by the
Company. The Company has leased approximately 26,103 square feet
that it does not occupy to non-affiliated tenants.
House of Fabrics of South Carolina, Inc., a wholly-owned
subsidiary of the Company owns and leases parcels of land totaling
approximately 28 acres from the County of Greenville, in Mauldin,
South Carolina. The remaining lease is for a 20-year term ending
in 1998. A 550,000 square foot warehouse and processing facility
has been constructed on the properties, which was expanded by the
addition of 240,000 square feet completed in July, 1993. The
Company has guaranteed all obligations of the subsidiary under the
lease. At the end of the lease term, the subsidiary has the right
to acquire fee title to the remaining property at a nominal price.
To finance the purchase of the land and construction of the plant,
Greenville County issued three series of industrial revenue bonds
in the aggregate principal amount of $4,750,000. One bond matured
in 1989 and another in 1992. The remaining bond matures in fiscal
1998. The interest rate on the industrial bond is 7% per annum.
The lease provides (1) for annual payment of $125,000 which
payment is sufficient to pay all interest on and to redeem the
bond by the end of the lease term, and (2) for the Company to pay
all taxes.
The Company owns a warehouse in Portland, Oregon, that
is not used by the Company. A portion of that warehouse is
currently leased to a third party. The Company is actively
pursuing the sale of this property.
The Company's leases for retail stores are described in
leased facilities under "Business - Retail Stores."
Item 3. Legal Proceedings
---------------------------
There are no pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
the Company or any of its subsidiaries is a party or to which any
of their property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------
No matters were submitted during the fourth quarter of
the fiscal year covered by this report to a vote of security
holders, through the solicitation of proxies or otherwise.
5
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
--------------------------------------------------------------
This information is included on the "Financial
Highlights" and "Corporate Listings" pages of the 1994 Annual
Report to Stockholders and is incorporated by reference herein.
The Company's common stock is traded on the New York Stock
Exchange and Pacific Stock Exchange.
Item 6. Selected Financial Data
---------------------------------
This information is included on page 7 of the 1994
Annual Report to Stockholders and is incorporated by reference
herein.
Item 7. Management's Discussion and Analysis of Operations
and Financial Condition
------------------------------------------------------------
This information is included on pages 8 through 10 of
the 1994 Annual Report to Stockholders and is incorporated by
reference herein.
Item 8. Financial Statements and Supplementary Data
-----------------------------------------------------
This information is included on pages 11 through 18 of
the 1994 Annual Report to Stockholders and is incorporated by
reference herein.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
----------------------------------------------------------
NONE
6
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- - ------------------------------------------------------------
The information regarding directors is included on page
3 of the Company's 1994 Proxy Statement and is incorporated by
reference herein.
Executive Officers of Registrant
- - --------------------------------
<TABLE>
<CAPTION>
Name Age Position and Office
---- --- -------------------
<S> <C> <C>
Barney Sofro 52 Chairman of the Board, and a Director
since 1970.
Gary L. Larkins 51 President and Chief Executive Officer,
and a Director since 1978.
Donald R. Ardemagni 61 Executive Vice President - Buying since
1988.
James R. Hartwig 49 Executive Vice President - Store
Operations and Merchandising since 1990.
From 1986 to 1990 he was Vice President -
Store Operations and Merchandising.
Doyle W. Parker 45 Executive Vice President - Craft Buying
since December, 1993 and Vice President
- Craft Buying since April, 1993. Prior
to that he was a craft buyer at Wal-Mart
Inc.
Donald W. Boyer 47 Sr. Vice President - Chief Financial
Officer and Controller since December,
1993. He was Vice President - Controller
from 1990 to 1993 and from 1988 to 1990
he was Controller.
Marvin S. Maltzman 57 Sr. Vice President - Administration,
Secretary and General Counsel since
December, 1993; Vice President,
Secretary and General Counsel from 1980
to 1993, and a Director since 1991.
Richard H.Shelton III 50 Sr. Vice President - Warehouse and
Distribution since December, 1993. Vice
President - Warehouse and Distribution
from 1988 to 1993.
James C. Webb 50 Sr. Vice President - Real Estate since
December, 1993. Prior to that was Vice
President - Real Estate.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
L. Jay Bowen 47 Vice President - Notions.
Edward L. Chow 55 Vice President - Chief Information
Officer.
Pamela M. Hicks 38 Vice President - Internal Audit and
Shortage Control since 1993. From 1991
to 1993 she was Divisional Vice President
and Assistant Controller at Robinsons
Department Stores, and from 1987 to 1991
she was Divisional Vice President,
Accounts Payable at Emporium Department
Stores.
Jeffrey L. Higgins 47 Vice President - Retail Sales since 1993.
From 1990 to 1993 he was Vice President -
Store Operations, Prior to that he was
Director of Store Operations.
Reva J. Johnson 46 Vice President - Advertising since 1990.
From 1988 to 1990 she was Director of
Advertising.
Kimberly S. Mitchell 33 Vice President - Merchandising since
November, 1993. District Sales Manager
from 1987 to 1993, and prior to that
Assistant Regional Manager.
F. Douglas Trovato 45 Vice President - Buying since April,
1993. Prior to that he was Vice
President - Craft Buying.
Paul A. Waalkes 39 Vice President - Construction since 1993,
and Director of Construction since 1992.
Prior to that he was Vice President and
General Manager of P.J. Caroll & Co. Inc.
Rita M. West 55 Vice President - Sewing Machine
Operations since 1992. Prior to that she
was Vice President - Sewing Machine Sales
and Promotions.
</TABLE>
Disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K, is
contained on page 10 of the Company's 1994 Proxy Statement and is incorporated
by reference herein.
8
<PAGE>
Item 11. Executive Compensation
- - --------------------------------
This information is included on pages 5 through 7 of the Company's 1994
Proxy Statement and is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- - ------------------------------------------------------------------------
This information is included on page 2 of the Company's 1994 Proxy
Statement and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
- - --------------------------------------------------------
This information is included on page 4 of the Company's 1994 Proxy
Statement and is incorporated by reference herein.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- - -------------------------------------------------------------------------
(a) The following documents are filed as a part of
this report.
1. All financial statements;
See Item 8 on page 6 of this report.
2. Financial Statements Schedules For the years
ended January 31, 1994, 1993 and 1992 are on
pages 11 to 15 of this report.
3. Independent Auditors' Report.
4. Independent Auditors' Consent.
9
<PAGE>
Schedules not included, and individual Financial
Statements of the Company have been omitted as not applicable, not
required, or the information required is included in the financial
statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended January 31, 1994.
(c) Exhibits (Attached to Complete Copies)
Exhibit 3(a) Second Amendment to Amended and
Restated Revolving Credit
Agreement, and Limited Waiver dated
March 22, 1994.
Exhibit 3(b) Third Amendment to Amended and
Restated Revolving Credit Agreement
dated May 13, 1994.
Exhibit 13 - 1994 Annual Report to Stockholders*
Exhibit 22 - Subsidiaries of the Registrant
Exhibit 28 - Additional Exhibits
* The 1994 Annual Report to Stockholders, except to the
extent incorporated herein by reference, is being furnished for
the information of the Securities and Exchange Commission only and
is not to be deemed filed as a part of this Annual Report on Form
10-K.
10
<PAGE>
SCHEDULE II
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
NOTES RECEIVABLE - EXECUTIVE OFFICERS
FOR THE YEARS ENDED JANUARY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
BALANCE AT AMOUNT BALANCE AT
NAME OF DEBTOR 1/31/91 ADDITIONS COLLECTED 1/31/92
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jim Heaton $297,602.00 $ 4,970.00 $302,572.00 --
Jim Webb $ 70,219.00 $ 1,028.00 $ 71,247.00 --
Gary Bunch $176,168.00 $ 2,942.00 $179,110.00 --
Jay Bowen $236,582.00 $ 2,641.00 $239.223.00 --
Barney Sofro $142,638.00 $312,920.00 -- $455,558.00
- - ----------------------------------------------------------------------------------------------
Total $923,209.00 $324,501.00 $792,152.00 $455,558.00
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT AMOUNT BALANCE AT
NAME OF DEBTOR 1/31/92 ADDITIONS COLLECTED 1/31/93
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barney Sofro $455,558.00 $20,707.00 -- $476,265.00
- - ----------------------------------------------------------------------------------------------
Total $455,558.00 $20,707.00 -- $476,265.00
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT AMOUNT BALANCE AT
NAME OF DEBTOR 1/31/93 ADDITIONS COLLECTED 1/31/94
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barney Sofro $476,265.00 $13,496.00 -- $489,761.00
- - ----------------------------------------------------------------------------------------------
Total $476,265.00 $13,496.00 -- $489,761.00
==============================================================================================
</TABLE>
NOTE: The loans are for a period of 12 months at an interest rate equal to the
Applicable Federal Rate adjusted quarterly. Loans are secured by a pledge of
the underlying Stock Certificates.
11
<PAGE>
Schedule IX
HOUSE OF FABRICS, INC., AND SUBSIDIARIES
SHORT-TERM BORROWINGS
FOR THE YEARS ENDED JANUARY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________________
CATEGORY OF BALANCE WEIGHTED MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED
AGGREGATE SHORT- AT END AVERAGE INTEREST OUTSTANDING OUTSTANDING AVERAGE
TERM BORROWINGS OF PERIOD RATE DURING THE DURING THE INTEREST
PERIOD (1) PERIOD (2) (3)
___________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 31, 1992 $39,142,000 5.0% $ 62,448,000 $ 39,801,000 6.8%
___________________________ =========== ==== ============ ============ ====
NOTES PAYABLE TO BANK
YEAR ENDED JANUARY 31, 1993 $79,403,000 4.5% $126,488,000 $ 95,680,000 4.5%
___________________________ =========== ==== ============ ============ ====
NOTES PAYABLE TO BANK
YEAR ENDED JANUARY 31, 1994 $143,000,000 6.5% $153,852,000 $119,340,000 5.0%
___________________________ ============ ==== ============ ============ ====
NOTES PAYABLE TO BANK
___________________________________________________________________________________________________________________________
(1) The maximum amount outstanding during the period is based on daily balances.
(2) The average amount outstanding during the period is based on daily weighted
averages of outstanding short-term borrowings.
(3) This rate is computed by dividing interest on short-term borrowings by average
short-term debt outstanding during the period.
</TABLE>
12
<PAGE>
Schedule X
HOUSE OF FABRICS, INC., AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED JANUARY 31, 1994, 1993 AND 1992
_______________________________________________________________________________
YEAR ENDED JANUARY 31,
1994 1993 1992
CHARGED TO COSTS AND EXPENSES
_______________________________________________________________________________
MAINTENANCE AND REPAIRS $11,789,000 $10,489,000 $ 9,470,000
=========== =========== ===========
ADVERTISING COSTS $17,748,000 $18,061,000 $11,655,000
=========== =========== ===========
NOTE: Amounts for taxes other than payroll and income taxes are not
presented, as such amounts are less than 1% of total sales for 1994,
1993 and 1992. The Company pays no royalties.
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
House of Fabrics, Inc.:
We have audited the consolidated financial statements of House of Fabrics, Inc.
and subsidiaries as of January 31, 1994 and 1993, and for each of the three
years in the period ended January 31, 1994, and have issued our report thereon
dated May 13, 1994; such financial statements and report are included in your
fiscal 1994 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedules of House
of Fabrics, Inc. and subsidiaries, listed in Item 14. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Deloitte & Touche
May 13, 1994
14
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-39467, 33-21965 and 33-46308 of House of Fabrics, Inc. on Form S-8 of our
reports dated May 13, 1994, appearing in and incorporated by reference in the
Annual Report on Form 10-K of House of Fabrics, Inc. for the year ended January
31, 1994.
Deloitte & Touche
May 13, 1994
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has fully caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HOUSE OF FABRICS, INC.
May 16, 1994 By /s/ Barney Sofro
----------------------
Barney Sofro
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Capacity
/s/ Barney Sofro Chairman of the Board & May 16, 1994
----------------------
Barney Sofro Director
/s/ Gary L. Larkins President, Chief Executive May 16, 1994
----------------------
Gary L. Larkins Officer and Director
/s/ Daniel Greenberg Director May 16, 1994
----------------------
Daniel Greenberg
/s/ Marvin S. Maltzman Sr. Vice President, Secretary, May 16, 1994
----------------------
Marvin S. Maltzman General Counsel and Director
/s/ James J. McMorrow Director May 16, 1994
----------------------
James J. McMorrow
/s/ Phillip G. Samovar Director May 16, 1994
----------------------
Phillip G. Samovar
/s/ Donald W. Boyer Sr. Vice President, Chief May 16, 1994
----------------------
Donald W. Boyer Financial Officer and
Controller
16
<PAGE>
SECOND AMENDMENT TO
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT,
AND LIMITED WAIVER
------------------
This SECOND AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT,
AND LIMITED WAIVER (herein this "Amendment") is entered into as of March 22,
1994, among HOUSE OF FABRICS, INC., a Delaware corporation (the "Company" or
"HF"), FABRICLAND, INC., an Oregon corporation and a Subsidiary of the Company
("FL"), HOUSE OF FABRICS OF SOUTH CAROLINA, INC., a South Carolina corporation
and a Subsidiary of the Company ("HS"), SOFRO FABRICS, INC., a Nevada
corporation and a Subsidiary of the Company ("SF"; HF, FL, HS, and SF being
hereinafter collectively referred to as the "Borrower", and each individually as
a "Borrower" or as a "Borrower Entity"), the several financial institutions
party to this Amendment, and Bank of America National Trust and Savings
Association, as agent for the Banks and the Issuing Banks. All terms used
herein and not otherwise defined herein that are defined in the Credit Agreement
(as defined below), shall have the meaning ascribed thereto in the Credit
Agreement when used herein.
WHEREAS, the Agent and the Banks heretofore made available to the Borrower
a secured revolving credit facility in the aggregate amount of up to
$165,000,000, pursuant to an Amended and Restated Revolving Credit Agreement
dated as of November 30, 1993, as amended by that certain First Amendment to
Amended and Restated Revolving Credit Agreement dated as of February 16, 1994
(herein, as the same may from time to time be amended, modified, supplemented,
renewed, or restated, the "Credit Agreement"); and
WHEREAS, the Borrower is in default of one of the financial covenants set
forth in the Credit Agreement and has requested the Agent and the Banks to waive
such default;
WHEREAS, the parties hereto wish to amend the Credit Agreement to provide,
among other things, for a $10,000,000 subfacility for letters of credit and to
provide for a limited waiver thereunder, as expressly set forth herein, and only
as expressly set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained herein, the parties hereto hereby amend the Credit
Agreement, and provide for a limited waiver thereunder, as follows, and the
parties hereto hereby agree as follows:
1. Limited Waiver.
--------------
(a) The Borrower has advised the Agent and the Banks that, as of the end of
the fiscal quarter of the Borrower that ended on January 31, 1994, the Borrower
was not in compliance with Section
-1-
<PAGE>
7.17 of the Credit Agreement. The Event of Default involving the failure of the
Borrower to be in compliance with Section 7.17 of the Credit Agreement as at the
end of such fiscal quarter is referred to herein as the "Specified Event of
Default." The Borrower has requested the Agent and the Banks, and the Agent and
the Banks are willing, expressly subject to the terms and conditions set forth
herein, to waive the Specified Event of Default for the limited time and on the
limited basis set forth herein. As used herein, "Other Event of Default" means
any Event of Default other than the Specified Event of Default.
(b) Except as otherwise set forth in the balance of this section,
commencing at such time as this Amendment becomes effective in accordance with
its terms, from and after January 31, 1994, and continuing through and including
April 29, 1994, the Agent and the Banks hereby waive the Specified Event of
Default for such duration. The continuing effectiveness of the limited waiver
set forth in the immediately preceding sentence (hereinafter the "Limited
Waiver") is conditioned upon the non-occurrence of any Other Event of Default.
Should any Other Event of Default occur during the period that the Limited
Waiver is in effect, the Limited Waiver shall cease and the Specified Event of
Default shall no longer be deemed to have been waived by the Agent and the
Banks. The Limited Waiver, unless subsequently extended or renewed in a writing
signed by the Agent and the Majority Banks, shall only be effective through
April 29, 1994, and thereafter the Specified Event of Default no longer shall be
deemed to have been waived by the Agent and the Banks.
(c) The Limited Waiver is specific in time and in intent and does not
constitute, nor should it be construed as constituting, except to the extent
expressly set forth herein, a waiver or modification of any term of, or right,
power, or privilege under, the Credit Agreement, the Loan Documents, or any
agreement, contract, indenture, document, or instrument mentioned therein.
Nothing herein constitutes a waiver of any Other Event of Default or of any
Event of Default based on future, post-January 31, 1994 non-compliance with
Section 7.17 of the Credit Agreement.
(d) The Limited Waiver does not preclude any exercise or further exercise
of any other right, power, or privilege under any Loan Document, including
without limitation, the taking of any action or remedy based upon any Other
Event of Default. Upon the expiration of the Limited Waiver, the Banks may
exercise any of their rights, remedies, powers, or privileges under the Credit
Agreement without limitation, including the ability to declare an Event of
Default premised upon the Borrower's failure to be in compliance with the
provisions of the Loan Documents as in effect prior to the giving of the Limited
Waiver provided for herein (as modified by the amendments set forth in this
Amendment).
2. The following defined terms are added to Section 1.01 of the Credit
Agreement, to be inserted alphabetically:
-2-
<PAGE>
"Issuing Bank" means, with respect to a Letter of Credit: (a) BofA,
------------
if the Borrower selects BofA to issue such Letter of Credit under this
Agreement; or (b) Such Bank, other than BofA, selected by the Borrower to issue
such Letter of Credit under this Agreement, if such Bank, in its sole
discretion, shall have agreed to issue such Letter of Credit.
"Letter of Credit" means any letter of credit that is issued pursuant
----------------
to this Agreement at the request of and for the account of any Borrower Entity
by an Issuing Bank, for the purpose of providing the principal payment mechanism
in connection with the purchase of Inventory from an overseas supplier, by a
Borrower Entity, in the ordinary course of business.
"Letter of Credit Usage" means, on any date of determination, the sum
----------------------
of (i) the maximum aggregate amount that is or at any time thereafter may become
available for drawing under all Letters of Credit then issued and outstanding,
plus (ii) the aggregate amount of all drawings under Letters of Credit honored
by the Issuing Bank and not theretofore reimbursed by the Borrower.
"Pro Rata Share" means, with respect to each Bank, as of any time of
--------------
determination, the fraction obtained by dividing such Bank's Revolving
Commitment by the Aggregate Revolving Commitment.
"Swing Line Advance" means any discretionary advance made by BofA to
------------------
the Borrower pursuant to Section 2.15.
"Total Utilization of Revolving Commitments" means, on any date of
------------------------------------------
determination, the sum of (i) the aggregate principal amount of Revolving Loans
outstanding, plus (ii) the aggregate principal amount of Swing Line Advances
outstanding, plus (iii) Letter of Credit Usage.
3. The following defined terms contained in Section 1.01 of the Credit
Agreement are amended in the respects noted:
(a) The definition of "Available Aggregate Revolving Commitment" is
----------------------------------------
amended and restated in its entirety to read as follows:
"Available Aggregate Revolving Commitment" means, at any given time,
----------------------------------------
the Aggregate Revolving Commitment then in effect minus the aggregate
Revolving Loans outstanding (provided that for the purpose of determining
the fee provided for in Section 2.10(b) hereof, Letter of Credit Usage
shall not be treated as Revolving Loans outstanding).
(b) The definition of "Bank" is amended and restated in its entirety
----
to read as follows:
"Bank" has the meaning specified in the introductory clause hereto.
----
Without limiting the generality of the
-3-
<PAGE>
foregoing, all references in the Loan Documents to "Bank" or "Banks"
includes each "Issuing Bank" acting in such capacity unless the context
clearly requires otherwise.
(c) The definition of "Consolidated Accounts Payable" is amended and
-----------------------------
restated in its entirety to read as follows:
"Consolidated Accounts Payable" means, as of any date of
-----------------------------
determination, the amount that would, in accordance with GAAP, and without
duplication, be included as the aggregate amount of accounts payable on a
consolidated balance sheet of the Company and its Subsidiaries; provided,
--------
however, that there shall be excluded from "Consolidated Accounts Payable" the
- - -------
aggregate amount of accounts payable that are supported by Letters of Credit.
(d) The definition of "Loan" is amended and restated in its entirety
----
to read as follows:
"Loan" means an extension of credit by a Bank to or for the benefit of
----
the Borrower pursuant to Article II (other than a Swing Line Advance prior
to the conversion thereof, if at all, into a Revolving Loan), and may be a
Base Rate Loan or Offshore Rate Loan. Where a Bank has made a payment to
an Issuing Bank on account of its participation in a Letter of Credit
following a draw thereunder that has not been fully reimbursed by the
Borrower, the extension of credit by such Bank to the Borrower resulting
from the making of such payment shall be deemed a Loan for the purposes of
all provisions of the Loan Documents, unless the context clearly requires
otherwise.
(e) The definition of "Loan Documents" is amended and restated in its
--------------
entirety to read as follows:
"Loan Documents" means this Agreement, the Notes, the Security
--------------
Agreements, and all documents, certificates, or instruments delivered to
the Agent, any Issuing Bank, or any Bank in connection therewith.
(f) The definition of "Majority Banks" is amended and restated in its
--------------
entirety to read as follows:
"Majority Banks" means, at any time, Banks then holding at least 66-
--------------
2/3% of the Aggregate Revolving Commitment, or, if the Aggregate Revolving
Commitment is zero, Banks then holding at least 66-2/3% of the combined (a)
aggregate outstanding Revolving Loans, and (b) aggregate outstanding Letter
of Credit Usage (giving effect to the participations therein provided for
herein).
(g) The definition of "Obligations" is amended and restated in its
-----------
entirety to read as follows:
-4-
<PAGE>
"Obligations" means all Loans, and other Indebtedness, advances,
-----------
debts, liabilities, obligations, covenants and duties owing by the Borrower
to any Bank, the Agent, any Issuing Bank, or any other Person required to
be indemnified under any Loan Document, of any kind or nature, present or
future, whether or not evidenced by any note, guaranty or other instrument,
arising under this Agreement or under any other Loan Document (including
without limitation interest that accrues after the commencement of any
Insolvency Proceeding, or that otherwise would accrue after the
commencement of any Insolvency Proceeding but for the effect of the
Bankruptcy Code or any like statute), whether or not for the payment of
money, whether arising by reason of an extension of credit, loan, guaranty,
indemnification, or the issuance of a Letter of Credit or the honoring of a
draw thereunder, or in any other manner, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due or to
become due, now existing or hereafter arising and however acquired.
4. Section 2.01 of the Credit Agreement is amended and restated in its
entirety to read as follows:
"2.01 Amounts and Terms of Revolving Commitments. Each Bank severally
------------------------------------------
agrees, on the terms and conditions hereinafter set forth, to make Loans to the
Borrower (each such Loan, a "Revolving Loan") from time to time on any Business
Day during the period from the Closing Date to the Revolving Termination Date,
in an aggregate amount not to exceed at any time outstanding the amount set
forth opposite the Bank's name in Schedule 2.01 under the heading "Revolving
Commitment" (such amount as the same may or shall be reduced pursuant to Section
2.05 or as a result of one or more assignments pursuant to Section 10.08, the
Bank's "Revolving Commitment"); provided, however, that, after giving effect to
-------- -------
any Borrowing of Revolving Loans, Total Utilization of Revolving Commitments
shall not exceed the lesser of the Aggregate Revolving Commitment and the
Borrowing Base. Anything in this Agreement (except for the next following
paragraph of this Section) to the contrary notwithstanding, any Revolving Loan
or portion thereof at any time outstanding hereunder that was not made,
converted to, or continued as an Offshore Rate Loan strictly in compliance with
the terms, provisions, and conditions hereof shall be a Base Rate Loan.
Without limiting the generality of the foregoing, and subject to the terms,
provisions, and conditions contained herein, on the Closing Date the principal
amount of all loans outstanding under the Old Credit Agreement and under the
Existing Indebtedness shall be converted into, and shall be deemed to be, Base
Rate Loans hereunder, and the Banks, acting through the Agent and at the Agent's
direction, shall make such intra-Bank adjustments, by means of transfers through
the Agent, to their respective outstandings, that, after giving effect to such
conversion on the Closing Date, and after giving effect to any new Borrowings,
if any, funded on
-5-
<PAGE>
the Closing Date, the aggregate outstanding Revolving Loans held by each Bank
shall bear the same relationship to such Bank's Revolving Commitment as the
relationship of the aggregate outstanding Revolving Loans held by all of the
Banks to the Aggregate Revolving Commitment. The Agent, the Banks, and the
Borrower agree that any amount advanced by any Bank in connection with such
intra-Bank adjustments shall be a Loan hereunder, and any amount received by any
Bank in connection with such intra-Bank adjustments shall be a payment of the
Loans of such Bank outstanding hereunder.
Within the limits of each Bank's Revolving Commitment, and subject to the
other terms, provisions, and conditions hereof, including the limitation that
Total Utilization of Revolving Commitments shall not in the aggregate exceed the
Borrowing Base, the Borrower may borrow under this Section 2.01, repay pursuant
to Section 2.06, and reborrow pursuant to this Section 2.01."
5. Section 2.05 (a) of the Credit Agreement is amended and restated in its
entirety to read as follows:
"(a) The Borrower may, upon not less than five Business Days' prior
notice to the Agent, terminate the Aggregate Revolving Commitment or permanently
reduce all or a portion of the Aggregate Revolving Commitment by an aggregate
minimum amount of $1,000,000 or any multiple of $1,000,000; provided that no
--------
such reduction or termination shall be permitted if, after giving effect thereto
and to any prepayments of the Loans made on the effective date thereof, the then
Total Utilization of Revolving Commitments would exceed the amount of the
Aggregate Revolving Commitment then in effect and, provided, further, that once
-------- -------
reduced in accordance with this Section 2.05, the Aggregate Revolving Commitment
may not be increased. Any reduction of the Aggregate Revolving Commitment shall
be applied to each Bank's Revolving Commitment in accordance with such Bank's
Commitment Percentage. All accrued commitment fees to, but not including the
effective date of any reduction or termination of Revolving Commitments, shall
be paid on the effective date of such reduction or termination."
6. Section 2.08(b) of the Credit Agreement is amended and restated in its
entirety to read as follows:
"(b) Anything herein to the contrary notwithstanding, at no time shall
Total Utilization of Revolving Commitments exceed the Borrowing Base then in
existence, and, if at any time there is such an excess, immediately thereupon
(and in any event by 11:00 a.m. San Francisco time the next Business Day) the
Borrower shall repay Revolving Loans, and/or advances made pursuant to Section
2.15 hereof, in an amount sufficient to eliminate such excess."
7. Section 2.08(c) of the Credit Agreement is amended and restated in its
entirety to read as follows:
-6-
<PAGE>
"(c) In connection with any reduction of the Aggregate Revolving
Commitment, if Total Utilization of Revolving Commitments thereafter would
exceed the Aggregate Revolving Commitment, the Borrower immediately and
concurrently with such reduction (and in any event by 11:00 a.m. San Francisco
time on the Business Day of such reduction, or by 11:00 a.m. San Francisco time
on the next following Business Day if the date of such reduction is not a
Business Day) shall repay Revolving Loans, and/or advances made pursuant to
Section 2.15 hereof, in an amount sufficient to eliminate such excess."
8. A new Section 2.16 is added to the Credit Agreement, to read as follows:
"2.16 Commercial Letters of Credit.
----------------------------
(a) Commercial Letters of Credit. In addition to the Borrower
----------------------------
requesting that the Banks make Loans, the Borrower may request, in accordance
with the provisions of this Section 2.16(a), that on and after the Closing Date
an Issuing Bank issue Letters of Credit for the account of the Borrower;
provided that the Borrower shall not request and any Issuing Bank shall not
- - --------
issue any Letter of Credit if: (i) after giving effect to such issuance, the
Total Utilization of Revolving Commitments would exceed the lesser of the
Aggregate Revolving Commitment then available or the then applicable Borrowing
Base (as the Aggregate Revolving Commitment may be reduced or limited from time
to time pursuant to the provisions hereof); (ii) after giving effect to such
issuance, Letter of Credit Usage in respect of all Letters of Credit would
exceed $10,000,000; (iii) any Letter of Credit shall have an expiration date
later than the Revolving Termination Date; and (iv) any Letter of Credit shall
have an expiration date more than 180 days after its date of issuance. The
issuance of any Letter of Credit in accordance with the provisions of this
section shall be given effect in the calculation of the Total Utilization of
Revolving Commitments and shall require the satisfaction of each condition set
forth in Section 4.03.
Immediately upon the issuance of each Letter of Credit by the Issuing
Bank, each Bank shall be deemed to, and hereby agrees to, have irrevocably
purchased from the Issuing Bank a participation in such Letter of Credit and
drawings thereunder in an amount equal to such Bank's Pro Rata Share of the
maximum amount that is or at any time may become available to be drawn
thereunder.
(b) Notice of Issuance. Whenever the Borrower desires the issuance
------------------
of a Letter of Credit, it shall make request therefor to the Issuing Bank (with
a copy to the Agent) at least two Business Days, or such shorter period as may
be agreed to by the Issuing Bank in any particular instance, in advance of the
proposed date of issuance, specifying (i) the proposed date of issuance
-7-
<PAGE>
(which shall be a business day under the laws of the jurisdiction of the Issuing
Bank), (ii) the face amount of the Letter of Credit, (iii) the expiration date
of the Letter of Credit, and (iv) the name and address of the beneficiary.
Together with such request for the issuance of a Letter of Credit,
Borrower shall deliver to the Issuing Bank and the Agent a notice which shall
certify that (i) the Letter of Credit requested to be issued, when added to the
then Total Utilization of Revolving Commitments, will not exceed the lesser of
the Aggregate Revolving Commitment and the Borrowing Base then available (as the
Aggregate Revolving Commitment may be reduced or limited from time to time
pursuant to the provisions hereof), (ii) Sections 4.03(b) & (c) are satisfied on
and as of the date of delivery of such notice, and (iii) when the requested
Letter of Credit is issued, total Letter of Credit Usage will not exceed
$10,000,000, and shall deliver to the Issuing Bank an executed application for
such Letter of Credit in the form customarily required by the Issuing Bank for
the issuance of commercial letters of credit, and specify a precise description
of the documents and the verbatim text of any certificate to be presented by the
beneficiary which, if presented by the beneficiary prior to the expiration date
of the Letter of Credit, would require the Issuing Bank to make payment under
the Letter of Credit; provided that the Issuing Bank, in its reasonable
--------
judgment, may require changes in any such documents and certificates. Any
Letter of Credit shall be issued in such form and format as may be required by
the Issuing Bank, consistent with its customary requirements for similar letters
of credit. In determining whether to pay under any Letter of Credit, the
Issuing Bank shall be responsible only to determine that the documents and
certificates required to be delivered under that Letter of Credit have been
delivered and that they comply on their face with the requirements of that
Letter of Credit.
Upon receipt by the Issuing Bank of such notice and such other
documents from the Borrower requesting the issuance of a Letter of Credit, and
upon compliance with all applicable provisions and conditions of this Agreement
(including, without limitation, with respect to any Issuing Bank that is a Bank
other than BofA, the requirement that such Bank in its sole discretion shall
have agreed to issue such Letter of Credit), the Issuing Bank shall issue such
Letter of Credit and shall notify the Borrower and the Agent of such issuance.
If the Issuing Bank for any reason declines to issue a Letter of Credit, the
Issuing Bank shall promptly so notify the Borrower and the Agent and no Letter
of Credit will be issued. On a semi-monthly basis, each Issuing Bank shall
notify the Agent, which in turn shall notify each Bank, of the amount of each
such Bank's respective participation in the Letters of Credit issued by such
Issuing Bank, determined in accordance with Section 2.16(d).
(c) Payment of Amounts Drawn Under Letters of Credit. In the event
------------------------------------------------
of any request for drawing under any Letter of Credit
-8-
<PAGE>
by the beneficiary thereof, the Issuing Bank shall immediately (and in any event
no later than one Business Day prior to the date of payment under such Letter of
Credit) notify the Borrower and the Agent, and the Borrower shall reimburse such
Issuing Bank on the day on which such drawing is honored in an amount in same
day funds equal to the amount of such drawing. If the Borrower shall fail to
reimburse such Issuing Bank on the date of any payment under a Letter of Credit
issued by it in an amount equal to the amount of such payment, the Issuing Bank
shall so advise the Agent as provided in subsection (d) below, and (i) the
Borrower shall be deemed to have given a Notice of Borrowing to the Agent
requesting the Banks to make Revolving Loans that are Base Rate Loans on the
date on which such drawing is honored in an amount equal to the smallest
integral multiple of $1,000,000 that is not less than the amount of such drawing
(unless the funding of such amount would cause Total Utilization of Revolving
Commitments to exceed the Aggregate Revolving Commitment, in which event the
requested amount of Revolving Loans shall be the maximum amount that can be
funded without causing Total Utilization of Revolving Commitments to exceed the
Aggregate Revolving Commitment), and (ii) subject to the satisfaction or waiver
of the applicable conditions specified herein for the making of Revolving Loans
(except that minimum dollar limitations on Borrowings shall not be applicable),
the Banks shall, on the Business Day next following the date of such drawing,
make Revolving Loans that are Base Rate Loans in such aggregate amount
determined as set forth above, which shall be applied directly by the Agent to
reimburse such Issuing Bank for the amount of such drawing together with such
accrued interest thereon, with the balance, if any, to the Borrower; provided,
--------
that, if for any reason proceeds of Revolving Loans are not received by such
Issuing Bank on such date in an amount equal to the amount of such drawing
together with accrued interest thereon, the Borrower shall reimburse such
Issuing Bank, within one Business Day of the date of such drawing, in the amount
of such drawing less the amount of such Revolving Loans, if any, that are so
received, plus accrued interest thereon. In such event, if the Borrower fails
to reimburse such Issuing Bank in such amount within one Business Day of the
date of such drawing, such failure shall be deemed to be an Event of Default
under Section 8.01(a)(i) hereof. Interest on all amounts not reimbursed to such
Issuing Bank on the date of such drawing shall accrue at the rates set forth
herein for Base Rate Loans (including, if and as applicable, past due or default
rates).
(d) Payment by Banks. If the Borrower shall fail to reimburse an
----------------
Issuing Bank as provided in Section 2.16(c) in an amount equal to the amount of
any drawing honored by such Issuing Bank under a Letter of Credit issued by it
together with accrued interest thereon, such Issuing Bank shall promptly notify
the Lenders by 3:00 p.m. (San Francisco time) of the unreimbursed amount of such
drawing together with accrued interest thereon and of each Bank's respective
participation therein based on each Bank's Pro Rata Share of the Aggregate
Revolving Commitment. Each Bank shall make available to the Agent, for
distribution to such
-9-
<PAGE>
Issuing Bank, an amount equal to its respective participation, in same day
funds, at the office of the Agent specified in such notice, not later than 10:00
A.M. (San Francisco time) on the Business Day next following the date notified
by the Issuing Bank. The day of payment by each Bank to the Agent, for
distribution to such Issuing Bank, and the day of notice by such Issuing Bank to
each Lender each shall be both a Business Day and a business day under the laws
of the jurisdiction of each such Bank. If any Bank fails to make available to
the Agent, for distribution to such Issuing Bank, the amount of such Bank's
participation in such Letter of Credit as provided in this subsection, such
Issuing Bank, or the Agent on its behalf, shall be entitled to recover such
amount on demand from such Bank, together with interest (to the extent such
interest is not received from the Borrower) until such amount is recovered at
the Federal Funds Rate. Nothing in this subsection shall be deemed to prejudice
the right of any Bank to recover from an Issuing Bank any amounts made available
by such Bank to such Issuing Bank pursuant to this subsection if it is
determined by a final judgment of a court of competent jurisdiction that the
payment with respect to a Letter of Credit by such Issuing Bank in respect of
which payment was made by such Bank constituted gross negligence or willful
misconduct on the part of such Issuing Bank. Each Issuing Bank shall distribute
to the Agent, for distribution to each other Bank which has paid all amounts
payable by it under this subsection with respect to any Letter of Credit issued
by such Issuing Bank, such other Bank's Pro Rata Share of all payments received
by such Issuing Bank from any Borrower Entity in reimbursement of drawings
honored by such Issuing Bank under such Letter of Credit if and when such
payments are received. The Borrower shall be liable to the Banks for all of the
principal and interest made available by the Banks to any Issuing Bank pursuant
to this subsection and interest on all amounts made available by Banks to any
Issuing Bank shall accrue at the rates set forth herein for Base Rate Loans
(including, if and as applicable, past due or default rates). All such
principal and interest amounts shall be part of the Obligations.
(e) Compensation. The Borrower agrees to pay the following amounts
------------
with respect to each Letter of Credit issued on behalf of Borrower:
(1) to the Agent, monthly in arrears, for distribution as provided
below, a letter of credit fee equal to the greater of $125 or 1/4% of the
maximum amount available to be drawn under such Letter of Credit;
(2) to the Agent, for distribution as provided below, with respect to
drawings made under any Letter of Credit, interest, payable on demand, on
the amount paid by the Issuing Bank in respect of each such drawing from
the date of the drawing through the date such amount is reimbursed by the
Borrower (including any such reimbursement out of the proceeds of Revolving
Loans pursuant to Section 2.16(c)) at a rate
-10-
<PAGE>
equal to the rate applicable to Base Rate Loans as the same may vary from
time to time (giving effect, if and as applicable, to past due or default
rates provided for herein); and
(3) to the Issuing Bank, issuance, opening, negotiation, amendment,
presentation, administrative, documentary, and processing charges and other
charges in accordance with the Issuing Bank's standard schedule for such
charges from time to time in effect or as otherwise mutually agreed.
On a monthly basis upon receipt by the Agent of any amount described
in clauses (1) and (2) of this subsection, the Agent shall distribute to each
Bank its Pro Rata Share of such amount. All amounts provided for by this
subsection are payable notwithstanding any cancellation or prepayment of any
Letter of Credit issued hereunder.
(f) Obligations Absolute. With respect to each Letter of Credit, the
--------------------
obligation of the Borrower to reimburse the Issuing Bank for payments made by
the Issuing Bank with respect to drawings made under such Letter of Credit, and,
subject to the express provisions of Section 2.16(d), the obligations of the
Banks under Section 2.16(d), shall be unconditional and irrevocable and shall be
paid strictly in accordance with the terms of this Agreement under all
circumstances, including, without limitation, the following circumstances:
i) any lack of validity or enforceability of such Letter of Credit;
ii) the existence of any claim, set-off, recoupment, defense, or
other right that any Borrower Entity or any Lender may have at any time
against any beneficiary or any transferee of any Letter of Credit (or any
persons or entitles for whom any such transferee may be acting), any Lender
or any other Person, whether in connection with this Agreement, the
transactions contemplated herein or any unrelated transaction (including
any underlying transaction between any Borrower Entity or any of its
Subsidiaries and the beneficiary for which the Letter of Credit was
procured);
iii) any draft, demand, certificate, or any other document presented
under such Letter of Credit proving to be forged, fraudulent, invalid, or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
iv) payment by the Issuing Bank under such Letter of Credit against
presentation of a demand, draft, or certificate or other document that does
not comply with the terms of such Letter of Credit; provided that such
--------
payment does not constitute gross negligence or willful misconduct of the
-11-
<PAGE>
Issuing Bank, as determined by a final judgment of a court of competent
jurisdiction;
v) the occurrence of any Material Adverse Effect;
vi) any breach of this Agreement or any other Loan Document by any
Borrower Entity, the Agent or any Bank, other than a breach involving the
wrongful issuance or honor of such Letter of Credit by the Issuing Bank
under circumstances where issuance or payment by the Issuing Bank
constituted gross negligence or willful misconduct, as determined by a
final judgment of a court of competent jurisdiction;
vii) the fact that an Event of Default shall have occurred and be
continuing; or
viii) any other circumstance of happening whatsoever that is similar
to any of the foregoing.
(g) Indemnification; Nature of Issuing Bank's Duties. In addition to
------------------------------------------------
amounts payable as elsewhere provided in this Section 2.16, the Borrower hereby
agree to protect, indemnify, pay, and hold each Issuing Bank harmless from and
against any and all claims, demands, liabilities, damages, losses, costs,
charges, and expenses (including reasonable out-of-pocket attorneys' fees and
costs) that such Issuing Bank may incur or be subject to as a consequence,
direct or indirect, of (i) the issuance of any Letter of Credit, or (ii) the
failure of such Issuing Bank to honor a drawing under any Letter of Credit as a
result of any act or omission, whether rightful or wrongful, of any present or
future de jure or de facto government or governmental authority (all such acts
-- ---- -- -----
or omissions are herein called "Government Acts").
As between the Borrower and any Issuing Bank, the Borrower assumes all
risks of the acts and omissions of, or misuse of the Letters of Credit issued by
such Issuing Bank by, the respective beneficiaries of such Letters of Credit.
In furtherance and not in limitation of the foregoing, subject to the last
paragraph of this Section 2.16(g), the Issuing Bank shall not be responsible:
(i) for the form, validity, sufficiency, accuracy, genuineness, or legal effect
of any document submitted by any Person in connection with the application for
and issuance of any Letter of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent, or forged;
(ii) for the validity or sufficiency of any instrument transferring or assigning
or purporting to transfer or assign any such Letter of Credit or the rights or
benefits thereunder or proceeds thereof, in whole or in part, which may prove to
be invalid or ineffective for any reason, or for the identify of any purported
transferee or assignee of any beneficiary thereof; (iii) for failure of the
beneficiary of any such Letter of Credit to comply fully with conditions
required in order to draw upon such Letter of Credit; (iv) for errors,
omissions, interruptions, or
-12-
<PAGE>
delays in transmission or delivery of any messages, by mail, cable, telegraph,
telex, or otherwise, whether or not they be in cipher; (v) for errors in
interpretation of technical terms; (vi) for any loss or delay in the
transmission or otherwise of any document required in order to make a drawing
under any such Letter of Credit or of the proceeds thereof; (vii) for the
misapplication by the beneficiary of any such Letter of Credit of the proceeds
of any drawing under such Letter of Credit; and (viii) for any consequences
arising from causes beyond the control of the Issuing Bank, including, without
limitation, any Government Acts. None of the above shall affect, impair, or
prevent the vesting of any of the Issuing Bank's rights or powers hereunder.
In furtherance and extension and not in limitation of the specific
provisions hereinabove set forth, any action taken or omitted to be taken by the
Issuing Bank under or in connection with the Letters of Credit issued by it or
the related certificates, if taken or omitted in good faith, and to the extent
not with gross negligence or willful misconduct as determined by a final
judgment of a court of competent jurisdiction, shall not put such Issuing Bank
under any resulting liability to the Borrower or any of its Subsidiaries.
Notwithstanding anything to the contrary contained in this Section
2.16(g), the Borrower shall have no obligation to indemnify any Issuing Bank in
respect of any liability incurred by such Issuing Bank arising out of the gross
negligence or willful misconduct of such Issuing Bank, as determined by a final
judgment of a court of competent jurisdiction.
9. Section 3.03 of the Credit Agreement is amended and restated in its
entirety to read as follows:
3.03 Increased Costs and Reduction of Return.
----------------------------------------
(a) If any Bank or Issuing Bank shall determine that, due to either
(i) the introduction of or any change in or in the interpretation of any law or
regulation or (ii) the compliance with any guideline or request from any central
bank or other Governmental Authority (whether or not having the force of law),
there shall be any increase in the cost to such Bank or Issuing Bank of agreeing
to make or making, funding or maintaining any Offshore Rate Loans, or issuing or
honoring Letters of Credit, then the Borrower shall be liable for, and shall
from time to time, upon demand therefor by such Bank (with a copy of such demand
to the Agent), pay to such Bank, additional amounts as are sufficient to
compensate such Bank for such increased costs.
(b) If any Bank or Issuing Bank shall have determined that (i) the
introduction of any Capital Adequacy Regulation, (ii) any change in any Capital
Adequacy Regulation, (iii) any change in the interpretation or administration of
any Capital Adequacy Regulation by any central bank or other Governmental
Authority
-13-
<PAGE>
charged with the interpretation or administration thereof, or (iv) compliance by
the Bank or Issuing Bank (or its Lending Office) or any corporation controlling
the Bank or Issuing Bank, with any Capital Adequacy Regulation, affects or would
affect the amount of capital required or expected to be maintained by the Bank
or Issuing Bank or any corporation controlling the Bank or Issuing Bank and
(taking into consideration such Bank's or Issuing Bank's or such corporation's
policies with respect to capital adequacy and such Bank's or Issuing Bank's
desired return on capital) determines that the amount of such capital is
increased as a consequence of its Revolving Commitment, Revolving Loans, Letters
of Credit or participations therein, or obligations under this Agreement, then,
upon demand of such Bank or Issuing Bank (with a copy to the Agent), the
Borrower shall upon demand pay to the Bank or Issuing Bank, from time to time as
specified by the Bank or Issuing Bank, additional amounts sufficient to
compensate the Bank or Issuing Bank for such increase."
10. A new Section 4.03 is added to the Credit Agreement, to read as follows:
"4.03 Conditions to All Letters of Credit. The issuance of any Letter of
-----------------------------------
Credit by an Issuing Bank hereunder is subject to prior or concurrent
satisfaction of all the following conditions:
(a) Notice. The Issuing Bank (and, to the extent applicable, the
------
Agent) shall have received, in accordance with the provisions of Section
2.16(b), a notice requesting the issuance of such Letter of Credit, an executed
application for such Letter of Credit in the form customarily required by the
Issuing Bank for the issuance of letters of credit, all other information
specified in Section 2.16(b), and such other documents as the Issuing Bank
reasonably may require in connection with the issuance of such Letter of Credit.
(b) Continuation of Representations and Warranties. The
----------------------------------------------
representations and warranties made by the Borrower contained in Article V or
contained in the Security Agreements shall be true and correct in all material
respects on and as of the date of such issuance of a Letter of Credit with the
same effect as if made on and as of such issuance of a Letter of Credit (except
to the extent such representations and warranties expressly refer to an earlier
date, in which case they shall be true and correct as of such earlier date);
(c) No Existing Default. No Default or Event of Default shall exist
-------------------
or shall result from such issuance of a Letter of Credit; and
(d) Satisfaction of Other Conditions. Any other applicable
--------------------------------
conditions to the issuance of such Letter of Credit contained in Section 2.16
shall have been satisfied."
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<PAGE>
11. Section 8.02(b) of the Credit Agreement is amended and restated in its
entirety to read as follows:
"(b) (i) demand that the Borrower hypothecate cash or cash equivalents
in an amount equal to the Letter of Credit Usage and, upon such demand, Borrower
agrees that it will hypothecate such amount, and (ii) declare the unpaid
principal amount of all outstanding Loans, all interest accrued and unpaid
thereon, an amount equal to Letter of Credit Usage (whether or not any
beneficiary under any Letter of Credit shall have presented, or shall be
entitled at such time to present, the drafts and other documents required to
draw under such Letter of Credit, and which amount, if received from the
Borrower, may be applied thereto or held as cash collateral therefor), and all
other amounts owing or payable hereunder or under any other Loan Document to be
immediately due and payable; without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived by the Borrower;
and"
12. Exhibit A to the Credit Agreement is amended and restated in its entirety
to read as set forth in the revised Exhibit A attached hereto and incorporated
herein by this reference as though set forth in full.
13. Exhibit B to the Credit Agreement is amended and restated in its entirety
to read as set forth in the revised Exhibit A attached hereto and incorporated
herein by this reference as though set forth in full.
14. This Amendment shall become effective only upon the satisfaction of each of
the following conditions precedent:
(a) The Agent shall have received from each Borrower Entity, each Bank,
and the Agent, an original of, or a facsimile of, a counterpart signature
page to this Amendment signed by a duly authorized representative of such
Person (to be followed promptly thereafter by the delivery by each such
Person to the Agent of sixteen (16) original signed counterpart signature
pages to this Amendment, for distribution by the Agent as appropriate).
(b) The Agent shall have received from the Borrower an original of, or a
facsimile of, each of the resolutions of the board of directors of each of
the Borrower Entities approving and authorizing the execution, delivery,
and performance by such Person of this Amendment, in each case duly
certified by the corporate secretary of such Person as having been adopted
at a meeting of the board of directors of such Person or by unanimous
written consent of the directors of such Person without a meeting, as being
in full force and effect, and as not having been rescinded or superseded
(to be followed promptly thereafter by the delivery by each such Person to
the Agent of sixteen (16) original counterparts of each such set
-15-
<PAGE>
of certified resolutions, for distribution by the Agent as appropriate).
(c) The Agent shall have received from in-house and outside counsel to the
Borrower favorable written legal opinions, in form and content acceptable
to the Agent and its counsel, opining as to the due authorization,
execution, and delivery of this Amendment, and as to the enforceability of
this Amendment and of the Credit Agreement as amended hereby.
(d) All representations and warranties of the Borrower contained in
Section 15 of this Amendment shall be true and correct as of the date that
the conditions set forth in subsections (a), (b),and (c) of this section
are satisfied.
15. The Borrower represents and warrants to the Agent and each Bank that:
(a) The Company and each of its Subsidiaries:
(i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation; and
(ii) has the power and authority and all necessary governmental
licenses, authorizations, consents, and approvals, if any, to execute,
deliver, and perform its obligations under this Amendment.
(b) The execution, delivery, and performance by the Company and its
Subsidiaries of this Amendment have been duly authorized by all necessary
corporate action, and do not and will not:
(i) contravene the terms of any of that Person's Organization
Documents;
(ii) conflict with or result in any breach or contravention of, or
the creation of any Lien under, any document evidencing any
Contractual Obligation to which such Person is a party or any order,
injunction, writ, or decree of any Governmental Authority to which
such Person or its Property is subject; or
(iii) violate any Requirement of Law.
(c) No approval, consent, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority is necessary or
required in connection with the execution, delivery, or performance by, or
enforcement against, the Company or any of its Subsidiaries of this
Amendment.
-16-
<PAGE>
(d) This Amendment, and the Credit Agreement as amended hereby, constitute
the legal, valid, and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms.
(e) After giving effect to the Limited Waiver, no Default or Event of
Default has occurred and is continuing.
(f) The representations and warranties set forth in Article V of the Credit
Agreement are true and correct in all respects on and as of the date of
this Amendment as though made on and as of such date.
16. This Amendment is a Loan Document. Except as expressly amended hereby, and
except for the effect of the Limited Waiver, the Credit Agreement remains in
full force and effect. The Obligations continue to be secured by the
Collateral.
17. The provisions of this Amendment shall be binding upon and inure to the
benefit of the Borrower Entities, the Banks, the Agent, and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights or obligations under this Amendment without the prior written
consent of the Agent and each Bank.
18. This Amendment may be executed by one or more of the parties to this
Amendment in any number of separate counterparts, each of which, when so
executed, shall be deemed an original, and all of said counterparts taken
together shall be deemed to constitute but one and the same instrument.
19. The illegality or unenforceability of any provision of this Amendment shall
not in any way affect or impair the legality or enforceability of the remaining
provisions of this Amendment.
20. This Amendment is made and entered into for the sole protection and legal
benefit of the Borrower, the Banks, and the Agent, and their permitted
successors and assigns, and no other Person shall be a direct or indirect legal
beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this Amendment. Neither the Agent nor any Bank shall have any
obligation to any Person not a party to this Amendment.
21. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE BANKS SHALL
RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
22. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AMENDMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE
NORTHERN DISTRICT OR CENTRAL DISTRICT OF CALIFORNIA, AND BY EXECUTION AND
DELIVERY OF THIS AMENDMENT, EACH OF THE BORROWER, THE AGENT, AND THE BANKS
CONSENTS, FOR ITSELF AND
-17-
<PAGE>
IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS.
EACH OF THE BORROWER, THE AGENT, AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION,
INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM
-----
NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION
- - --------------
OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AMENDMENT OR ANY DOCUMENT
RELATED HERETO. THE BORROWER, THE AGENT, AND THE BANKS EACH WAIVE PERSONAL
SERVICE OF ANY SUMMONS, COMPLAINT, OR OTHER PROCESS, WHICH MAY BE MADE BY ANY
OTHER MEANS PERMITTED BY CALIFORNIA LAW.
23. THE BORROWER, THE BANKS, AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS
TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF
OR RELATED TO THIS AMENDMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ANY
ACTION, PROCEEDING, OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE
PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT
CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER, THE BANKS, AND THE AGENT EACH
AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL
WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT
THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION
AS TO ANY ACTION, COUNTERCLAIM, OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN
PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AMENDMENT OR ANY
PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS, OR MODIFICATIONS TO THIS AMENDMENT.
24. This Amendment, together with the other Loan Documents, embodies the entire
agreement and understanding among the Borrower, the Banks, and the Agent, and,
except as otherwise provided in the Credit Agreement, supersedes all prior or
contemporaneous Amendments and understandings of such Persons, verbal or
written, relating to the subject matter hereof and thereof, except for the
letter referenced in subsection 2.10(a) of the Credit Agreement, and except for
any prior arrangements made with respect to the payment by the Borrower of (or
any indemnification for) any fees, costs, or expenses payable to or incurred (or
to be incurred) by or on behalf of the Agent or the Banks. The foregoing
notwithstanding, this Amendment and the Loan Documents do not supersede any
provision or provisions of the Old Credit Amendment or of any of the Old Loan
Documents that by its or their terms survive the termination of the Old Credit
Amendment or such other Old Loan Documents (such as, without limitation, any
ongoing obligation to indemnify or reimburse for expenses), and, in addition,
this Amendment and the Loan Documents do not supersede or render unenforceable
any unpaid obligations, if any, of the Borrower to pay accrued interest, fees,
expenses, or other amounts payable under the Old Credit Amendment or the Old
Loan Documents to the extent that such obligations were not paid on or before
the Closing Date, and to the extent that such obligations were not funded by or
converted into Revolving Loans outstanding under the Credit Agreement.
-18-
<PAGE>
25. This Amendment is the result of negotiations between and has been
reviewed by counsel to the Agent, the Borrower, and other parties, and is the
product of all parties hereto. Accordingly, this Amendment shall not be
construed against the Banks or the Agent merely because of the Agent's or Banks'
involvement in the preparation of such documents and agreements.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered in Los Angeles by their proper and duly authorized
officers as of the day and year first above written.
HOUSE OF FABRICS, INC.
By: _________________________
Donald W. Boyer
Senior Vice President
FABRICLAND, INC.
By: ________________________
Donald W. Boyer
Senior Vice President
SOFRO FABRICS, INC.
By: ________________________
Donald W. Boyer
Senior Vice President
HOUSE OF FABRICS OF SOUTH CAROLINA, INC.
By: ________________________
Donald W. Boyer
Senior Vice President
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<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as the Agent
By: ________________________
Name: Peggy Fujimoto
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a Bank
By: ________________________
Name: Dennis V. Arriola
Title: Vice President
THE DAIWA BANK LIMITED,
LOS ANGELES AGENCY
By: ________________________
Name: Mr. Hidehiro Ishibashi
Title: Deputy General Manager
FIRST INTERSTATE BANK OF
CALIFORNIA
By: ________________________
Name: Fred Dooman
Title: Vice President
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: ________________________
Name: Dennis Snyder
Title: Vice President
THE FUJI BANK, LTD., LOS ANGELES AGENCY
By: ________________________
Name: Mr. Yasuji Ikawa
Title: Joint General Manager
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<PAGE>
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, LOS ANGELES AGENCY
By: ________________________
Name: Mr. Juichi Tsuda
Title: General Manager
ISTITUTO BANCARIO SAN PAOLO
DI TORINO SpA, LOS ANGELES BRANCH
By: ________________________
Name: Roberto Gorlier
Title: Branch Manager
By: ________________________
Name: Donald W. Brown
Title: First Vice President
NBD BANK, NATIONAL ASSOCIATION
By: ________________________
Name: Mary Lu Cramer
Title: Second Vice President
SANWA BANK CALIFORNIA
By: ________________________
Name: Kevin D. Kelly
Title: Vice President
SOCIETE GENERALE
By: ________________________
Name: Donald L. Schubert
Title: Vice President
THE BANK OF CALIFORNIA, N.A.
By: ________________________
Name: Lynn Vine
Title: Vice President
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<PAGE>
UNITED STATES NATIONAL BANK OF OREGON
By: ________________________
Name: Elizabeth Hengeveld
Title: Vice President
-22-
<PAGE>
THIRD AMENDMENT TO
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
--------------------------
This THIRD AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
(herein this "Amendment") is entered into as of May 12, 1994, among HOUSE OF
FABRICS, INC., a Delaware corporation (the "Company" or "HF"), FABRICLAND,
INC., an Oregon corporation and a Subsidiary of the Company ("FL"), HOUSE OF
FABRICS OF SOUTH CAROLINA, INC., a South Carolina corporation and a Subsidiary
of the Company ("HS"), SOFRO FABRICS, INC., a Nevada corporation and a
Subsidiary of the Company ("SF"; HF, FL, HS, and SF being hereinafter
collectively referred to as the "Borrower", and each individually as a
"Borrower" or as a "Borrower Entity"), the several financial institutions party
to this Amendment, and Bank of America National Trust and Savings Association,
as agent for the Banks and the Issuing Banks. All terms used herein and not
otherwise defined herein that are defined in the Credit Agreement (as defined
below), shall have the meaning ascribed thereto in the Credit Agreement when
used herein.
WHEREAS, the Agent and the Banks heretofore have made available to the
Borrower a secured revolving credit facility, pursuant to an Amended and
Restated Revolving Credit Agreement dated as of November 30, 1993, as amended by
that certain First Amendment to Amended and Restated Revolving Credit Agreement,
dated as of February 16, 1994, and as further amended by that certain Second
Amendment to Amended and Restated Revolving Credit Agreement, and Limited
Waiver, dated as of March 22, 1994 (such Amended and Restated Revolving Credit
Agreement, as so amended, and as the same may from time to time further be
amended (including, without limitation, the amendments effected by this
Amendment), modified, supplemented, renewed, or restated, herein is referred to
as the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement in the
manner expressly set forth in this Amendment;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained herein, the parties hereto hereby amend the Credit Agreement
as follows, and the parties hereto hereby agree as follows:
1. The following defined terms are added to Section 1.01 of the Credit
Agreement, to be inserted alphabetically:
"Adjustment Integer" means, as of any date of determination, the
------------------
unique non-negative integer that is the greatest integer that is less than
or equal to the then applicable Adjustment Rational Number.
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<PAGE>
"Adjustment Rational Number" means, as of any date of determination, the
--------------------------
unique non-negative rational number that is equal to the quotient of the
then extant Cumulative Relevant Designated Net Cash Proceeds divided by
$500,000.
"Cumulative Adjustment" means, as of any date of determination, the
---------------------
amount, expressed as a percentage, equal to 0.15% multiplied by the then
applicable Adjustment Integer.
"Cumulative Relevant Designated Net Cash Proceeds" means, as of any
------------------------------------------------
date of determination, the unique non-negative dollar amount equal to the
cumulative sum of mandatory payments: (a) That have come due on or after
the Third Amendment Effective date pursuant to the last sentence of
subsection 2.08(b), without regard to whether such payments in fact have
been made; and (b) That are predicated upon the receipt of Designated Non-
Tax-Related Net Cash Proceeds.
"Designated Net Cash Proceeds" means:
----------------------------
(a) With respect to any Securities Offering, 100% (or such lesser
percentage as may be agreed to by the Supermajority Banks, in each instance
in their sole discretion) of the cash or cash equivalent proceeds thereof
at any time on or after the Third Amendment Effective Date received by or
for the account of the Borrower, less only: (i) The direct out-of-pocket
costs, expenses, and fees relating to such Securities Offering (not to
exceed any limitations thereon imposed by the Majority Banks as a condition
of any consent to such Securities Offering); and (ii) any permitted POS
Holdback;
(b) With respect to any Facility Financing, 100% (or such lesser
percentage as may be agreed to by the Supermajority Banks, in each instance
in their sole discretion) of the Net Proceeds thereof at any time on or
after the Third Amendment Effective Date received by or for the account of
the Borrower relating to such Facility Financing (provided that any costs,
expenses, or fees deducted in arriving at such Net Proceeds shall not
exceed any limitations thereon, if any, imposed by the Majority Banks as a
condition of any consent to such Facility Financing);
(c) With respect to any sale, lease, transfer, or other disposition of
Property of the Borrower that requires approval of the Majority Banks under
Section 7.02, 100% (or such lesser percentage as may be agreed to by the
Supermajority Banks, in each instance in their sole discretion) of the Net
Proceeds thereof at any time on or after the Third Amendment Effective Date
received by or for the account of the Borrower relating to such sale,
lease,
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<PAGE>
transfer, or other disposition (provided that any costs, expenses, or fees
deducted in arriving at such Net Proceeds shall not exceed any limitations
thereon, if any, imposed by the Majority Banks as a condition of any
consent to such sale, lease, transfer, or other disposition); and
(d) With respect to any federal or state tax refund at any time on or
after the Third Amendment Effective Date received by or for the account of
the Borrower, 100% (or such lesser percentage as may be agreed to by the
Supermajority Banks, in each instance in their sole discretion) of the cash
or cash equivalent proceeds thereof, less only the direct costs, expenses,
and fees, not to exceed $45,000 in the aggregate, relating to the obtaining
of such tax refunds, and otherwise without reduction by any amount for any
reason.
"Designated Non-Tax-Related Net Cash Proceeds" means Designated Net
--------------------------------------------
Cash Proceeds included within subpart (a), (b), or (c) of the definition of
such term.
"Designated Securities Offering Net Cash Proceeds" means Designated
------------------------------------------------
Net Cash Proceeds included within subpart (a) of the definition of such
term.
"Facility Financing" shall have the meaning given such term in Section
------------------
10.22.
"POS Holdback" shall have the meaning given such term in Section
------------
10.20.
"Securities Offering" means any offering, sale, or distribution by or
-------------------
on behalf of the Borrower, on or after the Third Amendment Effective Date,
of equity or debt securities or instruments of the Borrower (other than the
issuance of stock options for the Company's common stock pursuant to stock
option plans of the Borrower and the issuance of the Company's common stock
upon exercise of any such stock options), including, without limitation,
subordinated notes or debentures, or common or preferred stock, or
warrants, in each case whether or not convertible into capital stock or
other securities of the Company.
"Supermajority Banks" means at any time Banks then holding at least
-------------------
85% of the then aggregate unpaid principal amount of the Loans, or, if no
Loans are then outstanding, Banks then having at least 85% of the Aggregate
Revolving Commitments.
"Third Amendment" means that certain Third Amendment to Amended and
---------------
Restated Revolving Credit Agreement, dated as of May 12, 1994, and entered
into among the Borrower, the Agent, and the Banks.
-3-
<PAGE>
"Third Amendment Bank Signing Date" means the first date as of which the
---------------------------------
Agent and each of the Banks has signed and delivered to the Agent an
original or facsimile counterpart of the Third Amendment, regardless of
whether the Third Amendment Effective Date yet has occurred, or ever
occurs.
"Third Amendment Effective Date" means the date as of which the Third
------------------------------
Amendment becomes effective in accordance with its terms and conditions.
2. Subject to the proviso set forth at the end of this Section, the following
defined terms contained in Section 1.01 of the Credit Agreement are amended and
restated in their entirety to read as follows:
"Applicable Margin" means
-----------------
(i) with respect to Base Rate Loans, 1.50% with respect to the
period commencing on the Closing Date and continuing through and
including April 30, 1994, 1.75% with respect to the period commencing
on May 1, 1994, and continuing through and including July 31, 1994,
2.00% with respect to the period commencing on August 1, 1994, and
continuing through and including October 31, 1994, 2.25% with respect
to the period commencing on November 1, 1994, and continuing through
and including January 31, 1995, and 2.50% with respect to the period
commencing on February 1, 1995, and continuing thereafter until all
Obligations are repaid in full; and
(ii) with respect to Offshore Rate Loans, expressly subject to
Section 2.17, 2.50% with respect to the period commencing on the
Closing Date and continuing through and including April 30, 1994,
2.75% with respect to the period commencing on May 1, 1994, and
continuing through and including July 31, 1994, and 3.00% with respect
to the period commencing on August 1, 1994, and continuing thereafter
until all Obligations are repaid in full.
"Borrowing Base Certificate" means a certificate of a Responsible
--------------------------
Officer, in the form of Exhibit G, appropriately completed, (a) setting
forth, as of a specified date, the amount of the Borrowing Base as computed
by the Borrower, the pertinent details of such computation, and the amount
of Total Utilization of Revolving Commitments, (b) certifying, as of such
same specified date, Borrower's compliance with Section 7.22, and
specifying the pertinent details of the computations made by the Borrower
to verify such compliance (or, if there is not compliance with Section 7.22
as of such date, specifying the details of such non-compliance and the
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<PAGE>
steps Borrower is taking and proposes to take to restore compliance with
Section 7.22), and (c) certifying, as of such same specified date, that no
Default or Event of Default has occurred and is continuing (or, if a
Default or Event of Default has occurred and is continuing, specifying all
such existing Defaults and Events of Default in reasonable detail, and
specifying the steps Borrower is taking and proposes to take to cure or
eliminate such Defaults or Events of Default).
"Interest Payment Date" means, expressly subject to Section 2.17: (a)
---------------------
With respect to any Offshore Rate Loan, the last day of each Interest
Period applicable to such Loan; and (b) With respect to Base Rate Loans,
the last Business Day of each calendar month and each date a Base Rate Loan
is converted into an Offshore Rate Loan.
"Loan Documents" means this Agreement, the Notes, the Security
--------------
Agreements, all documents, agreements, certificates, or instruments
delivered to the Agent, any Issuing Bank, or any Bank in connection
therewith, all documents, instruments, and/or agreements at any time
entered into by any Borrower Entity in favor of BofA in connection with any
provision of cash management and/or cash concentration services by BofA to
any Borrower Entity, and any amendments, supplements, modifications,
renewals, or restatements of any thereof.
"Net Proceeds" means proceeds in cash, checks or other cash equivalent
------------
financial instruments (including Cash Equivalents) as and when received by
the Person making a Disposition or entering into a Facility Financing, net
of: (a) the direct costs relating to such Disposition or Facility Financing
excluding amounts payable to the Company or any Affiliate of the Company,
(b) sale, use or other transaction taxes paid or payable as a result
thereof, and (c) amounts required to be applied to repay principal,
interest and prepayment premiums and penalties on Indebtedness secured by a
Lien on the asset which is the subject of such Disposition or Facility
Financing.
"Permitted Liens" has the meaning specified in Section 7.01., as
---------------
supplemented by Section 10.22.
"Revolving Termination Date" means the earlier to occur of:
--------------------------
(a) May 31, 1995, and
(b) the date on which the Aggregate Revolving Commitment shall
terminate, or shall be reduced to zero dollars ($0.00), in accordance
with the provisions of this Agreement.
-5-
<PAGE>
"Specified Percentage" means, as of any date of determination thereof: (a)
--------------------
From and after the Closing Date, and through and including February 27,
1994, 64%; (b) From and after February 28, 1994, and through and including
March 30, 1994, 62.5%; (c) From and after March 31, 1994, and through and
including August 30, 1994, as of any date of determination thereof, 60%
minus the then applicable Cumulative Adjustment; and (d) From and after
August 31, 1994, until all Obligations are repaid in full, as of any date
of determination thereof, 55% minus the then applicable Cumulative
Adjustment. Any change in the Specified Percentage resulting from a change
in the Cumulative Adjustment shall take effect immediately upon the
effectiveness of the corresponding change in the Cumulative Adjustment, and
without awaiting the due date of the next due Borrowing Base Certificate
(provided that the Eligible Inventory value used for purposes of
computation of the Borrowing Base shall not be adjusted until the due date
of the next due Borrowing Base Certificate).
Provided, that the change in the definition of "Interest Payment Date" set forth
above shall be effective, as it pertains to Base Rate Loans, only for interest
accruing from and after May 1, 1994. Any interest accrued with respect to Base
Rate Loans during periods prior to May 1, 1994, that is unpaid on the Third
Amendment Effective Date, and that is not past due under the Credit Agreement as
in effect immediately prior to the Third Amendment Effective Date, shall be due
and payable on the last Business Day of May, 1994.
3. Subsection 2.05(b) of the Credit Agreement is amended and restated in its
entirety to read as follows:
"(b) In addition to the foregoing, the Aggregate Revolving Commitment
shall be automatically, mandatorily, permanently, and irrevocably reduced as
follows:
(i) Effective April 30, 1994, the Aggregate Revolving Commitment
shall be reduced to ONE HUNDRED SIXTY MILLION DOLLARS ($160,000,000)
(unless the Aggregate Revolving Commitment then is already a lower amount
by reason of prior reductions, in which case it shall remain at such lower
amount);
(ii) Effective on the Third Amendment Effective Date, the
Aggregate Revolving Commitment shall be reduced to ONE HUNDRED FIFTY
MILLION DOLLARS ($150,000,000) (unless the Aggregate Revolving Commitment
then is already a lower amount by reason of prior reductions, in which case
it shall remain at such lower amount);
(iii) Effective October 31, 1994, the Aggregate Revolving
Commitment shall be reduced to ONE HUNDRED FORTY
-6-
<PAGE>
MILLION DOLLARS ($140,000,000) (unless the Aggregate Revolving Commitment
then is already a lower amount by reason of prior reductions, in which case
it shall remain at such lower amount);
(iv) Effective January 31, 1995, the Aggregate Revolving
Commitment shall be reduced by the amount of $10,000,000 (unless the
Aggregate Revolving Commitment then is already less than $10,000,000 by
reason of prior reductions, in which case the Aggregate Revolving
Commitment shall be reduced to ZERO DOLLARS ($0.00) on such date);
(v) Effective on each date that a mandatory payment is due
pursuant to the last sentence of subsection 2.08(b), without regard to
whether such payment in fact is or is not made when due, the Aggregate
Revolving Commitment shall be reduced by an amount equal to the amount of
such mandatory payment that is due on such date (unless the Aggregate
Revolving Commitment then is already less than the amount of such mandatory
payment that is due on such date, in which case the Aggregate Revolving
Commitment shall be reduced to ZERO DOLLARS ($0.00) on such date); and
(vi) Effective May 31, 1995, the Aggregate Revolving Commitment
shall be reduced to ZERO DOLLARS ($0.00).
In connection with each reduction of the Aggregate Revolving Commitment, each
Bank's Revolving Commitment shall be reduced, ratably and correspondingly, based
on its Commitment Percentage."
4. Subsection 2.08(b) of the Credit Agreement is amended and restated in its
entirety to read as follows:
"(b) Anything herein to the contrary notwithstanding, at no time
shall Total Utilization of Revolving Commitments exceed the Borrowing Base then
in existence, and, if at any time there is such an excess, immediately thereupon
(and in any event by 11:00 a.m. San Francisco time the next Business Day) the
Borrower shall repay Revolving Loans, and/or advances made pursuant to Section
2.15, in an amount sufficient to eliminate such excess. In addition, on any day
that the Borrower receives any Designated Net Cash Proceeds, the Borrower shall
within one (1) Business Day make a mandatory payment in an amount equal to the
amount of Designated Net Cash Proceeds so received, which payment shall be
applied to repay Revolving Loans to the extent that Revolving Loans are
outstanding, and otherwise to the repayment or cash collateralization of
Obligations in such manner as the Agent may direct."
5. Subject to the proviso set forth at the end of this Section, Subsections
2.10(a) and (b) are amended and restated in their entirety to read as follows:
-7-
<PAGE>
"(a) Fees Payable to the Agent. The Borrower shall pay to the Agent,
-------------------------
for the Agent's own account, fees in the amounts and at the times set forth in
(i) a letter agreement between the Borrower and the Agent dated as of October
20, 1993, and (ii) a letter agreement between the Borrower and the Agent dated
as of May 3, 1994.
(b) Commitment Fee. In addition to the fees provided for in
--------------
subsection (a) of this Section, the Borrower shall pay to the Agent for the
ratable account of each Bank, in accordance with its respective Commitment
Percentage, a commitment fee equal to 0.375% of the average daily balance of the
Available Aggregate Revolving Commitment, computed on a monthly basis in arrears
on the last Business Day of each calendar month, based on a year of 360 days and
actual days elapsed. Such commitment fee shall accrue from the Closing Date to
the Revolving Termination Date and shall be due and payable monthly in arrears
on the last Business Day of each calendar month commencing on December 31, 1993
through the Revolving Termination Date, with the final payment to be made on the
Revolving Termination Date; provided that, in connection with any reduction or
termination of Revolving Commitments pursuant to Section 2.05, the accrued
commitment fee calculated for the period ending on such date shall also be paid
on the date of such reduction or termination, with the next succeeding monthly
payment being calculated on the basis of the period from the reduction or
termination date to such monthly payment date. The commitment fees provided in
this subsection shall accrue at all times after the above-mentioned commencement
date, including at any time during which one or more conditions in Article IV
are not met."
Provided, that the change in the provisions of Section 2.10(b) of the Credit
Agreement set forth above, to the extent that it requires monthly payment of
commitment fees rather than quarterly payment thereof, shall only be effective
with respect to commitment fees relating to periods commencing on or after May
1, 1994. Any commitment fees accrued with respect to periods prior to May 1,
1994, that are unpaid on the Third Amendment Effective Date, and that are not
past due under the Credit Agreement as in effect immediately prior to the Third
Amendment Effective Date, shall be due and payable on the last Business Day of
May, 1994.
6. A new subsection 2.10(d) of the Credit Agreement is added to read as
follows:
"(d) Restructuring Fee. The Borrower shall pay to the Agent, for the
-----------------
ratable account of each Bank, in accordance with its respective Commitment
Percentage, a restructuring fee, consisting of three components, each of which
shall be fully earned on the Third Amendment Bank Signing Date, and which shall
be due and payable as follows:
-8-
<PAGE>
(i) The first component of the restructuring fee shall be the amount
of $375,000, and shall be due and payable on the later of (x) the date that
the Borrower first signs and delivers to the Agent an original or facsimile
counterpart of the Third Amendment, and (y) the Third Amendment Bank
Signing Date.
(ii) The second component of the restructuring fee shall be the
dollar amount equal to 0.25% of the Aggregate Revolving Commitment in
effect on November 1, 1994, or, if no Aggregate Revolving Commitment is
then in effect, 0.25% of the Total Utilization of Revolving Commitments as
of November 1, 1994. Such second component of the restructuring fee shall
be due and payable on November 1, 1994, unless both the Aggregate Revolving
Commitment and the Total Utilization of Revolving Commitments are less than
or equal to $100,000,000 on November 1, 1994, in which case such second
component shall be deemed waived at such time and shall not be due or
payable.
(iii) The third component of the restructuring fee shall be the
dollar amount equal to 0.50% of the Aggregate Revolving Commitment in
effect on April 30, 1995, or, if no Aggregate Revolving Commitment is then
in effect, 0.50% of the Total Utilization of Revolving Commitments as of
April 30, 1995. Such third component shall be due and payable on April 30,
1995, unless both the Aggregate Revolving Commitment and the Total
Utilization of Revolving Commitments are equal to $0.00 on such date, in
which case such third component shall be deemed waived at such time and
shall not be due or payable.
Each such component of the restructuring fee shall be non-refundable to the
Borrower when received by the Agent or any Bank."
7. A new Section 2.17 of the Credit Agreement is added to read as follows:
"2.17 Phase-out of Offshore Rate Loans. Anything to the contrary in any
--------------------------------
Loan Document notwithstanding, from and after the Third Amendment Effective
Date, the Borrower shall not be entitled (a) to request or receive any new
Offshore Rate Loan, (b) to convert any outstanding Loan into an Offshore Rate
Loan, or (c) to continue in effect any Offshore Rate Loan as an Offshore Rate
Loan beyond the last day of the Interest Period applicable thereto immediately
prior to the Third Amendment Effective Date. Anything to the contrary in any
Loan Document notwithstanding, any Loans made on or after the Third Amendment
Effective Date shall be made as Base Rate Loans and not as Offshore Rate Loans.
To the extent that Offshore Rate Loans made prior to the Third Amendment
Effective Date are outstanding on the Third Amendment Effective Date, such
outstanding Offshore
-9-
<PAGE>
Rate Loans shall be allowed to mature in accordance with their then existing
terms and shall automatically convert into Base Rate Loans on the last day of
the applicable Interest Period, provided that nothing in this Section 2.17 shall
limit the rights and remedies of the Agent and the Banks provided for in the
Loan Documents should any Default or Event of Default at any time occur and be
continuing."
8. A new Section 6.13 is added to the Credit Agreement, to read as follows:
"6.13 Shareholder Approval. Not later than June 10, 1994, the Company
--------------------
shall have delivered to the Agent and each Bank a copy of a completed private
placement memorandum, offering memorandum, or other comparable document
(individually or collectively, "Offering Document") prepared by or at the
direction of the Company, relating to the placement of debt or equity securities
of the Company by means of a proposed Securities Offering that meets the
criteria enumerated below in this Section. The receipt, retention, or perusal
of any such Offering Document by the Agent or any Bank shall not under any
circumstances be construed to involve the Agent or any Bank in any Securities
Offering by the Company; neither the Agent nor any Bank is providing advice or
assistance to the Company, or otherwise assuming any duty or responsibility to
the Company or any other Person, in connection with any Securities Offering by
the Company; and the Company assumes full responsibility for all securities law
and regulation compliance matters in connection with any Securities Offering by
the Company and does not look to the Agent or any Bank with respect thereto.
Not later than June 30, 1994, the Company shall file with the Securities and
Exchange Commission a draft of a proxy statement to be sent to the shareholders
of the Company relating to the proposed solicitation of proxies from
shareholders of the Company to vote in favor of the approval of a proposed
placement of debt or equity securities of the Company by means of a Securities
Offering that meets the criteria enumerated below in this Section. Not later
than August 31, 1994, the Company shall, in compliance with applicable law, and
in accordance with any applicable rules, policies, practices, or requirements of
the New York Stock Exchange, have sent to its shareholders of record a proxy
statement soliciting proxies from such shareholders of the Company to vote in
favor of the approval of a proposed placement of debt or equity securities of
the Company by means of a Securities Offering that meets the criteria enumerated
below in this Section, at a meeting of the shareholders of the Company to be
held on or before September 30, 1994. Not later than September 30, 1994, the
Company shall obtain, in accordance with applicable law, and in accordance with
any applicable rules, policies, practices, or requirements of the New York Stock
Exchange, approval by the holders of a requisite majority of the shares of
capital stock of the Company of a Securities Offering that meets the criteria
enumerated below in this Section. The criteria referred to above are the
following:
-10-
<PAGE>
(a) the Company shall be authorized to issue up to $60,000,000 (or such greater
amount as such shareholders may authorize) in face amount of securities to be
issued in connection with such Securities Offering; (b) the cash interest
coupon, cash dividend, or other form of payment with respect to such securities
shall not exceed 9.5% on an annualized basis; (c) amortization of the principal
of, or redemption, repurchase, or retirement of, such securities shall not
commence prior to January 31, 1998; (d) if such securities constitute
Indebtedness of the Borrower, such Indebtedness shall be subordinated in right
of payment to the Obligations on terms and conditions acceptable to the Majority
Banks, in their sole discretion; (e) at least $50,000,000 (or such lesser amount
as the Supermajority Banks may approve in their sole discretion) of the
Designated Securities Offering Net Cash Proceeds of such Securities Offering
must be available to make a mandatory payment of Obligations; (f) subject to the
terms and conditions of the Loan Documents, including, without limitation,
Section 10.20, up to $7,500,000 of the net cash proceeds of such Securities
Offering may be set aside as POS Holdback; and (g) the fees and out-of-pocket
expenses payable in connection with such Securities Offering shall not exceed 5%
of the gross consideration raised in connection with such Securities Offering.
It is not necessary that the Offering Document, proxy statement, or shareholder
approval required by this Section address each of the above criteria in specific
detail so long as such Offering Document, proxy statement, or shareholder
approval is sufficiently broad so as to permit, without need for further
approval of the Securities and Exchange Commission, the New York Stock Exchange,
or the shareholders of the Company, a Securities Offering that complies with
each of the foregoing criteria, that complies with applicable law, and that
complies with any applicable rules, policies, practices, or requirements of the
New York Stock Exchange. Nothing in this Section shall be construed to authorize
the Borrower to effect the Securities Offering described above in this Section
without the prior written consent of the Majority Banks, and all material terms
and conditions of such Securities Offering by the Borrower must be satisfactory
to the Majority Banks."
9. A new Section 6.14 is added to the Credit Agreement, to read as follows:
"6.14 Tax Refunds. From and after the Third Amendment Effective Date:
-----------
(a) The Borrower at all times shall use its best efforts to obtain payment, in
cash or the equivalent, of all state and federal tax refunds to which it is
legally entitled, as soon as possible; and (b) If the Borrower legally can
obtain a refund or a credit of state or federal taxes, the Borrower shall use
its best efforts to obtain a refund in cash or the equivalent, rather than a
credit, and shall take all steps and make all elections permitted by law so as
to obtain a refund rather than a credit."
-11-
<PAGE>
10. Section 7.13 of the Credit Agreement is amended and restated in its
entirety to read as follows:
"7.13 Capital Expenditures. The Company and its Subsidiaries shall not
--------------------
make or commit to make Capital Expenditures for the period beginning 2/1/94 and
ending 10/31/94 in an amount in excess of $5,200,000; or with respect to any
fiscal quarter during the term hereof, in excess of the amount set forth below:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Capital Expenditures
--------------------- --------------------
<S> <C>
01/31/94 $1,800,000
04/30/94 $1,800,000
07/31/94 $2,000,000
10/31/94 $1,500,000
01/31/95 $1,600,000
04/30/95 $3,200,000
</TABLE>
In addition, the Company and its Subsidiaries shall not make or commit to make
Capital Expenditures: (a) For their fiscal year 1995, in an aggregate amount in
excess of $7,000,000; (b) For their fiscal year 1996, in an aggregate amount in
excess of $10,000,000; and (c) For the month of May, 1995, in an amount in
excess of $1,000,000."
11. Section 7.14 of the Credit Agreement is amended and restated in its
entirety to read as follows:
"7.14 Current Ratio. The Company shall not permit (as of the end of any
-------------
fiscal quarter) its ratio of Consolidated Current Assets to Consolidated Current
Liabilities to be less than 1.10 to 1.00 calculated as at the end of each fiscal
quarter. The foregoing notwithstanding, the Majority Banks shall have the right
unilaterally to effect an appropriate adjustment of such ratio if Indebtedness
of the Borrower to the Banks under the Loan Documents is reclassified in
accordance with GAAP from current liabilities to long term liabilities, which
adjustment, if any, promptly shall be communicated by the Agent to the Company,
and shall be effective prospectively from and after the effective date of such
reclassification, with respect to all fiscal quarters of the Company ending on
or after the effective date of such reclassification."
12. Section 7.15 of the Credit Agreement is amended and restated in its
entirety to read as follows:
"7.15 Consolidated Tangible Net Worth. The Company shall not permit its
-------------------------------
Consolidated Tangible Net Worth at any time during any fiscal quarter to be less
than the sum of (a) $100,000,000 plus (b) 75% of cumulative consolidated net
income (not to be reduced by net losses), earned in each fiscal quarter
beginning
-12-
<PAGE>
with the quarter commencing 5/1/94, and (c) 100% of any Net Issuance Proceeds."
13. Section 7.16 of the Credit Agreement is amended and restated in its
entirety to read as follows:
"7.16 Leverage Ratio. The Company shall not permit its ratio of
--------------
Consolidated Total Liabilities to Consolidated Tangible Net Worth, as determined
as of each date set forth below for the fiscal quarter ending on such date to be
greater than the ratio set forth below for such date:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Ratio
--------------------- -----
<S> <C>
10/31/93 2.65:1.00
01/31/94 2.30:1.00
04/30/94 2.50:1.00
07/31/94 2.50:1.00
10/31/94 2.40:1:00
01/31/95 2.20:1.00
04/30/95 2.25:1.00"
</TABLE>
14. Section 7.17 of the Credit Agreement is amended and restated in its
entirety to read as follows:
"7.17 Interest Coverage Ratio; EBITDA. The Company shall not permit its
-------------------------------
ratio of EBITDA to Consolidated Interest Expense as determined as of the last
day of any quarter set forth below for such quarter, to be less than the ratio
set forth below for such date:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Ratio
--------------------- -----
<S> <C>
01/31/94 2.10:1.00
04/30/94 1.05:1.00
07/31/94 0.75:1.00
10/31/94 1.40:1.00
01/31/95 2.30:1.00
04/30/95 1.60:1.00
</TABLE>
In addition, the amount equal to the Borrower's EBITDA for the fiscal quarter of
the Borrower ended 10/31/93, plus the Restructuring Adjustment, shall not be
less than $1.00."
15. Subsection 8.01(c) of the Credit Agreement is amended and restated in its
entirety to read as follows:
"(c) Specific Defaults. The Borrower fails to perform or observe any
-----------------
term, covenant or agreement contained in Sections 6.01, 6.02, 6.03, 6.09, 6.11,
6.13, or Article VII; or"
16. Section 10.01 of the Credit Agreement is amended and restated in its
entirety to read as follows:
-13-
<PAGE>
"10.01 Amendments and Waivers. No amendment or waiver of any provision of
----------------------
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Borrower therefrom, shall be effective unless the same shall be
in writing and signed by, or consented to in writing by, the Majority Banks, the
Borrower and the Agent, and then such waiver shall be effective only in the
specific instance and for the specific purpose for which given; provided,
--------
however, that no such waiver, amendment, or consent shall, unless in writing and
- - -------
signed by, or consented to in writing by, all the Banks, the Borrower and the
Agent, do any of the following:
(a) increase or extend the Revolving Commitment of any Bank (or
reinstate any Revolving Commitment terminated pursuant to subsection 8.02(a)) or
subject any Bank to any additional obligations;
(b) postpone or delay any date fixed for any payment of principal,
interest, fees or other amounts due to the Banks (or any of them) hereunder or
under any Loan Document;
(c) reduce the principal of, or the rate of interest specified herein
on any Loan, or of any fees or other amounts payable hereunder or under any Loan
Document;
(d) change the percentage of the Revolving Commitments or of the
aggregate unpaid principal amount of the Loans which shall be required for the
Banks or any of them to take any action hereunder;
(e) amend this Section 10.01 or Section 2.14;
(f) release, or consent to or provide for the release of, all or
substantially all of the Collateral; or
(g) amend the definitions of any of the following terms defined in
this Agreement: Adjustment Integer; Adjustment Rational Number; Borrowing Base;
Cumulative Adjustment; Cumulative Relevant Designated Net Cash Proceeds;
Designated Net Cash Proceeds; Designated Non-Tax-Related Net Cash Proceeds; and
Specified Percentage;
and, provided further, that no amendment, waiver or consent shall, unless in
-------- -------
writing and signed by, or consented to in writing by, the Agent, in addition to
the Majority Banks or all the Banks, as the case may be, affect the rights or
duties of the Agent under this Agreement or any other Loan Document."
17. Section 10.04 of the Credit Agreement is amended and restated in its
entirety to read as follows:
-14-
<PAGE>
"10.04 Costs and Expenses. The Borrower shall, whether or not the
------------------
transactions contemplated hereby shall be consummated:
(a) pay or reimburse BofA (including in its capacity as Agent) and the
Agent within five Business Days after demand (subject to subsection 4.01(e)) for
all costs and expenses incurred by BofA (including in its capacity as Agent) in
connection with the development, preparation, delivery, administration and
execution of, and any amendment, supplement, waiver or modification to (in each
case, whether or not consummated), this Agreement, any Loan Document and any
other documents prepared in connection herewith or therewith, and the
consummation of the transactions contemplated hereby and thereby, including the
reasonable Attorney Costs incurred by BofA (including in its capacity as Agent)
with respect thereto;
(b) pay or reimburse each Bank and the Agent within five Business Days
after demand (subject to subsection 4.01(e)) for all costs and expenses incurred
by them in connection with the negotiation, renegotiation, restructure, workout,
enforcement, attempted enforcement, or preservation of any rights or remedies
(including in connection with any "workout" or restructuring regarding the Loans
and including in any Insolvency Proceeding or appellate proceeding) under this
Agreement, any other Loan Document, and any such other documents, including
Attorney Costs incurred by the Agent and any Bank; provided that, with respect
to time periods after the Third Amendment Effective Date, and with respect to
Banks other than the Agent, the obligation under this subsection to pay or
reimburse costs and expenses shall be limited to fees and expenses incurred
during any period when a Default or Event of Default exists, but not otherwise;
and
(c) pay or reimburse BofA (including in its capacity as Agent) within
five Business Days after demand (subject to subsection 4.01(e)) for all
appraisal (including the allocated cost of internal appraisal services), audit,
consulting (subject to Section 10.21), environmental inspection and review
(including the allocated cost of such internal services), search and filing
costs, fees and expenses, incurred or sustained by BofA (including in its
capacity as Agent), or by counsel for BofA acting in accordance with the
instructions of BofA, in connection with the matters referred to under
subsections (a) and (b) of this Section, or as permitted by other express
provisions of the Loan Documents.
The agreements of the Borrower set forth in this Section shall survive the
termination of this Agreement."
18. A new Section 10.20 is added to the Credit Agreement, to read as follows:
-15-
<PAGE>
"10.20 POS Holdback. In connection with any Securities Offering that has
------------
been approved by the Majority Banks, that meets the criteria described in
Section 6.13, and that has generated not less than $50,000,000 (or such lesser
amount as may be agreed to by the Supermajority Banks in their sole discretion)
of Designated Securities Offering Net Cash Proceeds that have been paid, or that
concurrently are being paid, to the Agent for the benefit of the Banks pursuant
to the Loan Documents, the Borrower may hold back up to $7,500,000 (or such
greater amount as may be agreed to by the Supermajority Banks in their sole
discretion) of the remaining net cash proceeds of such Securities Offering (such
amount being referred to herein as the "POS Holdback") subject to and in
accordance with the following conditions: (a) The POS Holdback at all times
prior to its disbursement, withdrawal, or expenditure shall be deposited in
accounts maintained with and pledged to the Agent, in which the Agent shall have
a perfected first priority security interest for the benefit of itself and the
Banks, to secure the Obligations; (b) at the time POS Holdback amounts are to be
so set aside, no Default or Event of Default shall have occurred and be
continuing (and, if a Default or Event of Default has occurred and is continuing
at such time, any amounts that would otherwise be entitled to be set aside as
POS Holdback instead shall be paid to the Agent for the benefit of the Banks
pursuant to the last sentence of subsection 2.08(b), unless the Majority Banks
at such time in their sole discretion determine to waive, in whole or in part,
such requirement and permit the Borrower nevertheless to set aside all or part
of such amounts as POS Holdback); (c) POS Holdback and earnings thereon, if any,
are to be used by the Borrower only for the purpose of funding expenditures and
costs (exclusive of general operating overhead of the Borrower) reasonably and
directly related to the design, procurement, installation, upgrading, and
improvement of point-of-sale computerized inventory control systems for the
Borrower; (d) in connection with any disbursement, withdrawal, or expenditure of
POS Holdback, the Agent, in its discretion, may require from the Borrower
reasonable written specification and/or certification of the purposes for which
such POS Holdback is being disbursed, withdrawn, or expended, sufficient to
demonstrate compliance by the Borrower with the terms hereof; (e) upon the
occurrence and during the continuance of any Default or Event of Default, the
Agent shall not be required to permit disbursement, withdrawal, or expenditure
of POS Holdback; and (f) upon the occurrence and during the continuance of any
Event of Default, the Agent may cause POS Holdback to be applied in reduction of
Obligations."
19. A new Section 10.21 is added to the Credit Agreement, to read as follows:
"10.21 Consultants. The Agent (or the Agent's counsel, acting upon the
-----------
instructions of the Agent) may at any time retain one or more consultants to
advise the Agent and the Banks regarding valuation, operational, capital
structure, and
-16-
<PAGE>
financial issues relating to the Borrower. The Borrower shall cooperate with
such consultants, and provide them with full access to information concerning
the Borrower, its Properties, its operations, and its financial condition. The
Borrower promptly shall pay on demand all fees and expenses of such consultants,
provided that, unless otherwise agreed by the Borrower, the fees and expenses of
such consultants for which the Borrower shall be liable (exclusive of the fees
and expenses of counsel for the Agent and the Banks, to the extent the Borrower
is obligated under the terms of this Agreement to reimburse same, regardless of
when such fees and expenses of such counsel were incurred, and exclusive of the
fees and expenses of Ernst & Young incurred prior to the Third Amendment
Effective Date) shall not exceed $300,000. The work product of such consultants
shall be privileged and confidential and shall be available only to the Agent,
its counsel, the Banks, their counsel, and such other persons, if any, as the
Agent and the Majority Banks, in their discretion, may specify. The Borrower,
its counsel, and third parties (including, without limitation, the accountants
and investment bankers of the Borrower) shall have no right to receive such work
product unless the Agent and the Majority Banks, in their discretion, agree
otherwise."
20. A new Section 10.22 is added to the Credit Agreement, to read as follows:
"10.22 Possible Refinancings. The Borrower may seek to finance the real
---------------------
Property and related fixtures associated with its Mauldin, South Carolina
facility and/or its Sherman Oaks, California headquarters facility, by means of
mortgage or deed of trust loans, sale/leasebacks, or other long-term financing
techniques (individually, each a "Facility Financing"). Any Facility Financing,
including all material terms and conditions thereof, must be approved in
advance, in writing, by the Majority Banks, in their discretion. If so
approved, and to the extent consummated in accordance with the terms and
conditions, if any, of such approval, (a) any Liens incurred in connection with
such an approved Facility Financing shall be Permitted Liens and such Liens
shall be permitted in addition to the Liens permitted under clauses (a) through
(m) of Section 7.01, (b) any Indebtedness incurred in connection with such an
approved Facility Financing shall be permitted by Section 7.05 and such
Indebtedness shall be permitted in addition to the Indebtedness permitted under
clauses (a) through (g) of Section 7.05, (c) any transfers of affected real
Property or fixtures made in connection with such an approved Facility Financing
shall be permitted by Section 7.02 and such transfers shall be permitted in
addition to the transfers permitted under clauses (a) through (c) of Section
7.02, and (d) to the extent such an approved Facility Financing is obtained by
means of a sale/leaseback, the obligations under the lease entered into by the
Borrower in connection with such an approved Facility Financing shall be
permitted by Section 7.11 and such obligations shall be permitted in addition to
the
-17-
<PAGE>
obligations permitted under clauses (a) through (d) of Section 7.11. All
Designated Net Cash Proceeds received in connection with any such approved
Facility Financing shall be paid to the Agent for the benefit of the Banks in
accordance with the last sentence of subsection 2.08(b)."
21. Exhibit G to the Credit Agreement is amended in the following respect:
On page 2 of Exhibit G, after the words "compliance with such Section
7.22." and prior to the words "Date this certificate is signed" insert the
following paragraph:
"The Borrower hereby certifies that, as of the Relevant Date, giving full
effect to any Borrowings and/or repayments on such date: (a) Total Utilization
of Revolving Commitments was $__________________; and (b) [No Default or Event
of Default had occurred and was continuing] [The following Default(s) and/or
Event(s) of Default had/have occurred and was/were continuing: [Insert
description of Default(s) and/or Event(s) of Default in reasonable detail]. The
Borrower is taking and proposes to take the following steps with respect
thereto: [Describe steps]]."
22. This Amendment shall become effective only upon the satisfaction of each of
the following conditions, each of which is a condition precedent, except for the
conditions enumerated in subparts (i) and (j) below, which are conditions
concurrent:
(a) The Agent shall have received from each Borrower Entity, each Bank,
and the Agent, an original of, or a facsimile of, a counterpart signature
page to this Amendment signed by a duly authorized representative of such
Person (to be followed promptly thereafter by the delivery by each such
Person to the Agent of sixteen (16) original signed counterpart signature
pages to this Amendment, for distribution by the Agent as appropriate).
(b) The Agent shall have received from the Borrower an original of, or a
facsimile of, each of the resolutions of the board of directors of each of
the Borrower Entities approving and authorizing the execution, delivery,
and performance by such Person of this Amendment, in each case duly
certified by the corporate secretary of such Person as having been adopted
at a meeting of the board of directors of such Person or by unanimous
written consent of the directors of such Person without a meeting, as being
in full force and effect, and as not having been rescinded or superseded
(to be followed promptly thereafter by the delivery by each such Person to
the Agent of sixteen (16) original counterparts of each such set of
certified resolutions, for distribution by the Agent as appropriate).
-18-
<PAGE>
(c) The Agent shall have received from in-house and outside counsel to the
Borrower favorable written legal opinions, in form and content acceptable
to the Agent and its counsel, opining as to the due authorization,
execution, and delivery of this Amendment, and as to the enforceability of
this Amendment and of the Credit Agreement as amended hereby.
(d) All pre-closing fees and out-of-pocket expenses of Agent and each of
the Banks, including, without limitation, pre-closing legal fees and
disbursements of outside counsel to the Agent and each of the Banks, and
any unpaid pre-closing expenses and fees relating to Ernst & Young as
special advisor to counsel for the Agent, shall have been paid.
(e) The first component of the restructuring fee provided for in
subsection 2.10(d)(i) of the Credit Agreement, as amended by this
Amendment, shall have been paid to the Agent for the ratable account of the
Banks, in accordance with their respective Commitment Percentages.
(f) The Agent's fee provided for in the letter agreement referred to in
Section 2.10(a)(ii) of the Credit Agreement, as amended by this Amendment,
shall have been paid to the Agent for the Agent's sole account.
(g) No Material Adverse Effect shall have occurred since March 31, 1994.
The condition precedent set forth in this subsection conclusively shall be
deemed to have been satisfied if the Majority Banks shall not have
declared, by the close of business on May 13, 1994, their intention to
assert that a Material Adverse Effect has occurred since March 31, 1994.
(h) All representations and warranties of the Borrower contained in the
next following Section of this Amendment shall be true and correct as of
the date that the conditions set forth in subsections (a), (b), (c), (d),
(e), (f), and (g) of this Section are satisfied.
(i) Deloitte & Touche concurrently shall have delivered the certified
annual financial statements of the Company and its consolidated
Subsidiaries for their fiscal year 1994, together with an unqualified
opinion that same fairly present the financial condition and results of
operations of the Company and its consolidated Subsidiaries for such
period.
(j) Each of conditions set forth in subsections (a), (b), (c), (d), (e),
(f), (g), (h), and (i) of this Section shall have been satisfied on or
before May 13, 1994.
-19-
<PAGE>
Anything to the contrary contained in the foregoing provisions of this Section
notwithstanding, the Obligations of the Borrower to pay the pre-closing fees and
out-of-pocket expenses referred to in subsection (d) of this Section, to pay the
first component of the restructuring fee referred to in subsection (e) of this
Section, and to pay the Agent's fee referred to in subsection (f) of this
Section, shall be effective and enforceable on the later of (x) the date that
the Borrower first signs and delivers to the Agent an original or facsimile
counterpart of this Amendment, and (y) the Third Amendment Bank Signing Date,
regardless of whether the conditions set forth in this Section ever are
satisfied.
23. The Borrower represents and warrants to the Agent and each Bank that:
(a) The Company and each of its Subsidiaries:
(i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation; and
(ii) has the power and authority and all necessary governmental
licenses, authorizations, consents, and approvals, if any, to execute,
deliver, and perform its obligations under this Amendment.
(b) The execution, delivery, and performance by the Company and its
Subsidiaries of this Amendment have been duly authorized by all necessary
corporate action, and do not and will not:
(i) contravene the terms of any of that Person's Organization
Documents;
(ii) conflict with or result in any breach or contravention of, or
the creation of any Lien under, any document evidencing any
Contractual Obligation to which such Person is a party or any order,
injunction, writ, or decree of any Governmental Authority to which
such Person or its Property is subject; or
(iii) violate any Requirement of Law.
(c) No approval, consent, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority is necessary or
required in connection with the execution, delivery, or performance by, or
enforcement against, the Company or any of its Subsidiaries of this
Amendment.
(d) This Amendment, and the Credit Agreement as amended hereby, constitute
the legal, valid, and binding obligations
-20-
<PAGE>
of the Borrower, enforceable against the Borrower in accordance with their
respective terms.
(e) After giving effect to this Amendment, No Default or Event of Default
has occurred and is continuing.
(f) The representations and warranties set forth in Article V of the Credit
Agreement are true and correct in all material respects on and as of the
date of this Amendment as though made on and as of such date except to the
extent such representations and warranties by their express terms relate to
an earlier date, in which case, and to such extent, such representations
and warranties were true and correct in all material respects on and as of
such earlier date.
24. This Amendment is a Loan Document. Except as expressly amended hereby, the
Credit Agreement remains in full force and effect. The Obligations continue to
be secured by the Collateral.
25. The provisions of this Amendment shall be binding upon and inure to the
benefit of the Borrower Entities, the Banks, the Agent, and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights or obligations under this Amendment without the prior written
consent of the Agent and each Bank.
26. This Amendment may be executed by one or more of the parties to this
Amendment in any number of separate counterparts, each of which, when so
executed, shall be deemed an original, and all of said counterparts taken
together shall be deemed to constitute but one and the same instrument.
27. The illegality or unenforceability of any provision of this Amendment shall
not in any way affect or impair the legality or enforceability of the remaining
provisions of this Amendment.
28. This Amendment is made and entered into for the sole protection and legal
benefit of the Borrower, the Banks, and the Agent, and their permitted
successors and assigns, and no other Person shall be a direct or indirect legal
beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this Amendment. Neither the Agent nor any Bank shall have any
obligation to any Person not a party to this Amendment.
29. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE BANKS SHALL
RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
30. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AMENDMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA
-21-
<PAGE>
OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OR CENTRAL DISTRICT OF
CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AMENDMENT, EACH OF THE
BORROWER, THE AGENT, AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE
BORROWER, THE AGENT, AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING
ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
---------
CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR
- - ----------
PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AMENDMENT OR ANY DOCUMENT
RELATED HERETO. THE BORROWER, THE AGENT, AND THE BANKS EACH WAIVE PERSONAL
SERVICE OF ANY SUMMONS, COMPLAINT, OR OTHER PROCESS, WHICH MAY BE MADE BY ANY
OTHER MEANS PERMITTED BY CALIFORNIA LAW.
31. THE BORROWER, THE BANKS, AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS
TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF
OR RELATED TO THIS AMENDMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ANY
ACTION, PROCEEDING, OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE
PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT
CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER, THE BANKS, AND THE AGENT EACH
AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL
WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT
THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION
AS TO ANY ACTION, COUNTERCLAIM, OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN
PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AMENDMENT OR ANY
PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS, OR MODIFICATIONS TO THIS AMENDMENT.
32. This Amendment, together with the other Loan Documents, embodies the entire
agreement and understanding among the Borrower, the Banks, and the Agent, and,
except as otherwise provided in the Credit Agreement, supersedes all prior or
contemporaneous amendments and understandings of such Persons, verbal or
written, relating to the subject matter hereof and thereof, except for the
letter referenced in subsection 2.10(a) of the Credit Agreement, and except for
any prior arrangements made with respect to the payment by the Borrower of (or
any indemnification for) any fees, costs, or expenses payable to or incurred (or
to be incurred) by or on behalf of the Agent or the Banks. The foregoing
notwithstanding, this Amendment and the Loan Documents do not supersede any
provision or provisions of the Old Credit Amendment or of any of the Old Loan
Documents that by its or their terms survive the termination of the Old Credit
Amendment or such other Old Loan Documents (such as, without limitation, any
ongoing obligation to indemnify or reimburse for expenses), and, in addition,
this Amendment and the Loan Documents do not supersede or render unenforceable
any unpaid obligations, if any, of the Borrower to pay accrued interest, fees,
expenses, or other amounts payable under the Old Credit Amendment or the Old
Loan Documents to the extent that such
-22-
<PAGE>
obligations were not paid on or before the Closing Date, and to the extent that
such obligations were not funded by or converted into Revolving Loans
outstanding under the Credit Agreement. In addition, the foregoing
notwithstanding, this Amendment and the Loan Documents do not supersede the
indemnity given by the Borrower to the Agent, the Banks, and others, pursuant to
that certain letter from Peggy A. Fujimoto of the Agent to Gary L. Larkins of
the Borrower, dated April 26, 1994, as supplemented by that certain letter from
Peggy A. Fujimoto of the Agent to Gary L. Larkins of the Borrower, dated April
29, 1994, as accepted by Gary L. Larkins on behalf of the Borrower on April 29,
1994.
33. This Amendment is the result of negotiations between and has been reviewed
by counsel to the Agent, the Borrower, and other parties, and is the product of
all parties hereto. Accordingly, this Amendment shall not be construed against
the Banks or the Agent merely because of the Agent's or Banks' involvement in
the preparation of such documents and agreements.
34. The Borrower hereby generally and forever releases, remises, and discharges
the Agent, each Bank, each Issuing Bank, and each of their respective officers,
directors, employees, attorneys, agents, successors, and assigns from any and
all claims, demands, causes of action, damages, liabilities, indebtedness, and
costs heretofore or hereafter arising out of, connected with, or incidental to
the dealings on or before the Third Amendment Effective Date between the
Borrower, on the one hand, and any one or more of the Agent, the Banks, and the
Issuing Banks, on the other hand. The Borrower hereby generally and forever
releases and waives any and all claims it may have against the Agent, any Bank,
any Issuing Bank, or any of their respective officers, directors, employees,
attorneys, agents, successors, or assigns, under Section 790.03 of the
California Insurance Code or any statutory or case authority for failure to
effectuate a prompt, fair, and equitable settlement of any dispute between the
Borrower, on the one hand, and the Agent, any of the Banks, or any of the
Issuing Banks, on the other hand. With respect to each and every one of the
releases herein provided for, the Borrower hereby specifically waives the
benefit of the provisions of Section 1542 of the California Civil Code, which
provides that: "A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his settlement with
the debtor."
-23-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered in Los Angeles by their proper and duly authorized
officers as of the day and year first above written.
HOUSE OF FABRICS, INC.
By: _________________________
Donald W. Boyer
Senior Vice President
FABRICLAND, INC.
By: ________________________
Donald W. Boyer
Senior Vice President
SOFRO FABRICS, INC.
By: ________________________
Donald W. Boyer
Senior Vice President
HOUSE OF FABRICS OF SOUTH CAROLINA, INC.
By: ________________________
Donald W. Boyer
Senior Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as the Agent
By: ________________________
Name: ________________
Title: Vice President
-24-
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a Bank
By: ________________________
Name: Dennis V. Arriola
Title: Vice President
THE DAIWA BANK LIMITED,
LOS ANGELES AGENCY
By: ________________________
Name: Mr. Hidehiro Ishibashi
Title: Deputy General Manager
FIRST INTERSTATE BANK OF
CALIFORNIA
By: ________________________
Name: Fred Dooman
Title: Vice President
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: ________________________
Name: Dennis Snyder
Title: Vice President
THE FUJI BANK, LTD., LOS ANGELES AGENCY
By: ________________________
Name: Mr. Yasuji Ikawa
Title: Joint General Manager
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, LOS ANGELES AGENCY
By: ________________________
Name:
Title:
-25-
<PAGE>
ISTITUTO BANCARIO SAN PAOLO
DI TORINO SpA, LOS ANGELES BRANCH
By: ________________________
Name: Roberto Gorlier
Title: Branch Manager
By: ________________________
Name: Donald W. Brown
Title: First Vice President
NBD BANK, NATIONAL ASSOCIATION
By: ________________________
Name: Mary Lu Cramer
Title: Second Vice President
SANWA BANK CALIFORNIA
By: ________________________
Name: Kevin D. Kelly
Title: Vice President
SOCIETE GENERALE
By: ________________________
Name: Donald L. Schubert
Title: Vice President
THE BANK OF CALIFORNIA, N.A.
By: ________________________
Name: E. Leigh Irwin
Title: Vice President
UNITED STATES NATIONAL BANK OF OREGON
By: ________________________
Name: Elizabeth Hengeveld
Title: Vice President
-26-
<PAGE>
FINANCIAL HIGHLIGHTS
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the years ended January 31, 1994 1993 1992
Summary of Operations
<S> <C> <C> <C>
Sales $546,664,000 $557,521,000 $493,062,000
Net Income (Loss) $(29,542,000) $5,203,000 $19,691,000
Net Income (Loss) Per Share $(2.16) $.37 $1.44
Stockholders' Equity $150,409,000 $179,592,000 $182,592,000
Shares Outstanding at Year-End, less Shares held
in Treasury 13,697,107 13,658,530 14,081,860
Stockholders' Equity Per Share $10.98 $13.15 $12.97
Number of Stores at Year-End 556 695 667
High-Low High-Low High-Low
Sales Price of Common Stock
First Quarter $13.50-$10.13 $22.13-$16.00 $22.44-$15.25
Second Quarter $11.75-$ 8.75 $17.38-$11.88 $26.75-$22.25
Third Quarter $ 9.00-$ 7.75 $16.50-$ 9.63 $40.88-$24.25
Fourth Quarter $ 8.88-$ 7.25 $14.25-$10.50 $40.25-$20.50
</TABLE>
The number of holders of common stock as of January 31, 1994 is approximately
1,455.
THE COMPANY
House of Fabrics, Inc. is one of the largest home sewing/craft retailers in
the United States with 556 Company-owned super stores located in 40 states
selling medium-priced fabrics, notions, crafts and, in most of the stores,
sewing machines.
The Company began opening super stores in 1984, which have 10,000-12,000 square
feet. In July 1991, the Company acquired Fabricland Inc., a Portland, Oregon
fabric retailer with 84 super stores. At the end of January 1994, the Company
had 556 super stores, including 87 Fabricland stores. In the fiscal year ended
January 31, 1994, approximately 49.7% of the Company's sales were of fabrics,
sold by the yard and used principally for clothing, home decorating and crafts;
sewing notions represented 29.5% of the Company's sales; crafts represented
15.2%; and sewing machines and related accessories represented 5.6%.
Fabric and notion sales have been the primary business of the Company since
its incorporation in 1946. Sewing machine sales commenced in 1980 when the
Company became a dealer for the sale of Singer sewing machines and related
accessories, which complement the basic fabric and notion business. The Company
currently operates 339 full-line sewing machine departments in its stores. In
1981 the Company began opening full-line craft departments in its stores and
currently has 457 such departments.
The Company's stores operate under the name "House of Fabrics," "So-Fro
Fabrics," "Fabricland" or "Fabric King." The Company operates most of its
stores in leased premises, principally in neighborhood and regional shopping
centers, and does not engage in any franchising activity. The Company purchases
finished goods directly from mills and manufacturers, and has a facility in
South Carolina for processing and warehousing merchandise for distribution to
its stores.
HOUSE OF FABRICS, INC.
1994 ANNUAL REPORT
TO OUR SHAREHOLDERS
The past year was clearly one of the most difficult in
the history of House of Fabrics, Inc. The company's
results reflected weak economic conditions,
especially in California and the East Coast, intense
competition in an overstored retail fabric industry
and declining demand for fabrics used for apparel.
In the face of these challenging conditions, we felt it
was essential to implement new strategies to enhance
our competitive position, strengthen the balance
sheet and put the company on a sound course for the
future. As an index of progress, we are pleased to
report that we recorded a small profit in the fourth
quarter ended January 31, 1994. In response to
a continued softness in the economy, especially in
California where 154 or 28% of the Company's 556
stores are located at January 31, 1994, as well as
<PAGE>
highly competitive conditions in the fabric retailing industry, the Company
has taken certain actions as described below:
1) Effective September 1, 1993, the Board of Directors approved a plan of
restructuring ("the Plan") to close the Company's remaining mall stores and
embark on a new merchandising strategy that focuses on everyday value pricing.
Accordingly, in the third quarter of fiscal 1994, the Company recorded a
pretax restructuring charge of $12,909,000 for disposition of the remaining 110
mall stores. The mall stores are scheduled for closure over a three year
period, although the Company expects the majority of the stores to be closed in
the first twenty-four months. This charge includes estimated operating losses
through the scheduled closings of the mall stores ($2,325,000), lease
termination costs ($427,000), asset dispositions at the time of store closing
($9,965,000) and other related store closing costs ($192,000). In addition, the
Company reduced the carrying value of certain of its inventories by
$21,825,000, primarily to implement its repricing strategy for certain fabric,
notion and craft inventories under the Plan.
2) The Company has instituted cost reduction programs both in the stores and
at the Corporate office that include employee downsizing, part-time employee
labor reductions, and general and administrative cost controls.
3) Subsequent to year-end, the Company completed negotiations with its
lenders who have committed to an amendment of the Company's existing credit
facility which provides for, among other things, an extension of such credit
facility through May 31, 1995. The amended credit facility includes provisions
that reduce available borrowings over the term of the agreement and restrictive
quarterly and annual financial covenants that require the maintenance of
interest coverage and certain other financial ratios, minimum tangible net
worth and limits on capital expenditures.
4) The Company is exploring alternative sources of long-term financing,
which would be used primarily to reduce short-term borrowings.
While management believes it will successfully implement its new
merchandising and other business strategies and that general economic
conditions will improve, there can be no assurance that such plans will be
successful.
The plan included painful, but necessary steps. For several years, the
Company has been converting its operations from smaller, mall-based stores to
larger super stores, and the remaining mall stores were a drain on
profitability.
Fourth Quarter Profits
Operating profit for the fourth quarter was $4,488,000, after deducting over
$1 million in expenses due to the Northridge earthquake on January 17, 1994
which damaged our corporate headquarters and a number of our stores in the
area. We should add that our people responded very well to this difficult
situation. Within three days our corporate headquarters returned to full
operation, and nine of the twelve stores damaged by the quake have reopened,
most within days. The remaining three super stores are scheduled for reopening
by early summer.
Sales for the quarter were $147,645,000, compared with $157,745,000 a year
ago. For financial reporting purposes, results of the Company's mall stores
have been excluded from operating
<PAGE>
results effective September 1, 1993. Thus, such results are excluded from the
current fourth quarter, but included in the prior year period. Net income was
$212,000, equal to two cents per share, compared with $2,209,000, or 16 cents
per share, in the prior year. We should note that increased interest costs
restrained fourth quarter net income.
Superstore Sales Increase/
Overhead Cut
Store-for-store sales for our super stores posted an increase of 2.4 percent
for the fourth quarter. We were pleased to have stronger than industry average
sales in what is a very tough climate for fabric retailers.
While improving sales, we must also bring our costs more in line with
anticipated revenues. The fourth quarter benefited from substantial cost
reduction measures implemented at both the store level and the home office
which, combined with additional recent steps, are expected to significantly
reduce our overhead going forward.
Fiscal Year
Sales for the year totaled $546,664,000, compared with $557,521,000 in the
prior year. Net loss was $29,542,000, equal to $2.16 per share, compared to net
income of $5,203,000, or 37 cents per share in the prior year.
As noted previously, the company is no longer in an expansion mode. During
the year, we opened 31 new super stores, representing previously committed
leases, while closing 81 older units, primarily in malls.
Finances
Our company continues to focus on balance sheet improvement as an important
strategy in the present environment. Our continuing efforts to reduce
inventories have shown good progress in line with our expectations. Inventories
decreased from $267.5 million at October 31, 1993 to $243.1 million three
months later at fiscal year-end. Over the same period of time, bank debt was
lowered from $153.7 million to $143 million.
Summary and Outlook
House of Fabrics is now a leaner company with a much lower cost structure.
Based on our planned strategies, we look forward to improved results in the
coming fiscal year.
However, much work remains to be done. We will strive to enhance the
performance of existing stores while further eliminating marginal performers.
Balance sheet improvement, and expense control, will continue to receive the
highest priority. In addition, the further development of the popular crafting
and home decorating side of the business represents an exciting opportunity for
the future. Recently, we opened our first prototype of a super store offering a
much greater range and variety of this appealing merchandise. While it is still
early in the process, results are encouraging.
A Pioneer of Our Industry
All of us were deeply saddened by the passing on January 17, 1994 of David
I. Sofro, our chairman emeritus, co-founder and a director. Along with his late
brother Charles, he opened the first House of Fabrics location on Wilshire
Boulevard in Los Angeles in 1946 and built the company into one of the first
and largest independent retail fabric store chains in America. David
<PAGE>
was an outstanding retailer and an innovator. Through the years, we benefited
from his vision, drive and business acumen, just as we appreciated his
friendship and counsel. David Sofro was a true original, and he is greatly
missed.
Sincere Thanks
We wish to express our appreciation to our shareholders for their patience
and understanding during this unprecedented period of change among American
retailing operations. We are making progress and will do everything in our
power to justify your faith in us.
At the same time, we thank our people for responding so well to the many
challenges of the past year. Finally, we must extend a special word of thanks
to our customers, who are the basis of our business.
BARNEY SOFRO
Chairman of the Board
GARY L. LARKINS
President/Chief Executive Officer
<PAGE>
FIVE-YEAR SUMMARY
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1994 1993 1992(a) 1991 1990
<S> <C> <C> <C> <C> <C>
Summary of Operations
Sales $546,664,000 $557,521,000 $493,062,000 $393,495,000 $357,392,000
Gross Profit $222,907,000 $256,823,000 $242,059,000 $197,529,000 $186,625,000
Interest Expense $8,176,000 $5,296,000 $4,039,000 $2,308,000 $2,608,000
Income Taxes (Benefit) $(15,218,000) $3,750,000 $12,796,000 $9,414,000 $7,563,000
Net Income (Loss) $(29,542,000) $5,203,000 $19,691,000 $13,831,000 $11,111,000
Net Income (Loss) Per Share $(2.16) $.37 $1.44 $1.13 $.82
Cash Dividends Per Share -- -- -- $.06 $.24
Return (Loss) on Average Stockholders' Equity (17.9)% 2.9% 13.8% 13.0% 10.5%
Return (Loss) on Average Tangible Stockholders' Equity (23.8)% 3.7% 16.1% 13.0% 10.5%
Year-End Position
Assets $393,055,000 $383,132,000 $363,698,000 $212,443,000 $191,206,000
Long-Term Debt $2,862,000 $17,216,000 $6,742,000 $11,216,000 $11,561,000
Stockholders' Equity $150,409,000 $179,592,000 $182,592,000 $103,103,000 $110,346,000
Tangible Stockholders' Equity $110,197,000 $138,308,000 $141,758,000 $103,103,000 $110,346,000
Stockholders' Equity Per Share $10.98 $13.15 $12.97 $9.01 $8.28
Tangible Stockholders' Equity Per Share $8.05 $10.13 $10.07 $9.01 $8.28
Number of Stores 556(b) 695 667 604 629
</TABLE>
(a) On July 16, 1991, the Company acquired all of the Common Stock of
Fabricland, Inc. See Note 2 to the consolidated financial statements.
(b) This number comprises super stores only. 89 mall stores scheduled for
closure under the plan of restructuring are excluded.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
Operations In response to a continued softness in the economy, especially in
California where 154 or 28% of the Company's 556 stores are located at January
31, 1994, as well as highly competitive conditions in the fabric retailing
industry, the Company has taken certain actions as described below:
1) Effective September 1, 1993, the Board of Directors approved a plan of
restructuring ("the Plan") to close the Company's remaining mall stores and
embark on a new merchandising strategy that focuses on everyday value pricing.
Accordingly, in the third quarter of fiscal 1994, the Company recorded a
pretax restructuring charge of $12,909,000 for disposition of the remaining 110
mall stores. The mall stores are scheduled for closure over a three year
period, although the Company expects the majority of the stores to be closed in
the first twenty-four months. This charge includes estimated operating losses
through the scheduled closings of the mall stores ($2,325,000), lease
termination costs
<PAGE>
($427,000), asset dispositions at the time of store closing ($9,965,000) and
other related store closing costs ($192,000). In addition, the Company reduced
the carrying value of certain of its inventories by $21,825,000, primarily to
implement its repricing strategy for certain fabric, notion and craft
inventories under the Plan.
2) The Company has instituted cost reduction programs both in the stores and
at the Corporate office that include employee downsizing, part-time employee
labor reductions, and general and administrative cost controls.
3) Subsequent to year-end, the Company completed negotiations with its
lenders who have committed to an amendment of the Company's existing credit
facility which provides for, among other things, an extension of such credit
facility through May 31, 1995 (see Note 4 to the Consolidated Financial
Statements). The amended credit facility includes provisions that reduce
available borrowings over the term of the agreement and restrictive quarterly
and annual financial covenants that require the maintenance of interest
coverage and certain other financial ratios, minimum tangible net worth and
limits on capital expenditures.
4) The Company is exploring alternative sources of long-term financing,
which would be used primarily to reduce short-term borrowings.
While management believes it will successfully implement its new
merchandising and other business strategies and that general economic
conditions will improve, there can be no assurance that such plans will be
successful.
In consideration of the Plan described above, operations of the mall stores
are excluded from reported operations since the inception of the Plan. From
September 1, 1993 through the end of fiscal 1994, mall store sales of
$18,750,000 were excluded from operating results. Related operating losses,
asset dispositions and other related store closing costs of $1,775,000, which
includes the cost of closing 21 stores, were charged to the restructuring
reserve.
Sales for the year ended January 31, 1994 decreased 0.2% to $546,664,000
from $557,521,000 in the prior year. The decrease in sales of $10,857,000
consisted of a 2.2% decrease in store-for-store sales, in addition to the
elimination of sales for mall stores under the Plan of $18,750,000, all of
which were substantially offset by sales attributable to new stores which
exceeded sales attributable to closed stores. In response to overcapacity in
the retail fabric industry, the Company reduced store openings to 31 new super
stores, closed 60 traditional (mall) stores including stores closed under the
Plan, and closed 21 older super stores. The decrease in comparable store sales
resulted in part from the generally poor economic conditions (including
California, which has 154 of the Company's super stores at January 31, 1994)
and the competitive pressure in the fabric retailing industry. The Company
believes these factors may continue into the future and, as a result, will
continue to close stores when appropriate.
Sales for the year ended January 31, 1993 increased 13.1% to $557,521,000
from $493,062,000 in the prior year. The increase in sales of $64,459,000 is
attributable to the addition of 84 new House of Fabrics and Fabricland super
stores, the acquisition of 7 Fabric King stores, and including a full year's
sales for Fabricland in fiscal 1993, which was partially offset by closing 53
traditional (mall) stores and 10 super stores and a 1.1% decrease in
store-for-store sales resulting from competitive pressure in various parts of
the country.
Sales for the year ended January 31, 1992 increased 25.3% to $493,062,000
from $393,495,000 in the prior year. The increase in sales of $99,567,000 is
attributable to the addition of 54 new super stores, the acquisition of the
84-store Fabricland chain and an increase of 8.7% in store-for-store sales
which was partially offset by the closing of 68 traditional (mall) stores and
<PAGE>
7 super stores.
Gross profit as a percentage of sales decreased to 40.8% for the year ended
January 31, 1994 from 46.1% for the year ended January 31, 1993. This decrease
was due primarily to the $21,825,000 reduction in inventory carrying value
recorded during the third quarter of fiscal 1994 as part of the Plan described
above.
Gross profit as a percentage of sales decreased to 46.1% for the year ended
January 31, 1993 from 49.1% for the year ended January 31, 1992. Markdowns as a
percent of sales were 3.9% higher during fiscal 1993 compared to fiscal 1992,
as a result of significantly higher promotional markdowns that were taken
during fiscal 1993 in an effort to bring inventory levels down.
Gross profit as a percentage of sales decreased to 49.1% for the year ended
January 31, 1992 from 50.2% for the year ended January 31, 1991. The decrease
in 1992 from 1991 came from higher promotional markdowns, which increased 0.5%
as a percent of sales in fiscal 1992, and lower gross profit for the Fabricland
stores somewhat offset by higher initial opening markups.
Store and operating expenses for the year ended January 31, 1994 increased
$679,000 to $208,070,000 from $207,391,000 for the prior year. As a percent of
sales, these expenses increased to 38.1% for the year ended January 31, 1994
from 37.2% for the prior year, principally as a result of increased rents for
super stores which have higher rent expense due to larger square footages,
partially offset by a decrease in payroll expense, which is part of the
Company's strategy to reduce controllable expenses to their lowest possible
levels.
Store and operating expenses for the year ended January 31, 1993 increased
$32,483,000 to $207,391,000 from $174,908,000 for the prior year. As a percent
of sales, these expenses increased to 37.2% for the year ended January 31, 1993
from 35.5% for the prior year as a result of the significant increases in
payroll, advertising expense, and rent expense during fiscal 1993 due to
opening or acquiring 91 additional stores and a decrease in sales per store
during fiscal 1993.
Store and operating expenses for the year ended January 31, 1992 increased
$28,388,000 to $174,908,000 from $146,520,000 for the prior year. As a percent
of sales, these expenses decreased to 35.5% for the year ended January 31, 1992
from 37.2% for the prior year primarily due to the significant sales increases.
Payroll expense in fiscal 1992 increased $15.0 million over 1991 as a result of
opening more super stores and the acquisition of the Fabricland chain.
Additionally, payroll expense dropped 0.4% as a percent of sales in fiscal
1992, when compared to fiscal 1991.
General and administrative expense as a percent of sales increased to 6.8%
for the fiscal year ended January 31, 1994 from 6.1% for the prior year,
primarily as a result of increased insurance-related expenses.
General and administrative expense as a percent of sales remained flat at
6.1% for the fiscal year ended January 31, 1993 compared to the prior year. The
increase in general and administrative costs during fiscal 1993 was largely
attributable to opening or acquiring 91 new super stores and operating the
Fabricland chain for a full year compared to six months for 1992.
General and administrative expense as a percent of sales decreased to 6.1% for
the fiscal year ended January 31, 1992 from 6.5% for the prior year, primarily
due to significant sales increases during fiscal 1992. The increase in general
and administrative costs during fiscal 1992 was
<PAGE>
largely attributable to the acquisition of the Fabricland chain.
Interest expense for the year ended January 31, 1994 increased $2,880,000
compared to the prior year as a result of an increase in average borrowings
during the period of $36,071,000 in addition to an increase in the Company's
average effective borrowing rates.
Interest expense for the year ended January 31, 1993 increased $1,257,000
compared to the prior year. The increase in fiscal 1993 compared to fiscal 1992
was related to significantly higher average borrowings during the year, offset
by significantly lower average interest rates.
Interest expense for the year ended January 31, 1992 increased $1,731,000
compared to the prior year and was related to higher average borrowings,
partially offset by lower interest rates throughout the year.
For the year ended January 31, 1994, the Company reported a loss before
income taxes of $44,760,000, most of which related to the Plan, compared to
income before income taxes of $8,953,000 for fiscal 1993 and $32,487,000 for
fiscal 1992. The Company recorded a tax benefit of $15,218,000 for the year
ended January 31, 1994 as a result of the loss incurred. Realization of the
Company's deferred tax asset is more likely than not because the Company has
taxable income in prior carryback years, and existing taxable temporary
differences will reverse in future years. Accordingly, an allowance to reduce
the value of the deferred tax asset is not necessary.
Financial Condition Cash requirements of the Company have been met by the
use of short-term debt provided by a credit agreement as described in Note 4 to
the Consolidated Financial Statements, and long-term debt as described in Note
6 to the Consolidated Financial Statements.
During fiscal 1994, short-term borrowings ranged from $93,046,000 to
$153,852,000 with average borrowings of $131,751,000. Borrowings in fiscal 1993
ranged from $48,787,000 to $126,488,000 with average borrowings of $95,680,000,
and fiscal 1992 borrowings ranged from $7,000,000 to $62,448,000 with average
borrowings of $39,801,000. Increased borrowing levels in 1994 over 1993 were
due primarily to a lack of available inventory financing, the conversion of
certain long-term debt to short-term borrowings, and funds needed to fund
operating losses generated during the year. Increased borrowing levels in 1993
over 1992 were due to higher inventory levels in anticipation of increased
sales levels, in addition to opening or acquiring 91 new super stores during
the year. Increased borrowing levels in 1992 over 1991 resulted from
significantly higher inventories attributable to higher sales and the
Fabricland acquisition in fiscal 1992.
Cash at January 31, 1994 was $9,758,000, up significantly from $2,214,000 at
January 31, 1993. Cash flows from operating activities decreased $20,586,000
during fiscal 1994 compared to fiscal 1993, primarily due to the significant
loss generated in fiscal 1994, and the resulting increase in refundable income
taxes, and the decrease in accounts payable and accrued liabilities. Also, the
Company used $12,425,000 for capital expenditures. These investments were
financed by increased borrowings under the revolving credit agreement of
$48,597,000.
Cash at January 31, 1993 was $2,214,000, down slightly from $2,358,000 at
January 31, 1992. Cash flows from operating activities decreased $6,958,000
during fiscal 1993 compared to fiscal 1992, primarily as a result of a
significant decline in net income, the decrease in accounts payable and accrued
liabilities and the increase in merchandise inventories. Also, the Company
<PAGE>
used $21,776,000 for capital expenditures; $13,727,000 to acquire treasury stock
and $11,469,000 for the repayment of long-term debt. These investments were
financed by increased borrowings under lines of credit in fiscal 1993 of
$40,261,000 and by borrowings of $15,000,000 under a long-term note payable to
bank.
Cash at January 31, 1992 was $2,358,000, up from $1,484,000 at January 31,
1991. Cash flows from operating activities decreased $31,649,000 during fiscal
1992 compared to fiscal 1991, primarily as a result of a $28,709,000 net
increase in merchandise inventories over accounts payable and accrued
liabilities, net of the effect of the Fabricland acquisition. Also, the Company
used $11,953,000 for capital expenditures and $2,871,000 for Fabricland
acquisition costs. These investments were financed by increased borrowings
under lines of credit of $21,750,000. In addition, $6,699,000 was used for the
repayment of long-term debt.
The Company's January 31, 1994 ending inventory of $243,151,000 decreased
from $254,262,000 at January 31, 1993 and $247,009,000 at January 31, 1992.
During fiscal 1994, the average inventory balance was $275,139,000 compared to
$265,712,000 in fiscal 1993 and $201,626,000 in fiscal 1992. Average inventory
turnover during fiscal 1994 was 1.18 times, compared to 1.13 times during
fiscal 1993 and 1.25 times during fiscal 1992. A majority of the Company's
inventory consists of basic products that are kept in stock even though
turnover is slow. The Company monitors the level of these items to assure that
the level of slow-moving inventory is kept at a minimum, while still
consistently providing customers with a complete product mix. In addition,
markdowns are taken currently on out-of-season and discontinued merchandise.
The Company will continue to open new store locations, however, at
significantly reduced levels during fiscal 1995, and remodel existing locations
whenever the projected rate of return is acceptable. Such capital expenditures
will be financed primarily by the use of short-term borrowings.
The Company owns a warehouse in Portland, Oregon, that is not currently in
use by the Company. This property is reflected in the Consolidated Balance
Sheets as Property Held for Sale, and is valued at the lower of cost or market.
The Company is actively pursuing the sale of this property.
The Company's amended and restated credit agreement (see Note 4 to the
Consolidated Financial Statements) prohibits the payment of dividends.
The Company's implementation of FASB Statement No. 109, "Accounting for
Income Taxes," did not have a material impact on the Consolidated Financial
Statements.
The Company expects that future cash required to implement its restructuring
plan will approximate $619,000 and relates primarily to lease termination costs
and certain other store closing costs.
CONSOLIDATED STATEMENTS OF OPERATIONS
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended January 31, 1994 1993 1992
<S> <C> <C> <C>
Sales $546,664,000 $557,521,000 $493,062,000
Expenses:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cost of Sales 323,757,000 300,698,000 251,003,000
Store and Operating 208,070,000 207,391,000 174,908,000
General and Administrative 37,149,000 33,903,000 29,963,000
Interest 8,176,000 5,296,000 4,039,000
Intangibles Amortization 1,363,000 1,280,000 662,000
Restructuring Charge 12,909,000 -- --
Total 591,424,000 548,568,000 460,575,000
Income (Loss) Before Income Taxes (44,760,000) 8,953,000 32,487,000
Income Taxes (Benefit) (15,218,000) 3,750,000 12,796,000
Net Income (Loss) $(29,542,000) $5,203,000 $19,691,000
Net Income (Loss) Per Share $(2.16) $.37 $1.44
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Common Paid-in Retained
Stock Capital Earnings Treasury Stock
<S> <C> <C> <C> <C>
Balance, February 1, 1991 $1,366,000 $ 17,394,000 $106,807,000 $(22,464,000)
Exercise of Stock Options 28,000 1,963,000 -- --
Tax Benefit Related to Stock Options -- 3,836,000 -- --
Net Income -- -- 19,691,000 --
Fabricland Acquisition 38,000 36,428,000 -- 22,464,000
Treasury Stock Acquired -- -- -- (4,959,000)
Balance, January 31, 1992 1,432,000 59,621,000 126,498,000 (4,959,000)
Exercise of Stock Options 5,000 346,000 -- --
Tax Benefit Related to Stock Options -- 214,000 -- --
Net Income -- -- 5,203,000 --
Treasury Stock Acquired -- -- -- (8,768,000)
Balance, January 31, 1993 1,437,000 60,181,000 131,701,000 (13,727,000)
Exercise of Stock Options 4,000 318,000 -- --
Tax Benefit Related to Stock Options -- 37,000 -- --
Net Loss -- -- (29,542,000) --
Treasury Stock Retired (71,000) (13,656,000) -- 13,727,000
Balance, January 31, 1994 $1,370,000 $ 46,880,000 $102,159,000 $ --
</TABLE>
CONSOLIDATED BALANCE SHEETS
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
January 31, 1994 1993
<S> <C> <C>
Assets
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Current Assets:
Cash $ 9,758,000 $ 2,214,000
Receivables 9,765,000 6,836,000
Merchandise Inventories 243,151,000 254,262,000
Prepaid Expenses and Other Current Assets 5,601,000 5,055,000
Refundable Income Taxes 10,738,000 1,587,000
Deferred Income Taxes 4,538,000 2,504,000
Total Current Assets 283,551,000 272,458,000
Property:
Land 1,729,000 2,120,000
Buildings 14,403,000 9,485,000
Furniture & Fixtures 67,845,000 64,497,000
Leasehold Improvements 36,067,000 36,085,000
Construction in Progress -- 1,893,000
Total 120,044,000 114,080,000
Less Accumulated Depreciation and Amortization 54,454,000 49,160,000
Property -- Net 65,590,000 64,920,000
Property Held for Sale 2,740,000 3,340,000
Other Assets 962,000 1,130,000
Goodwill 40,212,000 41,284,000
Total $393,055,000 $383,132,000
Liabilities
Current Liabilities:
Accounts Payable $55,890,000 $75,863,000
Notes Payable to Banks 143,000,000 79,403,000
Accrued Liabilities 26,565,000 21,210,000
Current Portion of Long-Term Debt 1,963,000 3,814,000
Total Current Liabilities 227,418,000 180,290,000
Deferred Income Taxes 3,110,000 6,034,000
Long-Term Debt 2,862,000 17,216,000
Other Long-Term Liabilities 9,256,000 --
Equity
Stockholders' Equity:
Preferred Stock, $.10 Par Value;
Authorized, 1,000,000 Shares; Outstanding, None
Common Stock, $.10 Par Value;
Authorized, 29,000,000 Shares; Issued, 13,697,107 Shares in 1994
and 14,368,230 Shares in 1993 1,370,000 1,437,000
Paid-In Capital 46,880,000 60,181,000
Retained Earnings 102,159,000 131,701,000
Less 709,700 Common Shares in Treasury at Cost (1993) (13,727,000)
Total Stockholders' Equity 150,409,000 179,592,000
Total $393,055,000 $383,132,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended January 31,
1994 1993 1992
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) $(29,542,000) $ 5,203,000 $ 19,691,000
Adjustments to Reconcile Net Income (Loss) to Net Cash
Used In Operating Activities:
Depreciation and Amortization 11,186,000 9,853,000 8,229,000
Loss on Disposal of Fixed Assets 1,605,000 706,000 1,086,000
Deferred Taxes (5,623,000) 234,000 (442,000)
Repricing of Inventories and Restructuring Charges 34,734,000 -- --
Changes in Assets and Liabilities, Net of the Effects of the
Acquisition of Businesses:
Receivables (2,929,000) 719,000 152,000
Merchandise Inventories (10,714,000) (7,103,000) (46,294,000)
Prepaid Expenses, Refundable Income Taxes and Other Assets (9,492,000) (1,024,000) (1,351,000)
Accounts Payable and Accrued and Other Liabilities (18,113,000) (16,890,000) 17,585,000
Net Cash Used In Operating Activities (28,888,000) (8,302,000) (1,344,000)
Cash Flows from Investing Activities
Capital Expenditures (12,425,000) (21,776,000) (11,953,000)
Proceeds from Sale of Property 1,143,000 718,000 --
Acquisition of Businesses -- (1,200,000) (2,871,000)
Net Cash Used in Investing Activities (11,282,000) (22,258,000) (14,824,000)
Cash Flows from Financing Activities
Repayment of Long-Term Debt (1,205,000) (11,469,000) (6,699,000)
Issuance of Long-Term Debt -- 15,000,000 --
Proceeds from Exercise of Stock Options 322,000 351,000 1,991,000
Net Borrowings Under Lines of Credit Agreements 48,597,000 40,261,000 21,750,000
Purchase of Treasury Stock -- (13,727,000) --
Net Cash Provided by Financing Activities 47,714,000 30,416,000 17,042,000
Net Increase (Decrease) in Cash 7,544,000 (144,000) 874,000
Cash at Beginning of Year 2,214,000 2,358,000 1,484,000
Cash at End of Year $ 9,758,000 $ 2,214,000 $2,358,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid (Received) During the Year For
Interest $ 8,562,000 $ 5,410,000 $ 4,185,000
Income Taxes $ (891,000) $ 1,332,000 $ 11,074,000
SUPPLEMENTAL DISCLOSURES OF NON CASH FINANCING ACTIVITIES
During the year ended January 31, 1994, long-term debt of $15,000,000 was
converted into Notes Payable to Banks.
During the year ended January 31, 1992, the Company acquired all of the
common stock of
</TABLE>
<PAGE>
Fabricland, Inc. by issuing 2,591,468 shares of common stock amounting to
$58,930,000.
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1994, 1993 AND 1992
Note 1: Management Plans and Restructuring
In response to a continued softness in the economy, especially in California
where 154 or 28% of the Company's 556 stores are located at January 31, 1994,
as well as highly competitive conditions in the fabric retailing industry, the
Company has taken certain actions as described below:
1) Effective September 1, 1993, the Board of Directors approved a plan of
restructuring ("the Plan") to close the Company's remaining mall stores and
embark on a new merchandising strategy that focuses on everyday value pricing.
Accordingly, in the third quarter of fiscal 1994, the Company recorded a pretax
restructuring charge of $12,909,000 for disposition of the remaining 110 mall
stores. The mall stores are scheduled for closure over a three year period,
although the Company expects the majority of the stores to be closed in the
first twenty-four months. This charge includes estimated operating losses
through the scheduled closings of the mall stores ($2,325,000), lease
termination costs ($427,000), asset dispositions at the time of store closing
($9,965,000) and other related store closing costs ($192,000). In addition, the
Company reduced the carrying value of certain of its inventories by $21,825,000,
primarily to implement its repricing strategy for certain fabric, notion and
craft inventories under the Plan.
2) The Company has instituted cost reduction programs both in the stores and
at the Corporate office that include employee downsizing, part-time employee
labor reductions, and general and administrative cost controls.
3) Subsequent to year-end, the Company completed negotiations with its
lenders who have committed to an amendment of the Company's existing credit
facility which provides for, among other things, an extension of such credit
facility through May 31, 1995 (see Note 4). The amended credit facility
includes provisions that reduce available borrowings over the term of the
agreement and restrictive quarterly and annual financial covenants that require
the maintenance of interest coverage and certain other financial ratios,
minimum tangible net worth and limits on capital expenditures.
4) The Company is exploring alternative sources of long-term financing,
which would be used primarily to reduce short-term borrowings.
While management believes it will successfully implement its new
merchandising and other business strategies and that general economic
conditions will improve, there can be no assurance that such plans will be
successful.
Note 2: Summary of Accounting Policies Principles of Consolidation -- The
consolidated financial statements include the accounts of all subsidiaries, all
of which are wholly-owned. The Company's subsidiaries include Fabricland, Inc.,
Sofro Fabrics, Inc., House of Fabrics of South Carolina, Inc., and Metrolina
Express, Inc. Intercompany accounts and transactions are eliminated in
consolidation.
<PAGE>
Inventories -- Merchandise inventories are stated at the lower of cost or
market, cost being determined on the retail first-in, first-out method. Store
inventories are counted on a cycle basis throughout the year, and markdowns are
taken currently on out of season and discontinued merchandise.
Property -- Property is stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method at rates
based on the estimated lives of the assets. Leasehold improvements are
amortized over the estimated life of the improvements or over the term of the
lease, whichever is shorter.
Net Income (Loss) Per Share -- Net income (loss) per share is computed based
on the weighted average number of shares of common stock and the dilutive
effect, if any, of common stock equivalents outstanding during the year:
13,688,941 in 1994, 13,990,112 in 1993, and 13,702,976 in 1992, after giving
effect to the two-for-one stock split effective April 30, 1991.
Income Taxes -- Effective February 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires a liability approach in accounting for income taxes. Deferred tax
assets and liabilities are recognized based on enacted tax laws for the
estimated future tax effects of events that have been recognized in the
Company's financial statements or tax returns. For fiscal years prior to 1994,
the Company accounted for income taxes under the deferred method as promulgated
by Accounting Principles Board Opinion No. 11. The cumulative effect of adopting
SFAS No. 109 was not material to the Consolidated Financial Statements.
Fair Value of Financial Instruments -- The carrying amounts of receivables
and accounts payable represent a reasonable estimate of their fair values. The
carrying amounts of the Company's various debt instruments approximate fair
value because their interest rates are based on variable reference rates.
Goodwill -- The recoverability of Goodwill attributable to the acquisition
of Fabricland in fiscal 1992 is analyzed annually based on actual and projected
levels of profitability. Goodwill is being amortized over a 40-year period.
Property Held for Sale -- Property held for sale is valued at the lower of
cost or market and comprises a warehouse in Portland, Oregon, that is not
currently in use by the Company.
Reclassifications -- Certain amounts in prior year financial statements have
been reclassified to correspond to current year classifications.
Note 3: Acquisition
On July 16, 1991, the Company acquired all the common stock of Fabricland,
Inc., a fabric retailer located in Portland, Oregon, by issuing 2,591,468 of
its own shares. Total consideration paid for the Company was $63.5 million.
The Fabricland acquisition was accounted for using the purchase method, and
the results of operations of Fabricland have been included in the Company's
Consolidated Financial Statements since the date of acquisition. The excess of
the purchase price over the estimated fair value of the net assets acquired is
being amortized using the straight-line method over 40 years. Accumulated
amortization was $2,670,000 and $1,599,000 at January 31, 1994 and 1993,
<PAGE>
respectively.
In conjunction with the acquisition, total assets acquired had a fair value
of $100,971,000, common stock issued amounted to $58,930,000, and acquisition
costs incurred net of cash acquired amounted to $4,542,000, leaving net
liabilities assumed of $37,499,000.
The following unaudited proforma financial results of operations for the
fiscal years ended January 31, 1992 and January 31, 1991, add together the
results of the separate companies as though the acquisition of Fabricland had
occurred on February 1, 1991. For the 12 months ended January 31, 1992, sales
were $535,881,000; net income was $19,837,000 and net income per share was
$1.33.
Note 4: Notes Payable to Banks
On November 30, 1993, the Company renegotiated its existing three bank
agreements (Bank of America and the original Bank Group, Bank of California, and
United States National Bank of Oregon) into one amended and restated credit
agreement with Bank of America NT & SA as Agent Bank, and the Banks have
committed to amend the credit agreement as of May 13, 1994. (The credit
agreement together with the committed amendment is herein referred to as the
"Credit Agreement".) Borrowings under the Credit Agreement bear interest at
rates equal to either the "Offshore Rate" (which is generally based on LIBOR)
plus 2.5% through April 30, 1994, and 2.75% through May 13, 1994, or the "Base
Rate" (which is generally based on the reference rate announced by the Bank of
America) plus 1.50% through April 30, 1994, 1.75% through July 31, 1994, 2.00%
through October 31, 1994, 2.25% through January 31, 1995 and 2.50% through May
31, 1995.
As of May 13, 1994, the Credit Agreement provides for borrowings up to
$150,000,000, which is reduced to $140,000,000 on October 31, 1994 and further
reduced to $130,000,000 on January 31, 1995. Borrowings are also limited to a
specified percentage of eligible inventory ranging from 64% to 60% through
August 31, 1994 and 55% thereafter. Available borrowings are also subject to
further reductions upon the occurrence of certain future events that would
result in mandatory repayments of amounts borrowed. The Credit Agreement
expires on May 31, 1995. The amount of available unused borrowings at January
31, 1994 was $8,900,000. As of January 31, 1994, $143,000,000 was outstanding
under the Credit Agreement.
Borrowings under the Credit Agreement are secured by substantially all
assets of the Company, excluding property.
The Credit Agreement imposes quarterly and annual financial covenants
requiring the Company to maintain certain liquidity, leverage and interest
coverage ratios and achieve certain levels of tangible net worth. In addition,
the Credit Agreement prohibits the payment of dividends and restricts the level
of capital expenditures.
For the fourth quarter of fiscal 1994, the Company was unable to remain in
compliance with one of the quarterly financial ratio covenants and has obtained
a waiver from the banks, effective through May 13, 1994.
Note 5: Income Taxes
Income taxes were accounted for in fiscal 1994 using the liability approach as
promulgated by Statement of Financial Accounting Standards ("SFAS") No. 109. For
years prior to fiscal 1994, income taxes were accounted for using the deferred
method as promulgated by Accounting Principles Board Opinion No. 11.
Under SFAS No. 109, certain deferred tax liabilities were recognized related to
the July 1991 acquisition of Fabricland. Under prior accounting, these
liabilities were accounted for differently. However, the cumulative effect of
adopting SFAS No. 109 was not material to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
For the Years Ended January 31, 1994 1993 1992
<S> <C> <C> <C>
Income taxes (benefit) was as follows:
Current:
Federal $(9,745,000) $3,199,000 $10,547,000
State 150,000 317,000 2,691,000
(9,595,000) 3,516,000 13,238,000
Deferred:
Federal (5,272,000) 350,000 (332,000)
State (351,000) (116,000) (110,000)
(5,623,000) 234,000 (442,000)
Income taxes (benefit) $(15,218,000) $3,750,000 $12,796,000
Deferred income taxes consist of:
Depreciation $61,000 $(203,000) $311,000
Basis differences of property disposed 75,000 3,000 (94,000)
Restructuring reserve (3,854,000) -- --
Inventory reserve (1,809,000) (493,000) --
State franchise taxes 78,000 308,000 (31,000)
Other (174,000) 619,000 (628,000)
Total deferred income taxes $(5,623,000) $234,000 $(442,000)
</TABLE>
<TABLE>
<CAPTION>
A reconciliation to the statutory federal income tax rate is as follows:
For the Years Ended January 31, 1994 1993 1992
Effective Amount Rate Effective Amount Rate Effective Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes $(15,666,000) (35.0)% $3,044,000 34.0% $11,046,000 34.0%
State taxes, net of
federal benefit (245,000) (0.5)% 312,000 3.5% 1,703,000 5.2%
Amortization of intangibles 364,000 0.8% 435,000 4.9% 225,000 0.7%
Miscellaneous 329,000 0.7% (41,000) (0.5)% (178,000) (0.5)%
Income taxes (benefit) $(15,218,000) (34.0)% $3,750,000 41.9% $12,796,000 39.4%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred tax assets and liabilities at January 31, 1994 and 1993 comprise
the following:
1994 1993
<S> <C> <C>
Restructuring reserve $3,785,000 $ --
Inventory reserve 1,809,000 493,000
Medical claims reserve 552,000 471,000
Vacation pay reserve 356,000 332,000
Rent reserves 399,000 323,000
Other reserves 453,000 607,000
Other 222,000 570,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total deferred tax assets $7,576,000 $2,796,000
Depreciation and other
property differences $5,971,000 $6,132,000
Other 177,000 643,000
Total deferred tax liabilities $6,148,000 $6,775,000
</TABLE>
The deferred tax asset related to the restructuring reserve will reverse as
the reserve is utilized, through fiscal 1997. Other deferred tax assets at
January 31, 1994 will reverse, generally in fiscal 1995.
Note 6: Long-Term Debt
Long-term debt at January 31, 1994 and 1993 consists of the following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
7% First Mortgage Industrial
Revenue Bonds, payable in
annual amounts of $125,000 $500,000 $625,000
Note payable to bank 15,000,000
Notes payable to bank -- Fabricland 3,924,000 4,897,000
Other notes payable 401,000 508,000
4,825,000 21,030,000
Less current portion 1,963,000 3,814,000
Total long-term debt $2,862,000 $17,216,000
</TABLE>
The industrial revenue bonds are repayable in the form of rent on the
facilities leased, which have been accounted for as purchases and are being
depreciated over their estimated useful lives. The remaining bond matures in
fiscal 1998. The capitalized assets which are pledged with respect to these
bonds have a net book value of $1,694,000 at January 31, 1994. The note payable
to bank was obtained in August 1992 and, on November 30, 1993 was converted
into a portion of the Company's amended and restated Credit Agreement with Bank
of America NT & SA, as Agent Bank. See Note 4 to the Consolidated Financial
Statements. Notes payable to bank -- Fabricland relate to debt assumed as part
of the Fabricland acquisition, are collateralized by certain real property of
Fabricland, and bear interest at prime plus 1/2 (6.5% at January 31, 1994).
Other notes payable relate to the acquisition of a small retail fabric chain in
1989. Maturities of long-term debt for the succeeding five fiscal years are as
follows: 1995, $1,963,000; 1996, $662,000; 1997, $625,000; 1998, $564,000;
1999, $934,000, thereafter, $77,000.
Note 7: Capital
The Company has two stock option plans which provide for the granting of
3,250,000 options to officers and key employees. The incentive stock option
plan provides for the granting of 1,500,000 options. During fiscal 1988, the
Company authorized a new stock option plan consisting of 1,000,000
non-qualified stock options and, on March 19, 1991, the authorized options were
increased to 1,750,000.
The options granted allow employees to purchase shares of the Company's
common stock for the market value on the date of grant. Generally, the stock
options become exercisable in three equal installments commencing one year
after the date of grant, and expire ten years after the date of grant.
At January 31, 1994, there were 999,556 options outstanding under both of
these plans, and
<PAGE>
672,213 were available for future grant. Changes in stock options for the years
ended January 31, 1994, 1993 and 1992 are summarized below:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Outstanding, beginning of year 953,208 1,024,984 1,069,086
Granted ($8.25 to $24.88 per share) 144,750 44,000 240,000
Exercised ($6.00 to $8.69 per share) (38,577) (46,170) (283,102)
Cancelled ($6.00 to $18.31 per share) (59,825) (69,606) (1,000)
Outstanding January 31
($6.00 to $24.88 per share) 999,556 953,208 1,024,984
Exercisable January 31
($6.00 to $24.88 per share) 793,473 641,875 413,650
</TABLE>
In fiscal 1991 and fiscal 1992, the Board of Directors authorized the
purchase of up to 4,000,000 of the Company's common shares. The Company
repurchased 469,500 shares in fiscal 1993 and 240,200 shares in fiscal 1992.
During fiscal 1994, these 709,700 shares held in treasury were retired.
On March 20, 1991, the Board of Directors declared a two-for-one stock split
effected in the form of a stock dividend effective April 30, 1991. All share
and per share data have been restated to reflect the stock split.
Note 8: Commitments
Total rental expense, including real estate taxes and insurance, for the
years ended January 31, 1994, 1993 and 1992 was $61,830,000, $57,188,000, and
$46,870,000, respectively. Contingent rentals based on sales are not
significant. Most of the store leases require the Company to pay real estate
taxes and certain other expenses, and some contain renewal options for various
periods. Minimum future rentals under operating leases in effect at January 31,
1994 are summarized as follows: 1995, $53,052,000; 1996, $50,205,000; 1997,
$46,693,000; 1998, $42,013,000; 1999, $36,650,000; 2000-2014, $133,542,000 for
a total of $362,155,000.
In fiscal 1987, the Company entered into consulting and non-competition
agreements with certain former officers. The Company purchased, at less than
market value, 196,220 stock options previously granted and agreed to make
monthly payments to the former officers over periods not exceeding five years.
Related costs of $137,000, $149,000 and $155,000 were recognized in fiscal 1994,
1993 and 1992, respectively.
Note 9: Quarterly Financial Data for the Years Ended January 31, 1994 and
1993
<TABLE>
<CAPTION>
(Unaudited) 1994
April 30 July 31 October 31 January 31
<S> <C> <C> <C> <C>
Sales $127,981,000 $129,240,000 $141,798,000 $147,645,000
Gross Profit $60,291,000 $57,963,000 $39,258,000 $65,395,000
Net Income (Loss) $(693,000) $(4,032,000) $(25,029,000) $212,000
Net Income (Loss)
Per Share $(.05) $(.29) $(1.82) $.02
(Unaudited) 1993
Sales $126,316,000 $126,617,000 $146,843,000 $157,745,000
Gross Profit $62,895,000 $60,291,000 $65,611,000 $68,026,000
Net Income (Loss) $2,651,000 $(415,000) $758,000 $2,209,000
Net Income (Loss)
Per Share $.19 $(.03) $.05 $.16
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of House of Fabrics, Inc. We have
audited the accompanying consolidated balance sheets of House of Fabrics, Inc.
and subsidiaries as of January 31, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of House of
Fabrics, Inc. and subsidiaries as of January 31, 1994 and 1993 and the results
of their operations and their cash flows for each of the three years in the
period ended January 31, 1994 in conformity with generally accepted accounting
principles.
Deloitte & Touche
Costa Mesa, California
May 13, 1994
SUPER STORE LOCATIONS BY STATE
Super Stores
House of Fabrics/
So-Fro Fabrics 458
Fabricland 87
Fabric King 11
Total Super Stores 556
States Located 40
Alaska
Fabricland 2
Arizona
House of Fabrics 17
Fabricland 3
California
House of Fabrics 120
Fabricland 23
Fabric King 11
Colorado
House of Fabrics 4
So-Fro Fabrics 9
Connecticut
House of Fabrics 16
So-Fro Fabrics 1
Delaware
House of Fabrics 1
Idaho
House of Fabrics 3
So-Fro Fabrics 1
Fabricland 6
Illinois
House of Fabrics 15
So-Fro Fabrics 20
Indiana
House of Fabrics 7
So-Fro Fabrics 3
Iowa
House of Fabrics 5
So-Fro Fabrics 5
Kansas
House of Fabrics 4
So-Fro Fabrics 7
Louisiana
House of Fabrics 2
Maine
House of Fabrics 5
So-Fro Fabrics 1
Maryland
House of Fabrics 8
So-Fro Fabrics 2
Massachusetts
House of Fabrics 8
So-Fro Fabrics 6
Michigan
House of Fabrics 10
So-Fro Fabrics 8
Minnesota
House of Fabrics 3
So-Fro Fabrics 2
Missouri
House of Fabrics 3
So-Fro Fabrics 11
Montana
House of Fabrics 4
Fabricland 2
Nebraska
House of Fabrics 7
So-Fro Fabrics 1
Nevada
<PAGE>
House of Fabrics 4
Fabricland 1
New Hampshire
House of Fabrics 6
New Jersey
House of Fabrics 4
New Mexico
House of Fabrics 5
New York
House of Fabrics 17
So-Fro Fabrics 5
North Dakota
House of Fabrics 1
So-Fro Fabrics 1
Ohio
House of Fabrics 3
So-Fro Fabrics 11
Oklahoma
House of Fabrics 3
So-Fro Fabrics 1
Oregon
House of Fabrics 6
Fabricland 21
Pennsylvania
House of Fabrics 16
So-Fro Fabrics 8
Rhode Island
House of Fabrics 2
South Carolina
So-Fro Fabrics 1
South Dakota
House of Fabrics 2
Tennessee
House of Fabrics 1
Texas
House of Fabrics 3
Utah
House of Fabrics 14
Vermont
House of Fabrics 1
Virginia
House of Fabrics 2
So-Fro Fabrics 2
Washington
House of Fabrics 16
Fabricland 29
Wisconsin
House of Fabrics 3
So-Fro Fabrics
1 1 1 1 1 2 2 3 3 4 4 4 5 6 6 6
7 7 7 8 8 8 9 10 10 11 11 12 12 13 14
14 14 14 15 15 15 15 16 17 18 20 20 22 23 24
21 28 29 35 37 45 169 154
10 10 5 5 2 2 2 4 27
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
CORPORATE LISTINGS
Board of Directors
Daniel Greenberg
Chairman and Chief Executive Officer
Electro Rent Corp.
Gary L. Larkins
<PAGE>
President and Chief Executive Officer
Marvin S. Maltzman
Senior Vice President--Administration,
Secretary and General Counsel
James J. McMorrow
Senior Partner, The Foristall
Company (Financial Relations)
Philip G. Samovar
Attorney
Barney Sofro
Chairman of the Board
Member of Audit Committee
Member of Executive Committee
Member of Compensation Committee
Officers
Barney Sofro
Chairman of the Board
Gary L. Larkins
President and Chief Executive Officer
Donald R. Ardemagni
Executive Vice President-Buying
James R. Hartwig
Executive Vice President-Store
Operations and Merchandising
Doyle W. Parker
Executive Vice President-Buying
Donald W. Boyer
Senior Vice President-Chief Financial Officer
Marvin S. Maltzman
Senior Vice President--Administration,
Secretary and General Counsel
Richard H. Shelton, III
Senior Vice President-
Warehousing and Distribution
James C. Webb
Senior Vice President-Real Estate
L. J. Bowen
Vice President-Notions Buying
Edward L. Chow
Vice President-Chief Information Officer
Pamela M. Hicks
Vice President-Internal Audit
and Shortage Control
Jeffrey L. Higgins
Vice President-Store Operations
<PAGE>
Reva J. Johnson
Vice President-Advertising
Kimberly S. Mitchell
Vice President-Merchandising
F. Douglas Trovato
Vice President-Buying
Paul A. Waalkes, Jr.
Vice President-Construction
Rita M. West
Vice President-Sewing Machine Operations
Transfer Agent and Registrar
American Stock Transfer & Trust Co.
6201 15th Avenue, 3rd Floor
Brooklyn, New York 11219
Independent Auditors
Deloitte & Touche
695 Town Center Dr.
Costa Mesa, Ca. 92626
Listings
New York Stock Exchange
Pacific Stock Exchange
Ticker Symbol: HF
Request for Form 10-K
Without charge, on the written request of any stockholder of record on April
25, 1994, the record date for those eligible to vote at the annual meeting, the
Company will send a copy of its annual report on Form 10-K, including the
financial statements and schedules thereto required to be filed with the
Securities and Exchange Commission, pursuant to Rule 13a-1. Address said
request to Marvin S. Maltzman, Secretary, House of Fabrics, Inc., 13400
Riverside Drive, Sherman Oaks, California 91423.
Executive Headquarters
House of Fabrics, Inc.
13400 Riverside Drive
Sherman Oaks, California 91423
Telephone (818) 995-7000
Annual Meeting
The Annual Meeting of Stockholders of House of Fabrics, Inc. will be held on
June 22, 1994 at 10:30 A.M., at the Sportsmen's Lodge, Starlight Room, 12833
Ventura Blvd., Studio City, California.
<PAGE>
EXHIBIT 22
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Registrant owns 100% of all of the outstanding voting
securities of each of the following corporations.
Subsidiary State of Incorporation
---------- ----------------------
Fabricland, Inc. Oregon
House of Fabrics of South Carolina, Inc. South Carolina
Metrolina Express, Inc. South Carolina
Sofro Fabrics, Inc. Nevada
Yardage Fair, Inc. California
Registrant's consolidated financial statements include the
accounts of the foregoing subsidiaries.
Exhibit 22
<PAGE>
33-21965
33-39467
33-46308
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represents a
fundamental change in the information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8 and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(f) Employee plans on Form S-8.
(1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given a copy of the registrant's annual report to stockholders for its last
fiscal year, unless such employee otherwise has received a copy of such report,
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 day period the
annual report for the last fiscal year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan who do not otherwise
receive such material as stockholders of the registrant, at the time and in the
manner such material is sent to its stockholders, copies of all reports, proxy
statements and other communications distributed to its stockholders generally.
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be transmitted
promptly, without charge, to any participant in the plan who makes a written
request, a copy of the then latest annual report of the plan filed pursuant to
section 15(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report
is filed separately on Form 11-K, such form shall be delivered upon written
request. If such report is filed as a part of the registrant's annual report on
Form 10-K, that entire report (excluding exhibits) shall be delivered upon
written request. If such report is filed as a part of the registrant's annual
report to stockholders delivered pursuant to paragraph (1) or (2) of this
undertaking, additional delivery shall not be required.
(i) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Exhibit 28
