<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
______________________
For Quarter Ended July 31, 1994 Commission File No. 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 I.D. Number)
incorporation or organization)
13400 Riverside Drive, Sherman Oaks, CA 91423
Post Office Box 9110, Van Nuys, CA 91409
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 995-7000
No Change
__________________________________________________________________
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities & Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been the subject to such filing
requirements for the past 90 days. Yes X No
------ -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 26, 1994
Common Stock 13,697,107
________________________ _________________________________
<PAGE>
HOUSE OF FABRICS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet July 31, 1994 2
Consolidated Balance Sheet January 31, 1994 3
Consolidated Statements of Operations
for the three months ended
July 31, 1994 and 1993 4
Consolidated Statements of Operations
for the six months ended
July 31, 1994 and 1993 5
Consolidated Statements of
Cash Flows - for the six months
ended July 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8-11
Part II. Other Information
Item 6. Exhibits 12
27. Financial Data Schedule
Signature 13
</TABLE>
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JULY 31, 1994
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 30,809,000
Receivables 8,114,000
Merchandise Inventories 218,848,000
Prepaid Expenses & Other Current Assets 6,395,000
Refundable Income Taxes 3,541,000
Deferred Income Taxes 4,538,000
------------
Total Current Assets 272,245,000
------------
PROPERTY
Land 1,285,000
Buildings 14,531,000
Furniture and Fixtures 67,535,000
Leasehold Improvements 35,610,000
------------
Total 118,961,000
Less Accumulated Deprec. & Amort. 58,662,000
------------
Property - Net 60,299,000
------------
OTHER ASSETS 941,000
------------
GOODWILL - NET 39,676,000
------------
TOTAL ASSETS $373,161,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 63,290,000
Notes Payable to Banks 138,000,000
Accrued Liabilities 29,869,000
Current Portion of Long-Term Debt 1,110,000
------------
Total Current Liabilities 232,269,000
------------
DEFERRED INCOME TAXES 3,110,000
------------
LONG TERM DEBT 491,000
------------
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 Par Value;
Authorized, 1,000,000 Shares;
Common Stock $.10 Par Value;
Authorized 29,000,000 Shares;
Issued 13,697,107 Shares; 1,370,000
Paid-In Capital 46,880,000
Retained Earnings 89,041,000
------------
Total Stockholders' Equity 137,291,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $373,161,000
============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-2-
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 31, 1994
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 9,758,000
Receivables 9,765,000
Merchandise Inventories 243,151,000
Prepaid Expenses & Other Current Assets 5,601,000
Refundable Income Taxes 10,738,000
Deferred Income Taxes 4,538,000
------------
Total Current Assets 283,551,000
PROPERTY
Land 1,729,000
Buildings 14,403,000
Furniture and Fixtures 67,845,000
Leasehold Improvements 36,067,000
------------
Total 120,044,000
Less Accumulated Deprec. & Amort. 54,454,000
------------
Property - Net 65,590,000
------------
PROPERTY HELD FOR SALE 2,740,000
------------
OTHER ASSETS 962,000
------------
GOODWILL - NET 40,212,000
------------
TOTAL ASSETS $393,055,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 55,890,000
Notes Payable to Banks 143,000,000
Accrued Liabilities 26,565,000
Current Portion of Long-Term Debt 1,963,000
------------
Total Current Liabilities 227,418,000
------------
DEFERRED INCOME TAXES 3,110,000
------------
LONG-TERM DEBT 2,862,000
------------
OTHER LONG TERM LIABILITIES 9,256,000
------------
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 Par Value;
Authorized, 1,000,000 Shares;
Common Stock $.10 Par Value;
Authorized 29,000,000 Shares; 1,370,000
Issued 13,697,107 Shares;
Paid-In Capital 46,880,000
Retained Earnings 102,159,000
------------
Total Stockholders' Equity 150,409,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $393,055,000
============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
SALES $110,114,000 $129,240,000
EXPENSES
Cost of Sales 64,784,000 71,277,000
Store and Operating 45,217,000 52,437,000
General and Administrative 8,104,000 9,067,000
Interest Expense 3,766,000 1,709,000
Goodwill Amortization 365,000 324,000
------------ ------------
Total 122,236,000 134,814,000
------------ ------------
LOSS BEFORE INCOME TAXES (12,122,000) (5,574,000)
INCOME TAX BENEFIT (474,000) (1,542,000)
------------ ------------
NET LOSS $(11,648,000) $ (4,032,000)
============ ============
NET LOSS PER SHARE * $(0.85) $(0.29)
====== ======
</TABLE>
* Net loss per share is computed based on average outstanding shares of common
stock and common stock equivalents (13,697,107 shares in 1994 and 13,846,163
shares in 1993)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
SALES $224,809,000 $257,221,000
EXPENSES
Cost of Sales 126,952,000 138,967,000
Store and Operating 89,411,000 103,839,000
General and Administrative 15,321,000 17,576,000
Interest Expense 6,454,000 2,894,000
Goodwill Amortization 731,000 647,000
------------ ------------
Total 238,869,000 263,923,000
------------ ------------
LOSS BEFORE INCOME TAXES (14,060,000) (6,702,000)
INCOME TAXES BENEFIT (942,000) (1,977,000)
------------ ------------
NET LOSS $(13,118,000) $(4,725,000)
============ ===========
NET LOSS PER SHARE * $(0.96) $(0.34)
====== ======
</TABLE>
* Net loss per share is computed based on average outstanding shares of common
stock and common stock equivalents (13,697,107 shares in 1994 and 13,869,934
shares in 1993).
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-5-
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(13,118,000) $(4,725,000)
------------ -----------
Adjustments to Reconcile Net
Loss to Net Cash Provided by (Used In)
Operating Activities:
Depreciation and Amortization 5,691,000 5,676,000
Loss on Disposal of Fixed Assets 458,000 434,000
Deferred Taxes - (172,000)
Changes in Assets & Liabilities
Receivables 1,651,000 (2,169,000)
Inventories 24,303,000 (37,824,000)
Prepaid Expenses & Other Assets (773,000) (1,725,000)
Accounts Payable and
Accrued Liabilities 3,546,000 13,529,000
Reserve for Restructure (1,940,000) -
Refundable Income Taxes 7,197,000 -
----------- -----------
Total Adjustments 40,133,000 (22,251,000)
----------- -----------
Net Cash Provided by (Used in)
Operating Activities 27,015,000 (26,976,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (583,000) (8,341,000)
Proceeds from Sale of Property 2,843,000 982,000
----------- -----------
Net Cash Provided by (Used in)
Investing Activities 2,260,000 (7,359,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in Net Borrowings Under Line
of Credit Agreements (5,000,000) 39,243,000
Repayment of Long Term Debt (3,224,000) (880,000)
Proceeds from Exercise of Stock Options - 322,000
----------- -----------
Net Cash Provided by (Used in)
Financing Activities (8,224,000) 38,685,000
----------- -----------
NET INCREASE IN CASH 21,051,000 4,350,000
CASH AT BEGINNING OF PERIOD 9,758,000 2,214,000
----------- -----------
CASH AT END OF PERIOD $30,809,000 $ 6,564,000
=========== ===========
Cash Paid During the Period for:
Interest $4,882,000 $ 2,902,000
Taxes $ 219,000 $ 136,000
</TABLE>
-6-
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited interim consolidated financial
statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the Company's
financial position as of July 31, 1994, and the results of its
operations and its cash flows for the periods ended July 31, 1994
and 1993.
2. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
On November 30, 1993, the Company renegotiated its existing three
bank agreements (Bank of America and the original Bank Group, Bank
of California, and the United States National Bank of Oregon) into
one amended and restated credit agreement with Bank of America NT
& SA as Agent Bank, and have further renegotiated with the Banks
to amend the credit agreement as of May 13, 1994. Borrowings
during the quarter ended July 31, 1994, bear interest at rates
equal to the "Base Rate" (which is generally based on the
reference rate announced by the Bank of America) plus 1.75%.
Borrowings subsequent to July 31, 1994 will bear interest at rates
equal to the reference rate plus 2.00% through October 31, 1994,
2.25% through January 31, 1995 and 2.50% through May 31, 1995, except
that during the period in which the Company was in default of certain
covenants the interest rate was increased.
As of May 13, 1994, the Credit Agreement provides for maximum
borrowings of $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 July 31, 1994 is zero. As of July
31, 1994, $138,000,000 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 monthly, 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.
As a result of the significant loss for the six months ended July 31,
1994, the Company was unable to remain in compliance with two of its
financial covenants. On September 13, 1994, the Credit Agreement was
amended to, among other things extend through January 31, 1995 the
ability of the Company to borrow up to 60% of eligible inventory
after which the advance rate becomes 55%. In addition the amendment
cures the financial covenant defaults as of July 31, 1994 and waives
certain other potential defaults through November 11, 1994. Failure
by the Company to meet financial covenants subsequent to November 11,
1994 could have a significant adverse impact on the Company's
operations and financial condition.
-7-
<PAGE>
3. RESTRUCTURING PLAN
Effective August 26, 1994, the Board of Directors approved a plan
to restructure the Company's operations (the "1994 Plan"). The
1994 Plan will result in the closure of approximately 125
underperforming super stores by January 31, 1995. The estimated
cost of the 1994 Plan includes noncash charges to write-off
leasehold improvements, write-off store fixtures, and liquidate
inventories, and also includes other related store closing costs
that will affect future cash flows of the Company. The aggregate
of such costs is estimated to be between $30 million and $40
million. Final estimates are not currently available, but will be
determined as the restructuring charge is recorded in the quarter
ending October 31, 1994.
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED
Sales for the quarter ended July 31, 1994 decreased 14.8% to
$110,114,000 from $129,240,000 for the quarter ended July 31, 1993.
The decrease in sales of $19,126,000 was primarily due to the
elimination of sales for the mall stores under the 1993 Plan for the
quarter ended July 31, 1994 of $7.3 million and a 5.6% decrease in
store-for-store sales. During the quarter ended July 31, 1994, the
Company did not open any new super stores and closed 4 older super
stores.
The decrease in store-for-store sales resulted in part from the
generally poor economic conditions (including California, which has 149
of the Company's super stores as of July 31, 1994) and the competitive
pressure in the fabric retailing industry in general which resulted in
continued pressure on margins. The Company believes these factors may
continue to adversely affect sales for the remainder of fiscal 1995 and
possibly beyond. The Company will continue to close unprofitable super
stores in addition to mall stores under the 1993 Plan and the 1994 Plan
as described below during the remainder of fiscal 1995.
Gross profit as a percentage of sales decreased to 41.2% for the
quarter ended July 31, 1994 from 44.8% for the quarter ended July 31,
1993. This decrease was largely due to a reduction in the opening
markup slightly offset by lower markdowns.
Store and operating expense as a percent of sales increased slightly to
41.1% for the quarter ended July 31, 1994 from 40.6% for the quarter
ended July 31, 1993. This increase was mainly due to a small increase
in rent and advertising expenses offset by a decrease in payroll
expense. General and administrative expense as a percent of sales also
increased slightly to 7.4% from 7.0% in the same period in the prior
-8-
<PAGE>
year. Interest expense for the quarter ended July 31, 1994 increased
$2,057,000 over the quarter ended July 31, 1993 primarily as a result
of an increase in average borrowings during the period of $24,348,000
and by an increase in the Company's average effective borrowing rate
from 4.6% in the quarter ended July 31, 1993 to 9.1% in the quarter
ended July 31, 1994.
SIX MONTHS ENDED
Sales for the six months ended July 31, 1994, decreased 12.6% to
$224,809,000 from $257,221,000 for the six months ended July 31, 1993.
The decrease in sales of $32,412,000 was primarily due to the
elimination of sales for the mall stores under the 1993 Plan for the
six months ended July 31, 1994 of $14.5 million and a 3.8% decrease in
store-for-store sales. During the six months ended July 31, 1994, the
Company did not open any new super stores and closed 8 older super
stores.
The decrease in store-for-store sales for the first half of the fiscal
year was a continued result in part, of the generally poor economic
conditions (including California, which has 149 of the Company's super
stores as of July 31, 1994) and the competitive pressure in the fabric
retailing industry. These two factors in general resulted in the
continued pressure on margins. The Company believes these factors may
continue to adversely affect sales for the remainder of fiscal 1995 and
possibly beyond. The Company will continue to close unprofitable super
stores in addition to mall stores under the 1993 Plan and the 1994 Plan
during the remainder of fiscal 1995.
Gross profit as a percentage of sales decreased to 43.5% for the six
months ended July 31, 1994 from 46.0% for the six months ended July 31,
1993. This decrease was largely due to a reduction in the opening
markup slightly offset by lower markdowns.
Store and operating expense as a percent of sales decreased to 39.8%
for the six months ended July 31, 1994 from 40.4% for the six months
ended July 31, 1993. This decrease was due mainly to lower payroll
expense of 14.8% as a result of the Company's effort to control these
expenses. General and administrative expense as a percent of sales
remained the same at 6.8% during the six months ended July 31, 1994 and
July 31, 1993. Interest expense for the six months ended July 31, 1994
increased $3,560,000 over the six months ended July 31, 1993 primarily
as a result of an increase in average short-term borrowings during the
period of $40,215,000 and by an increase in the Company's average
effective borrowing rate from 4.4% in the six months ended July 31,
1993 to 7.6% in the six months ended July 31, 1994.
-9-
<PAGE>
FINANCIAL CONDITION
During the six months ended July 31, 1994, short-term borrowings
ranged from $138,000,000 to $149,000,000 with average borrowings
of $142,215,000. Borrowings in the six months ended July 31, 1993
ranged from $85,497,000 to $128,497,000 with average short-term
borrowings of $102,000,000. Increased borrowing levels during the
six months ended July 31, 1994 over the same period last year were
due primarily to reduced trade financing, conversion of certain
long-term debt to short-term borrowings, and funding operating
losses generated during the six months.
Cash at July 31, 1994 was $30,809,000, up from $9,758,000 at
January 31, 1994. Net cash provided by operating activities of
$27,015,000 for the six months ended July 31, 1994 is a change of
$53,991,000 compared to net cash used in operating activities of
$26,976,000 for the six months ended July 31, 1993. The major
reasons for the change included the decrease in inventories offset by
the change in accounts payable and accrued liabilities and the
receipt of a refund of federal income taxes as of July 31, 1994. The
income tax refund was used to pay the bank loan down from
$138,000,000 at July 31, 1994 to approximately $130,000,000 in the
first week of August, 1994. Also the Company used $583,000 for
capital expenditures.
The Company's July 31, 1994 ending inventory of $218,848,000
decreased from $243,151,000 at January 31, 1994. During the six
months ended July 31, 1994, the average inventory balance was
$234,831,000 compared to $282,549,000 in the same period last
year. Average inventory turnover during the six months ended July
31, 1994 was 1.30 times, compared at 1.15 times during the six
months ended July 31, 1993. The 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 owned a warehouse in Portland, Oregon, that was not
currently in use. The Company sold the property on June 1, 1994,
and realized a small loss on the transaction.
The Company's amended and restated credit agreement prohibits the
payment of dividends.
RESTRUCTURING PLANS
During the six months ended July 31, 1994, the Company has
continued to make progress with its plan of restructuring approved
by the board of Directors effective September 1, 1993 (the "1993
Plan"). The 1993 Plan approved the closure of the Company's
remaining mall stores and implemented a new merchandising strategy
that focuses on everyday value pricing.
Under the 1993 Plan, all operations of the mall stores are
excluded from operating results. During the six months ended July
31, 1994, mall store sales of $14,531,000 and operating losses of
$2,217,000 were excluded from operating results and charged to the
restructuring reserve. In accordance with the 1993 Plan, 9 mall
stores were closed during the six months ended July 31, 1994.
-10-
<PAGE>
The majority of the remaining mall stores are expected to be
closed by the end of fiscal 1995. The company estimates that
future cash outflows of $500,000 will be required to implement the
remainder of the 1993 Plan. Such cash outflows are related
primarily to lease termination costs and certain other store
closing costs.
As a result of continued competitive pressure and operating losses
during the six months ended July 31, 1994, the Board of Directors
approved a plan of restructuring effective August 26, 1994 to
further restructure the Company's operations (the "1994 Plan").
The 1994 Plan will result in the closure of approximately 125
underperforming super stores by January 31, 1995. The estimated
cost of the 1994 Plan includes noncash charges to write-off
leasehold improvements, write-off store fixtures, and liquidate
inventories, and also includes other related store closing costs
that will affect future cash flows of the Company. The aggregate
of such costs is estimated to be between $30 million and $40
million. Final estimates are not currently available, but will be
determined as the restructuring charge is recorded in the quarter
ending October 31, 1994.
The implementation of the 1994 Plan beginning in the quarter
ending October 31, 1994, will significantly reduce sales during
the quarter and will reduce operating losses in future quarters as
the operations of the stores scheduled for closure under the 1994
Plan will be charged to the restructuring reserve.
Management expects that the 1993 Plan and the 1994 Plan, when
fully implemented will reduce the Company's operating losses and
increase liquidity.
-11-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits.
27. Financial Data Schedule
-12-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
House of Fabrics, Inc.
Registrant
Date: September 19, 1994 /s/ DONALD W. BOYER
___________________________
Donald W. Boyer
Senior Vice President &
Chief Financial Officer
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> JUL-31-1994
<CASH> 30,809
<SECURITIES> 0
<RECEIVABLES> 8,114
<ALLOWANCES> 0
<INVENTORY> 218,848
<CURRENT-ASSETS> 272,245
<PP&E> 118,961
<DEPRECIATION> 58,662
<TOTAL-ASSETS> 373,161
<CURRENT-LIABILITIES> 232,269
<BONDS> 0
<COMMON> 1,370
0
0
<OTHER-SE> 46,880
<TOTAL-LIABILITY-AND-EQUITY> 373,161
<SALES> 224,809
<TOTAL-REVENUES> 224,809
<CGS> 126,952
<TOTAL-COSTS> 89,411
<OTHER-EXPENSES> 16,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,454
<INCOME-PRETAX> (14,060)
<INCOME-TAX> (942)
<INCOME-CONTINUING> (13,118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,118)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
